University Case Study: Analysis of West Ltd. and Goodwill Accounting

This case study examines West Ltd., a company recognized for its environmental efforts, and analyzes the implications of its marketing manager's proposed plan. The assignment delves into the accounting treatment of goodwill as per Australian Accounting Standard AAS 18, covering its requirements, measurement methods (including years' purchase, capitalization, and annuity methods), and the importance of amortization. It scrutinizes the ethical considerations of the marketing manager's proposal to compensate costs, potentially harming the company's financial position. The study highlights the importance of accurate budget allocation, adherence to accounting standards, and the correct treatment of goodwill in financial statements, emphasizing the need for separate assessments of goodwill components and regular reviews of amortization periods. The case concludes with an analysis of the potential negative impacts of the proposed plan on the company's financial reporting and ethical standing.

Running head: CASE STUDY ON WEST LTD.
Case Study on West Ltd.
Name of Student
Name of University
Author’s Note

1CASE STUDY ON WEST LTD.
Table of Contents
Introduction................................................................................................................................2
Requirement for Goodwill.........................................................................................................2
Measurement of the Purchase of Goodwill................................................................................6
Analysis of the Case Study........................................................................................................7
Reference....................................................................................................................................9

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Introduction
As per the case study, West Ltd. has a tag in the market as one of the company who
looks after the environment. The company’s effort of not catching the Dolphins while tuna
fishing. This effort fetches the company a tag of Dolphin friendly company (Bepari and
Mollik 2017). The effort which is made by the ship named Steve Irwin for stopping the
illegal activity of whaling will provide some good name for the company in the market. The
proposed plan, made by marketing managers of the company need to scrutinize by the board
as the plan contains some issues regarding the accounting treatment, which will affect this on
the financial declarations of the company.
Requirement for Goodwill
As per the standard made by the Australian Accounting Standard, AAS 18, goodwill
will apply for the following purpose. They are provided below:
 The standard for goodwill will be applied to each private sector companies and
organization irrespective of the company’s profit motive (Boučková 2016).
 The standard for goodwill will also applied to each public sector companies
and organization irrespective of the company’s profit motive.
The standard for goodwill falls under the Corporation Law of Australia. The standard
for goodwill present in the financial report of the company. This goodwill is known as
material whose information coming from the application present in the Australian
Accounting Standard AAS 5. AAS5 deals with the materiality of the accounting for the
company.
The very purpose of AAS 18 is to portray accounting system to be followed during
the calculation of the goodwill and discount on the acquisition of any company (Carvalho,

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Rodrigues and Ferreira 2016). The goodwill requires to disclose the information relating to
the financial position of the company in the financial report of the company.
Goodwill purchased by any organization need to be treated as the non-current asset at
acquisition, which is expected in the case of the company who deals with investment. When
the goodwill purchased by any organization during the acquisition procedure, the company
need to exchange transactions that enable the value of goodwill, which needs to be measured
reliably. There are number of methods which exists for measuring the goodwill (Faelli 2016).
They are as follows:
1. Years’ Purchase of Average profit Method: In this method, the average profit of
multiple years is multiplied by one or more number of years in order to establish the
good’s value. The number of profits which need to be taken for calculation and the
number of years which need to be taken depends on the entity’s opinion. The average
profit which is multiplied by the number of years that in turn ascertain the goodwill
of the company is called Year’s purchase. This method is also known as Purchase of
Past Profit Method or Average Profit Basis Method.
2. Years’ Purchase of Weighted Average Method: This method is one of the
modified versions of Years’ Purchase of Average Profit Method. As per this method,
the profit of every year needs to multiply by the weights. Then the same rule of
years’ purchase of standard method is calculated.
3. Capitalisation Method: As per this method, the value of the full firm is being
determined based on a reasonable profit. The goodwill is calculated by differentiating
the net tangible assets from the value of the business. To analysing the goodwill, the
following steps need to be incorporated. Firstly, the Expected Average Net Profit
needs to be ascertained (Farima 2018). Secondly, the capitalised value of profit needs

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to be calculated depending on the standard rate of return. Thirdly, the net tangible
asset needs to calculated. Thus, then goodwill needs to calculated:
Goodwill Profit (Adjusted)/Normal Rate Return x 100
4. Annuity Method: In this method the super profit is calculated. The super profit can
be calculated as the profit which is over normal profit. This amount is considered as
the value of annuity over the number of years (Kumar and Kavida 2017). To
calculate the annuity method the company tends to calculate the compound interest
with the certain percentage. The present value of annuity is known as goodwill.
5. Super Profit Method: Super profit is the difference between the average profit
method which is earned by business and the normal profit. The normal profit us the
profit which can be calculated by analysing the normal rate of return which in turn
represents firms in the market. These average profits and the normal profit helped to
anticipate the excess earnings of the company in a single year. If the company did not
earn any excess earnings then there will be no goodwill in that year.
6. Capitalisation Super Profit Method: In this method the company need to analyse
the super-profit in place of ordinary profit against the normal rate od return.
7. Sliding Scale Valuation Method: As per this method the distribution of profit is
related to the super profit method which may vary from year to year. To find the
goodwill through this method, the company need to find the super profit first and
then find the goodwill of the company.
In this view, the Standard explains the purchased goodwill through future benefits
which are assimilated in an exchange transaction process and the assets are recognised. The
alternative goodwill treatment which can be utilised for the calculation of the purchased
goodwill by valuing the expense at the time of acquisition (Muhammad et al. 2015). The
drawback for this process is that recognition of the future profits which are rising from the

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unidentifiable assets that are acquired during the acquisition. At the time of acquisitions
accounting treatment which can be applied for the purchase of goodwill is to write-off
goodwill against reserves at the time of acquisitions. There is also a drawback prevails. This
accounting treatment cannot be accepted because it fails to identify the future profit which are
mainly against the requirements of the Australian Accounting Standard AAS1 “Operating
Profit and Loss or Other Operating Statements” and also against Australian Accounting
Standard AAS4 “Depreciation of Non-Current Assets.”
As per this standard, the goodwill adopted by the company comprises future profits
from the assets which are unidentifiable. The nature of this goodwill cannot be recognised.
Unidentifiable assets include market penetration, good labour relations, market penetration
and team comprise of superior operating personnel (Ng 2018). Intangible assets are
excluded from the unidentifiable asset which are capable of identified and recorded, which is
the case in the patents, licenses, rights and copyrights. Purchase goodwill need to amortised,
which will help the purchaser to recognise the expense in the profit or loss or other operating
statements which are measured and represented in the straight-line method over the period.
The profit can be benefitted and even expected to rise from the date of acquisition at the end
of the period. Twenty years is the maximum limit for this period.
In the accounting treatment of the goodwill of the company, it can be observed that
the company has to amortise the goodwill over a long period. In this period, the benefits are
going to rise. Due to the above reason, the company needs to have separate assessments
concerning the different components of goodwill. The measurement and clarification need to
be done to such an extent that the components which are taken for the calculation of the
research can be identified separately. The aspects which need to be look after while
calculating the goodwill are effects of obsolescence, economic factors like demand and other
related factors (Omarjee, Yasseen and Mohamed 2019). The factors include service life of the

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individual employees or the group of employees and the related actions which can be
expected from the competitors and also from the provision like legal provisions. The most
important factors which the company needs to look after is the foreseeable life of the entity or
the industry. The period on which the goodwill need to be amortised need to be reviewed as
at each reporting date and if necessary the adjustments needs to be done after abiding the
given provisions of Australian Accounting Standard AAS4 “Depreciation of Non-Current
Assets”.
Measurement of the Purchase of Goodwill
The acquisitions of the asset of another entity and investment in the subsidiary which
are associated with the company are to be valued during the acquisition of the shares of the
acquired entity. This identification of the net assets can be done at the fair value. The fair
value needs to measure at the value of an asset at a quantified period and are utilised
following this standard. As per this Standard, when the assessment is made at the fair values
that can be attributed to the individual assets. The number of assets needs to find out by
purchaser, which are collective into a related or composite group. When this kind of
circumstances arises, companies needs to consider the fair value of the group rather averaging
the fair value of the assets which are stated as individual assets (Pickering 2015). The
purchased goodwill always needs to calculate the extra amount of purchase consideration
with the incidental expenses that is over the fair value of the identifiable net assets that are
mostly acquired by the company. The purchase consideration needs to take the cash in that
form of cash, other monetary assets, non-monetary assets and liabilities undertaken.
The value of the goodwill can easily determine when the purchase consideration is the
form of any monetary assets and cash. The determination of the value gets more high the
purchase consideration comprises of non-monetary assets. Then the value of the non-
monetary assets can be determined by reference to the fair value of the non-monetary assets.

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When the purchase consideration comprises of the securities like shares, bonds, etc. then the
price at which they are listed on the Australian Stock Exchange will be considered for the fair
value of the asset.
The unamortised value of goodwill from the balance sheet has a different way which
can be reviewed. In the case of unamortised goodwill, the revision of goodwill must be done
on each reporting date and can be brought down to its maximum extent (Wang and Hooper
2014). The loss which are incurred by the company must be realised and needs to reflect in
the financial statement of the company.
As it can be observed from the above discussion the amount of goodwill which needs
to be recognised in the financial statement of the company need to have unamortised balance
of goodwill, the amount of goodwill amortised during the period and the policy adopted in
amortising goodwill.
Analysis of the Case Study
As per the case study, it can be suggested that the marketing manager’s proposed idea
of compensating from the cost which was fixed for marketing purpose will be unethical and
may harm the financial position of the company. As the marketing manager has no idea
regarding the Standard of goodwill, stated by the Australian Accounting Board, so he propsed
such idea. As per the budgeting is concerned, the company often allocate the budget in
different departments beforehand. The allocations are done based on the historical data and
the performance of the different departments. The budget which that allocated for the
marketing department is for promotional activity like an advertisement, salaries of the
marketing personnel and also other marketing-related issues which will help the company to
enhance in the market or the industry in which the company is working in (Winter 2018). If
the board of the company sanction the proposals of the marketing managers of the company,

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then the company needs to face the serious issue with the marketing department. The cost
which was allocated for the marketing department are compensated for the sake of the
goodwill. The act in which the ship named Steve Irwin performing may have a good effect on
the goodwill of the company, but it will not help to increase the overall goodwill of the
company in the long run. As per Australian Accounting Standard 18, the company need to
evaluate the goodwill based on the fair value. This rule is applicable even when the company
is going for acquiring the different company and if the company is evaluating the goodwill of
the company by themselves. So, it is advisable for the board of West Ltd. to not approve the
proposal of the marketing managers, but instead, the board can allow an extra amount to the
repair and management department for looking after the ship named Steve Irwin.

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Reference
Bepari, M.K. and Mollik, A.T., 2017. R Vallius, S., 2016. Goodwill impairments and the
value relevance of goodwill of the small listed companies in Finland.
Boučková, M., 2016. Quality of disclosed information with emphasis on goodwill
impairment. European Financial and Accounting Journal, 11(2), pp.37-52.
Carvalho, C., Rodrigues, A.M. and Ferreira, C., 2016. Goodwill and mandatory disclosure
compliance: a critical review of the literature. Australian Accounting Review, 26(4), pp.376-
389.
Faelli, A., 2016. Are social media policies necessary? Analysing company policy and its
importance in the regulation and dismissal of employees (No. 20). Student Working Paper.
Farima, N., 2018. Ifrs 3 (r) required disclosures on goodwill and intangible assets: an
empirical analysis on the level of compliance of italian listed companies on required
disclosures.
Kumar, M.M.T. and Kavida, V., 2017. Intellectual Capital Disclosure in BSE Sensex
Companies of India. PACIFIC BUSINESS REVIEW INTERNATIONAL, 9(8), pp.92-99.
Muhammad, N., Scrimgeour, F., Reddy, K. and Abidin, S., 2015. The relationship between
environmental performance and financial performance in periods of growth and contraction:
Evidence from Australian publicly listed companies. Journal of Cleaner Production, 102,
pp.324-332.
Ng, C., 2018. Goodwill without Borders. The Law Quarterly Review.

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Omarjee, F.Z., Yasseen, Y. and Mohamed, W., 2019. The Value Relevance of Aged
Goodwill: A South African Study. Southern African Business Review, 23, pp.23-pages.
Pickering, M.E., 2015. An Exploratory Study of Profit Reporting Differences of Publicly
Owned Professional Service Firms and Partnerships. Australian Accounting Review, 25(3),
pp.262-278.
Wang, J. and Hooper, K., 2014. " To be or not to be": impairment practices among Indian
listed companies.
Winter, J.K.H., 2018. Managerial discretion or economic conditions? Examining the
determinants of goodwill impairments in Finnish listed companies.