Review of Accounting Issues: Goodwill and Impairment Analysis

This report provides an in-depth analysis of current accounting issues, focusing on goodwill and impairment, prompted by a news article regarding GE's significant writedown. It delves into the origin, concept, and requirements of goodwill and impairment as per International Financial Reporting Standards (IFRS), referencing discussions and amendments by the International Accounting Standards Board (IASB). The report examines the issues highlighted in the news article, particularly concerning GE's acquisition of Alstom and the subsequent goodwill impairment. It identifies the lack of amortization, inadequate justification of assumptions, and transparency issues in financial statements as key problems. Furthermore, the report discusses proposed changes to accounting rules by the Financial Accounting Standards Board (FASB) and their potential impact on financial reporting.

Current Developments in Accounting Thought
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Current Developments in Accounting Thought
Question 1: Overview
The systematic and comprehensive portrayal of accounting standards’ utilization and up-
gradation is necessary for empirical fields. To maintain the process, there is a specific board
of control and standards that are accountable for identifying accounting issues, making
decisions, and amending existing procedures in the process of facilitation in the future
development of the public companies’ financial statements. In order to develop public
interest towards a set of superior and enforceable global accounting standards, the
authoritative bodies require transparent as well as comparable information, which ultimately
can help the individuals, group, and organization to report their capital markets and financial
decisions. These stated aspects can only be possible with the rigorous application of effective
international accounting standards by fulfilling the accounting objectives (Jorissen, 2015, p.
243, 244). At present, the CEO forwarded an interesting accounting article, which needs to be
clarified with an in-depth theoretical understanding of the issues to engage the audience of an
upcoming financial conference. Considering the current requirement, the present study aims
to portray ‘Goodwill and Impairment’ as an accounting issue from the news of GE’s
goodwill.
Accounting Issue: Origin, Concept, and Requirements
According to the International Accounting Standards Board (IASB)’s meetings on 24th and
25th October 2018, there are certain amendments and final decisions that have been
undertaken regarding the International Financial Reporting Standards (IFRS) standards.
Among the prioritizes discussion agendas ‘Goodwill and Impairment’ is considered as one of
the prominent research projects for further development and betterment in the practical field
of operations. For better disclosure in a business combination, goodwill and impairment were
related as an aspect in June 2018 amendment of the subject matter that has been identified for
further discussion. In the board meeting, IASB has set distinctive research objectives, based
on which further decisions and amendments can be pursued. The objective of the agenda has
been associated with the improvement of disclosure requirements for facilitating investors’
assessment criteria, even after the acquisition of business (IFRS, 2018, “Goodwill and
Impairment (Agenda Paper 18)”, para. 3).
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The board has decided certain tentative decisions about the subject materials, which is
described in the following:
a) In order to track the projected exploring objective, the respective disclosures need
to be enhanced to facilitate the effectiveness of investors’ assessment under a business
combination. A good investment decision develops when the stated scenario can be
accomplished. The asserted condition is also accountable for the business acquisition. The
acquired businesses’ performance after the deal of acquisition is expected to be similar as the
time of the acquisition for sustaining the subject area
b) To generate the trail of the objective for exploring the disclosure of goodwill in
simplifying the accounting procedures, there can be two situational options i.e. i)
reintroduction of amortization for goodwill and/or ii) provision of accounting release within
the ‘mandatory annual quantitative impairment testing’ for the same
c) To pursue the respective objective for developing an advanced value calculation,
individual or group or institution should utilize the process, wherein IAS 36 Impairment of
Assets is removed. For this specific implication, the board is also presenting two criteria
including constraints and requirements. The constraints are excluded from the calculation.
Within operational cash flows, the restrictions are expected to portray the respective results.
This can be highlighted due to the future restructuring format of operational accounting
content in order to develop a future enhancement. Moreover, the required criteria are
associated with the utilization of pre-tax inputs within the financial calculation
(Deloitte Touche Tohmatsu Limited, 2019, “Cover Paper (Agenda Paper 18)”, para 2; IFRS,
2018a, p. 8; European Financial Reporting Advisory Group, 2017, p. 7)
The agenda has identified a better disclosure for business combinations, goodwill, and
impairment, for which possible improvements highlighted the following criteria-based
standpoints:
a) After acquisition, during the financial year, business combination occurred when
respective body needed to consider and post the amount of revenue and operating profit for
the first two full financial years
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b) To align the data and balanced information, the debt amount within the financial
database is assumed for generating business combination
c) After the acquisition, the effective tax rate in accordance with the operating profit
should be recorded under the acquired business specification
d) Qualitative impairment test is a crucial application for the accounting calculation.
Organizations should be concerned regarding the issues because disclosure of accounting
indicators can facilitate the application of quantitative impairment test in the respective field
of concern
e) Considering the requirement of the advancement in the accounting disclosure
related implications, the authoritative boards tentatively stated about improvement in IFRS 8
Operating Segments
f) Moreover, the specific requirement of the disclosure improvement also included an
amendment in the contents to be exposed for the operative organizations. This highlighted
that associated companies are required to reveal their total assets appropriately, while they
can disclose about their goodwill in relatively lesser detail
(Deloitte Touche Tohmatsu Limited, 2019, “Identifying better disclosures for business
combinations, goodwill and impairment (Agenda Paper 18B)”, para 1; Deloitte Global
Services Limited, 2019, “Other developments”, para 9; Deloitte, 2019, “Suggested changes”,
para 1)
Description of the Issues in “GE’s $23bn Writedown is a Case of Goodwill Gone Bad”
Concepts: The selected news article has portrayed the after acquisition scenario of the
company namely General Electric (GE) along with its goodwill disclosure. The charge is
associated with 2015’s acquisition deal (i.e. $10.1bn) between GE and the energy businesses
of Alstom in France. After the deal, the write off value was identified as $23Bn from its core
business divisions. It is considered as a critical financial scenario for GE because write-off
value greater than the asset acquisition rate is not at all emphasized to be effective for the
owner’s of the company (Crooks, 2018, “GE’s $23bn writedown is a case of goodwill gone
bad”, para 1, 2).
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Facts: Considering the acquisition deal, it has been highlighted that the business of
Alstom comprised $21.3bn gross assets (including property, machines, and plant of $2.8bn,
an intangible asset of $4.4bn such as customer relationship, patents, technology, and
software. However, the company also had a major amount of liabilities amounting to
$23.2bn, which contained near about expected costs of $10.7bn in order to accomplish the
customers’ contracts (para 5). The business that was acquired by GE already had a negative
book value (i.e. $7.2bn). In accordance with the standard accounting of acquisition format,
the purchase amount of Alstom i.e. $10.1bn was considered as the goodwill in the balance
sheet of the company. According to the market analytics, the portrayal of the goodwill size or
amount of GE clearly concluded that the company overpaid for Alstom’s acquisition (Crooks,
2018, “GE’s $23bn writedown is a case of goodwill gone bad”, para 6, 8).
Ideas/Issues: Considering the initial association of information from the news article
regarding GE’s goodwill, it is highlighted that the portrayal of goodwill clearly depicts the
origin of the issue. Lack of amortization, less implementation of the effective process of
justification for assumptions, and lack of transparency in a financial statement according to
the accounting standards was considered as the main issues of the article.
Issues and their Association with the Subject Content
Considering the new report, it has been highlighted that the company’s interim revision
highlighted growth in the balance sheet, while only three months later the company witnessed
a completely different version of expectation. In the context of the scenario, it has been
emphasized that GE tested the goodwill in the third quarter (para 10). The following
graphical version highlighted GE’s goodwill scenario after acquisition:
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Figure 1: GE’s Rise and Loss of Goodwill
Source: (Crooks, 2018, “GE’s $23bn writedown is a case of goodwill gone bad”, para 14)
According to the accounting analysts, “it amounts to an admission that the acquisition
that gave rise to the goodwill was ill-conceived and the business so acquired does not have
the earning power you initially envisioned for it” (para 15). Generally, the accrued goodwill
of the company does not include in the regular financial written contents. According to the
accounting written down standards, in relation to a process namely amortization, the
company’s goodwill needed to be tested for minimum once within a year. It can be proved to
be effective for evaluating the fair value in the balance sheet and identifying that the
assumptions of the future benefits are justified (Crooks, 2018, “GE’s $23bn writedown is a
case of goodwill gone bad”, para 11).
In the context of the financial standards, improvement of impairment tests can be
possible by revising the methods of calculation and mandating a specific method in order to
help reflect the entity and recover the assets. Considering the goodwill testing in the level of
the entity within the reportable segment, proper guidance for assessing the difference
between VIU and fair value fewer costs of disposal (FVLCD) as well as recognition of the
intangible assets are the necessary application for evading conflicts and misconceptions.
Contextually, the utilization of amortization, consultation, and feedback approach can also be
applicable for assessing a better approach of the identified issues (Deloitte Touche Tohmatsu
Limited, 2019, “Additional work to be performed (Agenda Paper 18A)”, para 1;
Oghoghomeh and Akani, 2016, p.180; Overton, Fox and Kandiah, 2018, p.3).
Conclusion
The clarity in financial statements and improvement in the process with the implementation
of advanced accounting standards is highly imperative for maintaining the financial strategy
of the business. According to the news article, the discussion found out that GE has faced
critical accounting times due to the disclosure of goodwill after the acquisition, which
undoubtedly hampered the company’s reputation in the respective marketplace. In
accordance with the standard accounting provisions asserted by IASB, the company needs to
utilize amortization to write off the goodwill accurately and sustain a balance between the
assumptions and results’ justifications.
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Question 2: Overview
There is a probability of huge changes to be brought into the accounting rule as circulated by
the Financial Accounting Standards Board, also known as FASB. The innovative rule
mentioned by FASB appears with the title ‘Financial Instruments–Overall: Recognition and
Measurement of Financial Assets and Financial Liabilities.’ This entirely will alter the ways
of equity investments in both big and small companies’ accounts in other organizations. The
supposed new rule aims to provide both the creditors and the investors with precise
information and more transparency in an organization’s financial statements. The goal of
issuing this new rule is to enable the company officials to take better decisions while
providing capital to the business (Cohan, 2017). Hence, the purpose of this section of the
paper is to illustrate the issues that are present in accordance with the alterations that are
implied into the accounting standards along with a proper evaluation of the comments and
impact that the alterations had on other companies.
Outline of the Major Issue That is Extensively Present in the Exposure Draft
There are four varied issues that are identified in the exposure draft and they are proposed
adjustment linked with financial statements, codification instruments in financial statements,
alteration in income statement along with reporting comprehensive income and targeted
improvements. The former issue that is presented in the exposure draft signified the proposed
adjustments that are related to the accrued interest and other financial statements (Ernst &
Young LLP, 2018). Accrued interest is nothing but the accumulated interest on the loan that
has been charged by the lender but not all are paid. Considering the accrual rate method that
goes into accounting, the interest amount is identified as the expenses that are payable along
with the accrued interest, which is considered a liability (Quain, 2018). In the exposure draft,
the proposed amendments that are pursued on the financial statements aim to provide new
guidance on hedging, credit losses, and identifying as well as measuring financial instruments
(Ernst & Young LLP, 2018).
Similarly, the second issue also deals with the codification of the financial statements
that are associated with the proposed alterations. FASB has made some significant alterations
in its Accounting Standards Codification and it is not at all expected that it will procure
significant impacts on present accounting practices or in forming noteworthy implementation
costs for most of the individuals who prepare financial statements (Tysiac, 2018). In the
exposure draft, the response is asked by the companies to react to the changes that have been
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pursued in the financial statements (Golden, Keene & McEnerney, 2018). The third alteration
is viewed in the income statement and it must be acknowledged that income statement
attempts to sum up the revenue that a company possibly makes during the reporting period
(Smith, 2018). In the exposure draft, the updates are illustrated in the income statement that,
in turn, involves reporting comprehensive income. This income is highlighted and analyzed
to understand its benefits in the long-run (Gullette, 2018). The fourth issue that is illustrated
in the exposure draft is the targeted improvements. FASB issued an update of accounting
standards on August 15, 2018, so that the financial reporting of the insurance companies that
issues contracts for long-duration such as annuities and life insurance can be benefitted
(FASB in Focus, 2018). The issue presented in the exposure draft signifies the alterations in
targeted improvements and collaborative arrangements (AICPA, 2018).
Outline of the Views
In the first exposure draft, the views that have been presented by the company in accordance
with the codification of the financial statements can be evaluated to understand the impact
that the changes had on the company operations. Ernst & Young LLP had responded to some
questions that were formulated as FASB’s proposal. The responses were aimed at queries that
were focused on the amendments done for the purpose of improving the financial instruments
altogether. Nevertheless, the company has also suggested that more clarifications are required
so that the improvements that are meant for the companies can easily access the new
guidance and attain benefits out of the amendments. The company also encouraged the Board
to distinctly consider amendments of the new guidance on the factor of credit losses along
with the decisions that have been undertaken by FASB in the public meetings that are
presently recognized in meeting minutes (Ernst & Young LLP, 2018).
Following that, another exposure draft also evaluates the similar factors that are
involved in the decision of FASB for codification improvement. Opinions are derived from
New York State Society of Certified Public Accountants with regards to three main issues
and those are ‘recoveries’, ‘transfers between classifications or categories for loans and debt
securities’ and ‘accrued interest’. They have agreed with almost all the factors that have been
provided in the proposed amendment, but in certain areas, the company has illustrated some
disagreements and those are ‘negative allowance’, ‘implementation time of the proposed
amendment’ and ‘permission provided to entity so as to record negative allowance’. In case
of negative allowance, the company is not at all comfortable and it is focused that the
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amendments should be broadly interpreted. Moreover, with regards to providing permission
to the companies for utilizing negative allowances, the company illustrated disagreement and
they also expressed that implementation time of the proposed amendment should depend
largely on the organization (Golden, Keene & McEnerney, 2018).
The third exposure draft involves the proposed accounting standard update that is
related to the income statement. The American Bankers Association (ABA) highly
encourages the opportunity taken by FASB to investigate backward tracing as the solution to
solve long-term issues. The association in order to evaluate its encouragement has provided
the reasoning that they acknowledge that FASB will definitely add a project to its research
agenda that mainly focuses on backward tracing and expected costs and that, in turn, can
rectify these existent issues (Gullette, 2018). The fourth issue concerns the collaborative
arrangements and targeted improvements and herein the American Institute of CPAs
(AICPA) opinion has been derived. They have issued with their agreements on factors, such
as clarity providence in the proposed update, operating effectiveness of the proposed
amendment, providence of more time to institutions other than PBEs and enabling clarity of
account guidance by the proposed amendment. On the other hand, AICPA has expressed their
disagreements to the early adoption of the amendment, need of reporting entities with regards
to present recurring disclosures and requirement of additional guidance. All of these reveal
the dimensions where AICPA have expressed their opinions on the basis of their proposed
amendment (AICPA, 2018).
Assessment of the Comments Letter
The comment letters that have been attained to evaluate the agreed or disagreed reactions to
the proposed amendments can be assessed to understand the probable impact that the
alterations can have on the entities. The first comment letter that deals with the Ernst &
Young LLP’s comments express encouragement to the proposed amendment with regards to
the aims and objectives that the amendment possesses for the improvement of entities.
However, there are also specific suggestions that are provided by the company so that the
alteration or the proposed amendment can provide clarity to the industries. The need for
clarity is significant as that alone can provide the guidance that can be utilized by the
companies to implement precisely the proposed amendment within its operations (Ernst &
Young LLP, 2018). The second comment letter that is attained exemplifies agreements in
some spheres and disagreements in some dimension where there are some important areas to
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be considered. New York State Society of Certified Public Accountants has responded on the
basis of three relevant issues and has also expressed their negative points at certain factors
(Golden, Keene & McEnerney, 2018). The third comment letter involving the American
Bankers Association (ABA) strongly encourage the proposed amendment as it understands
that the alteration will definitely incur improvements in the economic statement that will
provide benefits to the companies in the long run (Gullette, 2018). The fourth comment letter
is similar to the second one, which agrees with a certain aspect of the proposed amendment
and disagrees at some point with logical reasoning (AICPA, 2018).
Application of the Theories of Regulation
The public interest theory of regulation provides complete emphasize on the regulations
demand size (Cetin, 2017, p. 1).On the other hand, the private interest regulation theory
implies for those who are in the government sectors but possess the same motivation as that
of private sectors (Schenk, n.d.). Regulatory capture happens when a government’s
regulatory agency, which was aimed to create on the basis of the public interest, culminates
into advancing political concerns of the entities or the peoples who are supposed to be
regulating (Market Business News, 2019). Capture theory provides benefits to the industry
and not on society (AmosWEB*LLC, 2019). Interest groups, decision makers and
supervisors are involved in the capture regulatory (Wren-Lewis, 2011, p. 1). All the theories
of regulation attain significant positions in the three provided comment letters as Ernst &
Young LLP (2018) and the second comment letter Golden, Keene & McEnerney (2018)
identifies the public interest regulation. On the other hand, Gullette (2018) and the AICPA
(2018) illustrate both private interest and capture regulation with its interests and motives.
Conclusion
In conclusion, the comment letters that have been attained and analyzed to understand the
alternations in the proposed amendment exemplify the impact that the alterations had on the
organizations and the public sectors.
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