Accounting Treatment of Repair and Maintenance Expenditure for Goodwill

This report evaluates the accounting treatment of repair and maintenance expenditure for goodwill in the case of West Limited. It discusses the applicable accounting standard, classification as goodwill, definition of an intangible asset, justification of the suggestion made by the marketing manager, and provides recommendations.

Case Study Report
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Contents
Executive summary....................................................................................................................3
Introduction................................................................................................................................4
Background of the case study....................................................................................................5
Applicable accounting standard- AASB 138.............................................................................5
Classification as Goodwill......................................................................................................6
Definition of an intangible asset-...........................................................................................6
Justification of suggestion made by the marketing manager..................................................7
Accounting treatment.................................................................................................................8
Recommendations......................................................................................................................9
Conclusion................................................................................................................................10
References................................................................................................................................11
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Executive summary
The primary focus of this report is on proposal made by marketing manager of West Limited.
This proposal has suggested that management of the organization should offer to provide for
repair and maintenance expenditure of "The Steve Erwin" ship. This step expected to have
positive impact on Goodwill of the company as shape under consideration is working against
whaling and illegal fishing activities. The main focus of this report is to evaluate accounting
treatment of the proposal under consideration. According to AASB 138, accounting treatment
suggested by marketing manager is valid. All the expenses can be capitalized over the period
of time and it will be disclosed as Goodwill in financial statements. This report has also
provided accounting treatment of repair and maintenance expenditure in each and every
element of financial statements.
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Introduction
Intangible assets are also an important part of business organization as they help in improving
profitability of a company. For example trademark registered by the company will be helpful
in ensuring that other organizations are not copying product and services of the company.
Therefore overall revenue will be higher in situation where is trademark registered as
compared to situation in which trademarks and not registered by a particular organization.
The main objective of this report will be to assess the situation presented by marketing
manager of West Limited. West Limited is a business organization that is operating in frozen
and canned fish produce. It is one of the leading organization in this industry and significant
contribution of its revenue can be given to its environmental-friendly practices (Kaplan and
Atkinson, 2015). This report will be concerned with intangible assets that are created by
organization in order to improve their reputation in market with their target customer. The
primary focus of this report will be on AASB 138 issued by Australian accounting standard
board. Principles of these standards will be discussed to evaluate the case study of West
Limited.
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Background of the case study
As it is already discussed in the introduction section that West Limited is a leading business
organization in frozen and canned fish produce. This organization has been selling its product
and services under two brand names that are "Arctic Fresh" and "Tropical Taste". All the fish
that is caught by Organization in Southern Australian waters is a sold under the name of
Arctic fresh and fish caught in northern oceans are sold under the name of tropical taste. West
limited has always been an environmentally friendly organization and it has directed its
marketing strategies towards representing themselves as dolphin-friendly company. They
have also ensured their customers that dolphins are not harmed while tuna fishing by the
organization (Brewer, Garrison and Noreen, 2015). This is one of the primary factors that
overall revenue of the organization has been increasing and it is one of the leading
organization in this industry. Being environmental friendly is one of the most essential in
requirement to lead in this industry as product and services provided by other organizations in
this industry are similar to each other.
Marketing manager of the organization has analysed the efforts of "The Steve Irwin" ship.
The primary focus of this ship is to disrupt and stop the efforts of whalers to harm dolphins
and other water bodies. Marketing manager of the organization has identified an opportunity
to improve Goodwill of the organization among customers. The proposal suggested by the
marketing manager is to finance any kind of repair or damage occurred to the ship during the
time it has been protecting the whales and other living things in the ocean. It is expected that
this action taken by the organization will definitely have positive impact on overall revenue
of the organization as goodwill of the organization is expected to increase. In addition to that
marketing manager is also suggested that this will not have any kind of impact on
profitability of the organization as all of the expenses can be charged as Goodwill in balance
sheet.
Applicable accounting standard- AASB 138
In the given scenario primary objective of chairman of the company is to analyse the impact
of decision taken by marketing manager on accounting process and profitability. For detailed
analysis management of the organization is required to analyse AASB 138 issued by
Australian Accounting Standard Board. The accounting standard is focused on recording,
accounting and disclosures to be provided by a particular organization while recording
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intangible asset in balance sheet (Weygand, Kimmel and Kisi, 2015). Goodwill is intangible
asset and AASB will be required to follow in creation of goodwill.
Classification as Goodwill
After analysing the case study it can be said that expenses incurred by the organization can be
categorized as Goodwill in balance sheet. According to the applicable accounting standard,
Goodwill can be generated in a particular organization with two methods i.e. self-generation
and acquired goodwill. Acquired goodwill is recorded when Goodwill is acquired during
purchase and merger decision. On the other hand self-generated goodwill is recorded when
management of the organization is spending money for improving reputation of the
organization in industry or among customers (Johansson, Hjelström and Hellman, 2016).
After considering the concept of self-generated Goodwill it can be said that expenses incurred
by the organization for repair of the ship can be categorized as goodwill. This is due to the
fact that management is spending the money only to ensure that customers are aware of the
environmentally friendly practices of the company.
Definition of an intangible asset-
According to AASB 138, an asset can be categorized as intangible assets only if following
conditions are for satisfied-
 Asset under consideration is owned by the organization.
 Asset under consideration has future economic benefit.
According to this definition, it can be said that expenses incurred by the organization for
repair and maintained of the ship can be categorized as an intangible asset. Therefore
suggestion made by the marketing manager is in line with the applicable accounting standard
(Chen, Shroff and Zhang, 2017). In addition to that it also has future economic values as this
expenditure will help to maintain eco-friendly image in market. Therefore it can be said that
it will definitely have future economic benefits to the organization. Expenses can be
categorized as an intangible asset and management of the organization would not be required
to show these expenses in income statement of the organization.
Another condition for any resource to be considered an asset is that such an asset should be
owned by the organization. This condition is also satisfied in this scenario as brand is also
considered as an intangible asset. Goodwill can be created against the brand value of two
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different kinds of the brand under which management of the organization is selling its
product and services (Vetoshkina and Tukhvatullin, 2015). Therefore it can be said that both
of the above-mentioned conditions are satisfied in the given scenario.
As described in AASB 138, both of the above-mentioned condition should be satisfied by an
organization in order to categorize a resource as an asset. In the given scenario both of the
conditions are satisfied with respect to the expenditure to be incurred by the organization for
repair and maintenance of the ship.
Justification of suggestion made by the marketing manager
The primary focus of marketing manager is to improve profitability of the organization by
presenting organization as an eco-friendly organization. The intention of marketing manager
behind the suggestion is very good and it will definitely have positive impact on profitability.
Accounting treatment suggested by marketing manager is that it will not have any impact on
profitability of the organization. Any revenue expenditure that is incurred by the organization
in a particular accounting period will be disclosed as revenue expenditure in profit and loss
account of such accounting period. The marketing manager has suggested that it is not a
revenue expenditure as capital expenditure that is incurred for improving the value of
goodwill on the market (Schroeder, Clark and Cathey, 2019).
This suggestion made by marketing manager is in accordance with the applicable accounting
standard. This is due to the fact that any capital expenditure incurred by the organization in
order to improve brand value will be categorized as goodwill. In the given scenario this will
be categorised as goodwill at the end of every year in which management is making such
repair and maintenance expense.
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Accounting treatment
According to the applicable standard following will be the treatment of repair and
maintenance expenses in financial statements-
Balance sheet
Value of goodwill will arise in the balance sheet of the company in the first year in which this
expense is incurred by the organization. Over the period of time the value of goodwill will
increase along with the increase in expenses on repair and maintenance of the ship.
Profit and loss account
As discussed by marketing manager there will be no impact on Profit and loss account during
any year in which repair and maintenance expense under consideration is undertaken by the
management (Williams and Dobelman, 2017). This is due to the fact that this is not a revenue
expenditure and it will be categorized as Goodwill expense which will be capitalized in
balance sheet toward the end of every financial year. Depreciation on intangible asset will be
charged on such goodwill in each financial year and such depreciation will be shown as
expense in profit and loss account.
Cash flow statement
As it is already discussed with that goodwill is also considered as an asset of the organization.
Any cash inflow or outflow due to the asset is always categorized under the head cash flow
from investing activities (Robinson et.al, 2015). Therefore cash expenditure incurred by the
organization on repair and maintenance of the ship will be shown as cash outflow from
investing activity at the end of every financial year in which such expenditure is incurred.
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Recommendations
After evaluating the case study it can be said that this type of transaction has not been
incurred by the organization in past and management is facing difficulties while managing
this financial transaction. In addition to that, it can also be said that management is not aware
of the applicable accounting standard in this scenario. Following are the recommendations
that will be helpful for management in the given scenario-
 First of all management of the organization is required to consult in accounting expert in
the field of intangible assets. They should explain the given scenario in detail so that such
accounting expert can help in the preparation of financial statement at the end of
accounting period.
 Knowledge of accounting standards is very essential for any business organization.
Therefore management should hire certain human resources that have expert knowledge
in the field of accounting standards.
 It is recommended that suggestion means by marketing manager of the organization is
very effective when it will definitely have positive impact on position of the company in
market. In future it is suggested that marketing manager of the company should consult a
particular proposal with accounting department in order to provide more detailed report to
board of directors and chairman.
 Violation of accounting standards can result in a qualified report issued by auditor of the
organization. Therefore management should consider each and every aspect of AASB 138
before starting preparation of financial statements.
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Conclusion
After considering this report it can be said that the importance of accounting for any business
organization is very important. Importance of accounting is not limited to applicable
legislatures or prevention of legal action due to non-compliance with applicable rules and
regulations. Accounting is also important as accurate accounting will help in accurate
decision making in future. After considering the case study it can be said that proposal
suggested by marketing manager of West Limited is in accordance with applicable
accounting standards. This report has suggested accounting treatment and presentation in
financial statements with respect to the repair and maintenance expenditure under
consideration. This proposal will definitely have positive impact on profitability as it can be
considered as a marketing strategy to improve eco-friendly image of West Limited in the
industry. Only providing the money for repair and maintenance would not be enough in this
scenario. Marketing manager should make sure that target customers are aware about this
campaign as sales will increase only if eco-friendly image is developed among customers.
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References
Brewer, P.C., Garrison, R.H. and Noreen, E.W., 2015. Introduction to managerial
accounting. McGraw-Hill Education.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: consequences of booking
market-driven goodwill impairment. Available at SSRN 2420528.
Johansson, S.E., Hjelström, T. and Hellman, N., 2016. Accounting for goodwill under IFRS:
A critical analysis. Journal of international accounting, auditing and taxation, 27, pp.13-25.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Vetoshkina, E.Y. and Tukhvatullin, R.S., 2015. Economic efficiency estimation of intangible
assets use. Mediterranean Journal of Social Sciences, 6(1 S3), p.440.
Weygand, J.J., Kimmel, P.D. and Kisi, D.E., 2015. Managerial accounting. Wiley..
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific
Book Chapters, pp.109-169.
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