Goodwill Impairment Disclosures Australia -Myassignmenthelp.Com

Question: Discuss About The Goodwill Impairment Disclosures Australia? Answer: Introducation The Amortization of goodwill is the old concept though still valid where an organization needs to analyse the useful life of goodwill to amortize the value of goodwill on a straight-line basis over such useful life of the asset. Firstly, it is important to state that the amount of efforts needed and required to assess the useful life of goodwill of an entity is very difficult task if not feasibly impossible. Feasibly impossible because it is not possible to calculate the useful life of goodwill absolutely correctly. There after by using straight line method to amortize the value of the goodwill over the useful life of the asset does not provide any significant financial information in the financial statements to the users of the financial statements (Kabir et al. 2017). Thus, the whole process of valuation of goodwill and then to assess the useful life of the asset does not provide any important information to the users of the financial statements as the process after that is very mu ch redundant. The International Accounting Standards Board (IASB) has recommended that it is no longer required for the entities to do the impossible task of ascertaining the useful life of the goodwill to amortize the value of goodwill over the useful life of the assets. International Financial Reporting Standard IFRS 3 have clearly provided that the earlier requirement of amortization of goodwill over the useful life of the asset is no longer compulsory. The amortization of goodwill over the useful life of the asset will not yield any benefit to the users of the financial statements as periodical amortization of same amount on straight line basis is of no relevance as it is redundant process. On the other hand, the impairment testing which is generally conducted on the non-current assets of companies is scientifically sound method to ascertain the expected realizable value or value in use of non-current assets (Boennen and Glaum 2014). The reason is that the actual expected benefit from the use of non-current assets can be ascertained properly and the financial statements will be far more reflective of the actual financial performance and position of an entity. Similarly, the goodwill shall also be tested periodically, i.e. preferably, annually at the time of preparation and presentation of financial statements to state the actual value of the goodwill in the Balance sheet. Impairment testing will allow the organization to provide for impairment loss in respect of goodwill if the value of goodwill has reduced. Thus, the financial statements will better reflect the financial performance and position to the users of the financial statements as the expected benefit from the goodwill will be taken into consideration and included in the Balance sheet (Pawsey 2017). Thus, the process of impairment testing of goodwill to assess the financial position of an entity as on a particular date will provide relevant information to the users of the financial statements. This process is better than rendering the whole process redundant by providing amortization in the books of account of an organization for the value of the goodwill over the useful life of the asset. Therefore based on the above discussion it can be said that the process of conduction impairment testing of goodwill is more acceptable. Statement showing interest rate Particulars Annual Semi Annually Coupon Rate 6% 3% Market Interest Rate 4% 2% Number of times (year) 6 12 Issue price of debenture = Present value of Interest + Present value of Debenture Present value of Interest = 1000000*3 %*( 1-1.02^-12)/2%= $317260 Present value of principal= 1000000*1.02^-12 = $788493. Issue price of Debenture= $317260 + $788493= $1105753. Statement showing Journal entries Particulars Debit Credit i) 1 July 2015 Cash $1,105,753 Debentures $1,105,753 ii) 31 December 2015 Interest Expenses $22,115 Debenture $7,885 Cash $30,000 iii) 30 June 2016 Interest Expenses $21,957 Debenture $8,043 Cash $30,000 Statement showing calculation of the Gross profit Amounts are in million Particulars 2015 2016 2017 Contract Price 50 50 50 Less: Estimated costs Cost up to date 10 28 40 Cost estimated for completion 28 12 0 Estimated total costs 38 40 40 Estimated total Gross Profit 12 10 10 Percentage Completion 26.32% 70.00% 100.00% Statement showing calculation of Gross profit Particulars 2015 2016 2017 Total Gross Profit $3,157,895 $7,000,000 $10,000,000 GP recognized in previous year 0 $3,157,895 $7,000,000 Gross Profit recognized $3,157,895 $3,842,105 $3,000,000 Percentage completion method Journal Entry Particulars Debit Credit Construction in Progress $10,000,000.00 Material and other items $10,000,000.00 (Being the cost related to contract recorded) Accounts Receivable $12,000,000.00 Billing on Construction contracts $12,000,000.00 (Being amount billed) Cash $11,000,000.00 Accounts Receivable $11,000,000.00 (Being cash received from accounts receivable) Construction in Progess $3,157,895 Construction Expenses $10,000,000.00 Revenue from Contract $13,157,894.74 (Being percentage completion recorded) Journal Entry Particulars Debit Credit Construction in Progress $10,000,000.00 Material and other items $10,000,000.00 (Being the cost related to contract recorded) Accounts Receivable $12,000,000.00 Billing on Construction contracts $12,000,000.00 (Being amount billed) Cash $11,000,000.00 Accounts Receivable $11,000,000.00 (Being amount received against the bill received) The AASB 116 is applicable for the accounting of the property, plant and equipment except in cases where other standards permits or requires different treatment. The Para 31 of the standard provides that if the fair value of an assets can be measured reliably then the assets should be carried at revalued amount. This revalued amount shall be calculated after deducting any subsequent accumulated depreciation or impairment loss. The Para 39 of the standard provides that if as a result of revaluation the carrying amount of the assets is increased then the increase should be recorded in other comprehensive income and should be accumulated under equity as the revaluation reserve (Yao et al. 2015). That portion of the revaluation increase shall be recorded in the profit or loss that has been recognised earlier because of decrease in the carrying amount of the assets. The Para 40 provides that if there is a decrease in the carrying amount as a result of the revaluation of the asset then the decrease shall be immediately recorded in the profit or loss account. However, if there is a balance in the revaluation reserve then at first the decrease in the carrying amount is adjusted with that amount. Statement showing increase or decrease in Revaluation Investments in companies Carrying Value ($) Current fair value ($) Revaluation Increase/ (Decrease) Property, plant and equipment Factory (NSW) Land $100,000.00 $150,000.00 $50,000.00 Buildings Cost $70,000.00 $800,000.00 $730,000.00 Accumulated depreciation (20 000) Factory (Qld) Land $150,000.00 $120,000.00 -$30,000.00 Buildings Cost $125,000.00 $70,000.00 -$55,000.00 Accumulated depreciation (45 000) Journal Entry Particulars Debit Credit Factory (NSW) $50,000.00 Building (NSW) $730,000.00 Revaluation Reserve $780,000.00 (Being increase in carrying amount recorded) Profit or Loss Account/ Revaluation Reserve $85,000.00 Land $30,000.00 Building $55,000.00 (Being loss on revaluation adjusted) Reference Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature. Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. Pawsey, N.L., 2017, June. IFRS adoption: A costly change that keeps on costing. InAccounting Forum(Vol. 41, No. 2, pp. 116-131). Elsevier. Yao, D.F.T., Percy, M. and Hu, F., 2015. Journal of Contemporary Accounting Economics.Journal of Contemporary Accounting Economics,11, pp.31-45.