Goodwill and impairment of asset Report 2022

Running head: GOODWILL AND IMPAIRMENT OF ASSET
Goodwill and impairment of asset
Name of the Student
Name of the University
Student ID
Author Note

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Bottom Line Accounting
4A Broadway Road, North South Wales
Australia – 4005
Tel: 205 629
Subject: Issues raised by IASB in context of Goodwill and impairment
Aim of the memo is to highlight the issues recently raised by IASB in context of goodwill and
impairment. Goodwill is generally reported by the entity while it acquires any other entity and
the same is reported to reflect the future profit that is expected to be generated from the assets
those are acquired in the process of acquisition or merger not separately identified. Initially, in
accordance with AASB 136 / IAS 36, goodwill used to be tested only for annual impairment.
However, owing the users and investor’s concerns regarding the present practice IASB board is
considering reintroduction of goodwill amortization in replacement of the existing approach of
impairment-only. Hence, the memo will critically analyse the amortization approach as against
the impairment only approach.
As per IAS 36, Para 90, goodwill acquired in the process of business combination shall be
annually tested for the purpose of impairment irrespective of whether there is any warning for
impairment or not and the same came into force in 2004. However prior to that period IAS 22
business combination required that the acquired goodwill shall be amortised over the useful life
with the assumption that the useful life will not exceed 20 years. In case the assumption
invalidates, the goodwill acquired shall be tested for the purpose of impairment at least once at
the closing of each financial year regardless of whether there is any warning for impairment or
not. However, different issues identified by the board in context of the same are – (i) generally it
is impracticable predicting goodwill’s useful life along with the pattern in which the same
reduces. Owing to the same, amortisation amount is the best possible way to describe the amount
of goodwill consumption in arbitrary manner (ii) amortisation provided in straight line basis over
the arbitrary useful life is not able to provide the useful information (iii) in case operational and
rigorous impairment test is developed, the entity will be able to offer more useful information to
the users of financial statement where amortisation of goodwill is used.

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Hence, number of participants in PIR (post-implementation review) of IFRS 3 suggested
reintroduction of goodwill amortisation. Different advantages in context of the same also
highlighted are – (i) some of the investors were in the view that impairment-only method is
useful for associating price that is paid for acquiring and for computing return on the invested
capital, verifying acquisition is performing as per expectation. Further various participants felt
that the losses on account of impairment are identified too late or not identified in timely manner.
It was felt that the same have only confirmatory value and does not have predictive value (ii)
different participants felt that procedure of impairment test is time consuming, expensive,
complex and require significant judgements.
Arguments those can be placed for reintroducing the amortisation are – (i) consideration of PIR
was contentious or crucial in the development phase of standard and is anticipated to recognise
the areas where implementation issues or unexpected costs have been met. One of these crucial
issues is amortisation (ii) decision of the board for implementing the impairment–only approach
was established on conclusion that the same will offer more useful information to the financial
statement users and impairment test was operational as well as rigorous. Questionable conclusion
in context of the same were – (a) though some of the stakeholders feel that impairment test offer
useful information, value provided by the same is confirmatory only (b) losses on account of
impairment often are not reported in timely manner and it raise doubts regarding whether
impairment test is rigorous (iii) feedback specified that impairment test is time consuming,
expensive and complex and hence creates doubts whether it is operation to the extent it was
considered by the board.
On the other hand, arguments those can be placed for retaining impairment-only approach are –
(i) amortisation charge offers the financial statement users with no useful information in case the
useful life is arbitrary (ii) some of the investors informed that impairment-only approach is
useful for associating the price that is paid for acquiring and for computing return on the invested
capital, verifying acquisition is performing as per expectation. They further mentioned that the
information offered by impairment test is useful as it has confirmatory value. On the contrary,
they feel that goodwill amortisation in subsequent years may provide ambiguous price that is
originally paid and hence, become more difficult in analysing the stewardship. In addition,
amortisation will reduce opportunity of impairment to take place. Hence, introduction of

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amortisation will mask the goodwill impairment along with some amortisation charges that will
further reduce usefulness of information offered by impairment test. Amortisation reintroduction
will lower the information quality and the same can be difficult for supporting re-introduction of
amortisation of goodwill if the information is less useful.
While reviewing both the arguments question that the board was facing is not to access whether
the goodwill amortisation is better approach in context of concepts for succeeding accounting for
goodwill as against the approach of impairment-only. Rather question here is whether strong
case is there for making changes for reintroducing goodwill amortisation approach and whether
any benefits will exceed the disruption and cost that will be resulted into for changing again the
requirements. However, it can be concluded that reintroducing the amortisation model will not
solve the issue associated with impairment-only approach to recognise the loss in timely manner.
In addition while the goodwill’s useful life is arbitrary carrying amount of goodwill acquired
after deducting the charges of amortisation will not provide the original benefits from business
combination that will considerably be better as compared to impairment-only approach. Hence,
these facts shall be kept in mind before reintroducing the amortisation approach.
Yours’ sincerely,
John Mathew,
Accountant, Bottom Line Accounting

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To,
Mr Neil Jackson
Senior Accountant, ABC Limited
Subject: - Impact of IASB’s proposed developments
Dear Mr Jackson,
Objective of preparing this letter is providing information in context of the proposed
development by IASB on account of goodwill and its impact on the organisation’s profitability. I
will discuss the method applied by ABC Limited for computation as well as reporting the
amount of goodwill and its treatments. Mainly the letter will take into account the recent
acquisition made by ABC Ltd and computation of goodwill generated on account of the same
acquisition.
Based on the computation made that is attached in the appendix, it can be noticed that if the
entity adopts the amortisation approach the value for amortisation over the years remain same
and goodwill value is reduced by constant amount. Major reason behind adopting the
amortisation approach is that the value of goodwill will kept on reducing on straight line basis
year after year and at the end of the life the remaining value will become nil. In the given case,
the value of goodwill is getting reduced by $ 127,500 in each year as amortization expenses. This
approach is considered as effective for computing goodwill value however, the entity is not able
to deliver actual value of the goodwill as the amortisation expenses is charged on the basis of the
assumption that the life of goodwill is ten years and the goodwill is assumed at fixed rate in each
year. However, in reality this may not be the case. Hence, number of analysts and investors
raised concern that the amortisation approach shall not be used as it fails to provide exact value
of the goodwill and the entire valuation is based on the assumption. In addition, high amount of
amortisation expenses even in the later period of goodwill’s useful life will have an adverse
impact on the profits of the entity that will in turn adversely impact the market value of the firm
if it is not clearly mentioned through disclosures that the profit has been reduced owing to
amortization expenses.

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In accordance with the above presented computation it can be identified that if the entity follows
the impairment-only approach the entity will not face any impairment for the year ended 30th
June 2017 as well as 30th June 2018 as the recoverable amount of the goodwill is greater than the
carrying amount and the impairment takes place while the carrying amount is greater than the
recoverable amount of goodwill. Accordingly, for the year ended 30th June 2019 the firm will
report impairment loss amounting to $ 380,000 as the carrying amount exceeds the recoverable
amount by $ 380,000. This amount will be charges as an expense in the income statement of the
entity for the year ended 30th June 2019 and the residual value will be reported under the balance
sheet for the same period.
However, this method may be considered as complex and time consuming by the users. Hence,
the amortization approach may be used after keeping in mind the facts that the goodwill’s useful
life is arbitrary and carrying amount of goodwill acquired after deducting the charges of
amortisation will not provide the original benefits from business combination that will
considerably be better as compared to impairment-only approach.
Yours sincerely,
John Mathew,
Accountant, Bottom Line Accounting

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Appendix