Corporate Accounting & Reporting Assignment - Finance Module Report

This report delves into the intricacies of corporate accounting, specifically focusing on the recognition and measurement of goodwill impairment losses. It begins with an introduction to goodwill as an intangible asset acquired through business acquisitions and clarifies that in-house goodwill is not recognized. The report outlines the concept of impairment loss, defined as the difference between the carrying amount of an asset and its recoverable amount, and emphasizes the prohibition of goodwill amortization under IFRS 3. It explains the annual impairment testing of goodwill, the allocation of goodwill to cash-generating units, and the determination of recoverable amounts. The report also contrasts the current standards with previous practices regarding the reversal of impairment losses. The report then presents a practical example of impairment assessment for Gali Limited, providing the carrying amounts, allocation summary, and the journal entry to effect the impairment loss. The conclusion highlights the complexity of goodwill impairment accounting and the need for adherence to relevant standards. References from various academic journals and publications are included.

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By student name
Professor
University
Date: 27 Spetember 2017.
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Contents
Introduction...…………………………………………………………………………………………….......3
Recognition & measurement of impairment loss……………………..……………………...4
Conclusion and Disclosure..……………………………………….....…………………………………6
Solution to Question 2……………………………………………….....…………………………………7
Refrences.....……………………………………………………………….......................................8
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Introduction
Goodwill is an intangible asset that the entities can recognize in their financial
statements, but only that goodwill is recognized that the firms acquire through business
acquisitions. When companies merge and acquire other companies they also acquire
certain amount of goodwill from the process. In house goodwill or self generated
goodwill cannot be recognized in the books of accounts; only acquired goodwill can be
placed in the balance sheet of the company (Boccia & Leonardi, 2016). The cost of
impairment loss of intangible assets when reversed can be recognized in the financial
statements. Impairment loss can be defined as the amount by which the carrying
amount of the asset is more than its recoverable amount. In that case if the company
disposes that asset it will be considered as impairment loss. All the intangible assets
needs to recognize the impairment losses and in cases where the situation betters and
the recoverable amount is more than the carrying amount such amount will be reversed
as per the new IAS 36.However it is stated that as per IAS 36, impairment loss that is
related to goodwill cannot be reversed, the companies cannot do any changes with
respect to such goodwill. In case of goodwill it is tested annually or more frequently in
cases if there is any change in the cost of the goodwill, however any kind of impairment
loss cannot be reversed. A brief analysis of the same is done is essay and important
points related to the same is highlighted (Das, 2017).
Recognition & measurement of impairment loss
As per the new IFRS 3, the amortization of the goodwill is prohibited and not allowed.
Previously it was stated that any impairment loss that was related to the goodwill in
case of purchased goodwill can be amortized over a period that is not more than 40
years. However with the new IFRS this has been abolished. Now goodwill can only be
tested for impairment on an annual basis however no loss can be reversed (Fay &
Negangard, 2017). As per IAS 36, in case of any other intangible asset if the company
has incurred any loss, such impairment losses that the company has recognized in the
previous years, can be reversed. For reversal it is important that a former situation has
reversed and the reasons for impairment has subsidized and improved. However in
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case of goodwill the companies are having no such option, they cannot make the
desired changes as and when they want.
The companies are allowed to test the goodwill for impairment annually or within
particular time frame, however if there is any impairment loss then that will be
recognized but it cannot be reversed in the future. There are various indicators of
impairment that are both internal and external and the companies must consider the
same. In case of goodwill the test of impairment can be done by allocating the amount
of goodwill to the cash generating units, in which the specific assets and liabilities of the
acquired party is attached (kabir, et al., 2017). Once the allocation is done, the amount
of goodwill is tested on the basis of these cash generating units. If the carrying amount
of the unit is more than the recoverable unit then that will be considered as impairment
loss and if the carrying amount is less than the recoverable amount it will be considered
as impairment loss. The recoverable amount is considered as the highest of the value in
use or the fair value of the asset less of any disposal cost. The carrying amount can be
defined as the amount that is recognized in the balance sheet after deducting the
accumulated depreciation and the other amount (Buchanan, et al., 2017).
Before this new amendment, the companies were allowed to reverse the losses that
were related to goodwill under certain specific circumstances like impairment loss had
occurred due to certain events that were of exceptional nature and there was no chance
of them occurring again (Michaely & Jacob, 2017). There may be also cases that other
external situations occur that reduces those losses; in all that cases the companies
were allowed to reverse the amortized goodwill. The companies need to recognize the
same and take the necessary steps for calculating the impairment losses. And when
such situations are improved, the companies can reverse these losses. But now there is
no such option for the companies, they cannot make the necessary reversal with
respect to the goodwill of the asset. It can also be seen that the companies have been
asked to consider that if after recognizing the impairment losses, the amount of goodwill
increase in the coming years, then that will be considered as an increase in the internal
goodwill of the companies (Mahapatra, et al., 2017). It will not be considered as an
increase in the acquired goodwill that the companies acquire through specific
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acquisition. And because the internal goodwill is not allowed to be recognized as an
asset the companies cannot do the same and any revaluation in the same is not
accounted for by the companies.
Conclusion and disclosures
After the entire analysis it can be said that this amendment with respect to the
impairment of the asset and especially with respect to the goodwill is a bit complicated.
Sometimes the companies do not understand the entire method of allocation of goodwill
to the cash generating which is not acceptable. It is important to understand the
important points that are related to the allocation of the impairment losses of the
goodwill (J, 2016). The companies need to follow the said accounting standard with
respect to the same and make the necessary changes accordingly. In case they do not
follow the same, they will be held liable for the same (Meroño-Cerdán, et al., 2017).
The following disclosures are to be given-
 The total accrying amount of the assets and the CGU
 The total amount of impairment losses recognised and reversed
 The internal and external factors that are affecting impairment.
 Any other disclosures that is necessary.
Solution to Question 2
As per the data given, in the books of Gali limited ended on 30th June, 2015, the
impairment assessment needs to be done and fine china division has been identified as
one of it CGU. (Goldmann, 2016) The carrying amount is as follows:
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Account Carrying amount
Plant 484,000
Equipment 111,000
Fittings 70,000
Inventory 30,000
Goodwill 25,000
Total carrying amount 720,000
Value in Use of division 645,000
Fair value less cost of disposal of plant 465,804
Account Carrying Amount Pro rata Impairment loss allocated Adjusted CA
Plant 484,000 0.73 36,391 447,609
Equipment 111,000 0.17 8,346 102,654
Fittings 70,000 0.11 5,263 64,737
Total CA 665000 1.00 50,000 615000
 The revised allocation summary is shown below:
Account Adjusted CA Pro rata Impairment loss allocated Total impairment loss allocated
Plant 18,196
Equipment 102,654 0.61 11,158 19,504
Fittings 64,737 0.39 7,037 12,300
Total CA 167,391 1.00 18,195 50,000
 The final allocation of the impairment loss comes out to be Goodwill: 25000,
Plant, 18196, Equipment 19504 and Fittings 12300.
 The journal entry to effect for the above impairment loss is mentioned
below:
Impairment loss Dr 75000
Goodwill Cr 25000
Accumulated depreciation and
impairment losses –Plant Cr 18196
Accumulated amortisation and
impairment losses –Equipment Cr 19504
Accumulated amortisation and
impairment losses –Fittings Cr 12300
(Allocation of impairment loss)
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References
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and
Appropriate Economic Models, pp. 1-16.
Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect
of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
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Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
J, G., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
kabir, H., Rahman, A. & Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill
Impairment Test-Related Disclosures in Australia. 8th Conference on Financial Markets and Corporate
Governance (FMCG) 2017, pp. 1-32.
Mahapatra, S., Levental, S. & Narasimhan, R., 2017. Market price uncertainty, risk aversion and
procurement: Combining contracts and open market sourcing alternatives. International Journal of
Production Economics, pp. 34-51.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Michaely, R. & Jacob, M., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and
Shareholder Conflicts. Review of Financial Studies, 30(9), pp. 3176-3222.
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