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Information about goodwill method - Memo

   

Added on  2021-02-19

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MemoTo: Accounting ColleaguesFrom: BDODate: 22nd September, 2019 Subject: Information about goodwill method, IAS 36and AASB 136.Goodwill is defined as an established reputation of business which is regarded as quantifiable asset (Srinivasan and Kottam, 2018). It is recorded when purchase price of business is higher than its fair value . As per the clarifications given by govt companies can record goodwill which is more appropriate for the business. As per the govt requirements companies are required to perform impairment tests once over a year. Impairment refers to bring the value of goodwill to it current market value and on decline record it as impairment for respective year(AbuGhazaleh, Al-Hares and Haddad, (2012)). The report will cover Memo about the issues raises regarding Goodwill and Impairment project related to replacement of impairment only approach with amortization. Impairment project is for giving better information to users of financial statements and also gives accurate financial of company. Removal of mandatory impairment test will make the process cost efficient and the complexity of mandatory impairment tests.. It is written for supporting impairment only approach of recording goodwill over amortization approach. Reintroducing amortization will not give clear and reliable information to users (Chalmers, Godfrey and Webster, (2011)) . Further study will also give draft of short letter to be issued to one of the firm's client (Griffiths, 2015). Goodwill refers to reputation and worth that a business gains over a period. This reputation gets converted into monetary terms that will emerge future benefits for company over and above its normal profits. In brief it is a reputation of firm which is computed on expected profits above normal profits. In accounting terms goodwill is an intangible asset. (Zaman, Hossain and Rahman, 2018). Accounting of goodwill has always been controversial topic among academics and accounting standards professional bodies. The topic of debate is which method of goodwill gives better representation of underlying economic characteristic and value. Amortization method of goodwill is having a fixed expense that is charged in each reporting over the useful life of goodwill. Amortization gives more assets and income on balance sheet. It reduces the tax burden till the asset is in use by company. Amortization method was
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not accepted as it was not accounting for real decrease in economic value of goodwill but based on false assumptions that goodwill decreases with straight value over time. Another issue with amortization is related to negative relation to equity value (Gibbons and Hazy, 2017). Considering the disadvantages ofamortization methods in goodwill treatment a new approach of impairment only is adopted over amortization. This approach is adopted by companies as it reflects more reliable economic value of company. AASB came with this approach after conducting studies and tests about more effective approach that shows more accurately economic impact of goodwill on enterprise. Para 90 of IAS 36 required that acquisition of goodwill in business combination is tested annually irrespective of any impairment indicator. Impairment only approach provides users of financial statement information to calculate return on capital invested and for ensuring that CGU has ioncreased carrying amount of CGU net assets (IFRS, Agenda ref 18B, 2019),(Glaum, Landsman and Wyrwa, S. (2018)). In this method if carrying value is more than fair value of company than value of goodwill needs to be reduced in such way that it is carrying value equals to the fair value of company. (Carvalho, Rodrigues and Ferreira, 2016)2
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You sincerely,LETTER22nd September 2019Subject: To suggest the method of recognizing goodwill in an organization. Dear Mr. Macgregor I would like to advice you that the report is about company method of goodwill that should be adoptedBDO Company from amortization and impairment only. Amortization method records the expense in income statements at fixed rate throughout the life of assetswhere impairment records the goodwill at fair value every year. Difference between carrying amount arecalculated every year and difference is recorded as impairment loss. Australian Accounting StandardsBoard (AASB) is Australian Government agency which deals with development and managementfinancial reporting standards that are applicable to enterprises in public and private sectors of AustralianEconomyAmortization of GoodwillYearAmortization Expense AccumulatedAmortizationN AV2016127500001275000020171275000127500011475000201812750002550000102000002019127500038250008925000202012750005100000765000020211275000637500063750002022127500076500005100000202312750008925000382500020241275000102000002550000202512750001147500012750003
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