...presents the main changes of the regulation in the last years and the key differences between the two accounting treatments. In spite of the new accounting approach there are still lots of discussions, which indicate that the field is still not properly regulated. Finally, the article offers possible directions for future research and reporting practice. Key words: goodwill treatment, impairment of goodwill, intangible assets 1 Introduction We are facing a new era of economic development with a growing significance of intangible assets. Goodwill constitutes a significant asset for numerous companies, especially those which are operating in high technology industries. According to the growing importance of intangibles there has also been a significant change in standards associated with accounting for goodwill. In 2004 International Accounting Standard Board (IASB) issued...
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...| Goodwill | Research paper | | | ACC 620 - Advance entities Contents: Introduction 2 Accounting standards of goodwill development 3 Affection on SFAS 141 and SFAS 142 4 The definition of goodwill 4 Contribution to the creation of goodwill 5 Goodwill inclusion and exclusion 6 Identification of goodwill and intangible assets 7 Calculation of goodwill 7 Goodwill impairment 10 Comparison IFRS with U.S. GAAP for goodwill 11 Conclusion 13 References 14 Introduction: When one company gains control over the others, a business combination is established. As a part of this process, reciprocal accounts and intra-entity transactions must be adjusted or eliminated to ensure that all reported balances truly represent the single entity and current financial reporting standards require the acquisition method to account for business combinations. However, in many cases, the parent records both the consideration transferred and the individual amount of the identified assets acquired and liabilities assumed at their acquisition-date fair values are difference. Thus, GAAP requires the acquirer recognizes the asset goodwill as the excess of the consideration transferred over the collective fair values of the net identified assets acquired and liabilities assumed. Nevertheless, in a business combination, assets of the purchase price and book value of assets varies greatly. Such as the 1989 Time and Warner merged the two companies...
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...IMPAIRMENT Depreciation, depletion, and amortization reflect a gradual consumption of the benefits inherent in an operational asset. An implicit assumption in allocating the cost of an asset over its useful life is that there has been no significant reduction in the anticipated total benefits or service potential of the asset. Situations can arise, however, that cause a significant decline or impairment of those benefits or service potentials. An extreme case would be the destruction of a plant asset—say a building destroyed by fire—before the asset is fully depreciated. The remaining carrying value of the asset in that case should be written off as a loss. Sometimes, though, the impairment of future value is subtler. The way we recognize and measure an impairment loss differs depending on whether the operational assets are to be held and used or are being held to be sold. Accounting is different, too, for operational assets with finite lives and those with indefinite lives. We consider those differences now. Operational Assets to Be Held and Used An increasingly common occurrence in practice is the partial write-down of operational assets that remain in use. For example, in the second quarter of 2001, American Airlines reduced the carrying value (book value) of certain aircraft by $685 million. The write-down reflected the significant reduction in demand for air travel that occurred even before the September 11, 2001, terrorist attacks on the World Trade Center and...
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...annual impairment testing of goodwill and other non-amortised intangible assets. -Difficulties surrounding the identification of a cash-generating unit. -Challenges in projecting cash flows and estimating various assumptions for the testing of value in use. Kolb’s TEL with Paul’s Critical Thinking Components: IAS 36 Impairment of assets-assess of key features Objects/Events: To prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. To also specifies when an entity should reverse an impairment loss and prescribes disclosures. (IASC Foundation Education) Worldviews: Institutional Investor: likely to know the long term stability of business by reviewing the current true worth of assets. Standard Setters: To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. (Deloitte Touche Tohmatsu, 2009) Assertions: Option2 =the reversal of an impairment loss on intangible assets and goodwill should be recognised in the current period if, certain conditions are met: •an external event caused the recognition of the...
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...UNDERSTOOD U.S. GAAP VS. IFRS: IMPAIRMENT OF LONG-LIVED ASSETS AT-A-GLANCE Increasing globalization coupled with related regulations continues to put pressure on moving towards a common global accounting framework – International Financial Reporting Standards (IFRS). Currently, more than 100 countries use IFRS, so if your business goals include global expansion, it is critical to educate yourself about the impact of IFRS on your financial reporting processes and business now. To gain a better understanding of what IFRS means for your organization, we have prepared a series of comparisons dedicated to highlighting significant differences between IFRS and U.S. generally accepted accounting principles (GAAP). This particular comparison focuses on the significant differences between U.S. GAAP and IFRS when accounting for the impairment of long-lived assets. For other comparisons available in this series, refer to our U.S. GAAP vs. IFRS comparisons at-a-glance series. A discussion about U.S. GAAP and IFRS would not be complete without mentioning the status of the Securities and Exchange Commission’s (SEC) activities focused on determining whether the application of IFRS by U.S. registrants should be required or allowed. While the SEC has not made any final decisions with respect to use of IFRS by U.S. registrants, its activities are ongoing. For more information, refer to our IFRS Resource Center. The guidance related to accounting for the impairment of goodwill and indefinite-lived intangible...
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...Senior Reviewed by: Manager XWZ CPA Adam Smith ISSUE: Grouping of long-lived assets to be held and used for impairment testing purposes. BRIEF BACKGROUND OF HISTORY A2 Auto Corporation (“A2 Auto”) is one of the world’s largest manufacturers and distributors of automobiles and automobile ancillary parts. In its Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”), A2 Auto has disclosed within Note 24, Segment Information, that it has four operating segments: (1) A2 Americas, (2) A2 Asia Pacific, (3) A2 Others, and (4) Financial Services. Note 12, Goodwill and Other Intangibles, disclose that A2 Auto has the same four reporting units. ACCOUNTING QUESTIONS 1. What are the appropriate criteria for the grouping of long-lived assets to be held and used for impairment testing purposes? 2. On the basis of the information in A2 Auto’s 2010 Form 10-K, what is the appropriate grouping for purposes of recognizing and measuring an impairment loss? 3. What audit considerations should be made when testing the appropriate grouping of long-lived assets for purposes of recognition and measurement of an impairment loss? 4. Is A2 Auto’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used appropriate? 5. After the A2 Americas $1.76 billion impairment loss was recognized, strategy refocus effort began which has resulted in an improved forecast for the Americas...
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... management projects a decline in the net cash flows for the A2 Americas segment. As a result, in the third quarter of 2010, management has tested the long-lived assets of this segment for recoverability. They recorded a pretax impairment charge of $1.76 billion in cost of sales. Secondly, during the third quarter of 2010, management also reviewed their business plan for the Alpha and Beta operating units. These units projected lower sales, a decline in net cash flows, and currency exchange deterioration. As a result, they tested the long-lived assets of these units for recoverability and recorded a pretax impairment loss of $1.28 billion. Lastly, during 2009, management updated their Asia Pacific Improvement Plan for the Alpha and Beta operating units. They projected a decline in net cash flows for these units based on market projections that reflected the recent market performance for Alpha. As a result, management tested the long-lived assets for impairment and recorded a pretax impairment charge of $1.04 billion. After this 10-K was filed with the SEC, the SEC responded to the Company and required them to explain the inconsistencies of this reporting. The SEC noted that the Company had determined the appropriate amount of impairment for the A2 Americas segment for the Americas operations and the Alpha and Beta operating units for the A2 Asia Pacific segment. The SEC also asked the Company to advise them as to the nature and structure of their operations in the...
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...and they may be classified into two basic types: tangible and intangible. Tangible assets have physical substance, while intangible assets either have no physical substance, or have a value that is not conveyed by what physical substance they do have (e.g., the value of computer software is not reasonably measured with reference to the cost of the diskettes on which these are contained). The value of an intangible asset is a function of the rights or privileges that its ownership conveys to the business enterprise. Intangible assets can be further categorized as either 1. Identifiable, or 2. Unidentifiable (i.e., goodwill). Identifiable intangibles include patents, copyrights, brand names, customer lists, trade names, and other specific rights that typically can be conveyed by an owner without necessarily also transferring related physical assets. Goodwill, on the other hand, cannot be meaningfully transferred to a new owner without also selling the other assets and/or the operations of the business. Research and development costs are also addressed in this chapter. Formerly the...
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...Goodwill has long been a controversial subject. Wines and Ferguson (1993) and McCarthy and Schneider (1995) documented the fact that the controversy regarding the accounting for goodwill in US and abroad had existed since the early 1900s. The controversy focused on the recognition of goodwill as an asset, on its treatment and its link to the income statement. A search of the accounting literature yields two definitions of goodwill. One is that goodwill is the excess of purchase price over fair value of the net assets acquired. Alternatively, goodwill is defined as the price paid for excess earnings where excess earnings are defined as the difference between the earnings of the acquired asset over the normal earnings for a similar business. Historically, there are three views on the treatment of goodwill. The first suggests that goodwill should be written off immediately against retained earnings. The second view holds that goodwill is a wasting asset and it should be amortized over a useful life. Further, the amount of goodwill amortized should be allocated to periods where it contributes to company’s earnings. Goodwill arises is calculated as the difference between the value of the business as a whole and the aggregate of the fair values of its various identifiable assets both tangible and intangible. As outlined in Financial Accounting Standards Board Accounting Standards Codification 350: Intangibles - Goodwill and Other (formerly Statement of Financial...
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...Conceptual Framework A conceptual framework establishes the concepts that underlie financial reporting. Conceptual framework includes objectives, qualitative characteristics, elements, measurement, and recognition concepts. The FASB Concepts Statements guide the board in developing accounting principles and provide understanding. These concept statements are non-authoritative and do not establish generally accepted accounting principles. Entities do not use the FASB Concept Statements in routine preparation of financial statements. (8,2) The IASB and the Interpretations Committee use conceptual framework when developing new or revised International Financial Reporting Standards (IFRS) and interpretations or when amending existing IFRSs. It is used as a point of reference to help preparers of financial statements in applying IFRSs or when no specific guidance is given. The IASB’s Conceptual Framework is not an International Financial Reporting Standard and does not override any specific IFRS. However, the Conceptual Framework is used in development of future standards and the IASB is reviewing IFRSs and the Conceptual Framework to eliminate all conflicts between them. (2,7) Basis of Accounting Both U.S. GAAP and IFRS use a modified historical cost basis with a growing emphasis on fair value when preparing financial statements. When non-U.S. entities operate in a highly inflationary environment and prepare GAAP financial statements; they have the choice to either report price-level...
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...the company prospects. This situation does not look very promising. (b) Because the market value of each company is less than its book value of its net assets, it fails the first step in the goodwill impairment test, an impairment should be recorded. A B C D E F G H (Columns C–D) (Columns B–F) (Columns D–G) Company Market Value Book Value (Net Assets) Carrying Value of Goodwill ROA Estimated Fair Value of Net Assets Implied GW (NA-Market Value) Goodwill Impairment Sprint Nextel $36,361 $51,271 $30,718 3.5% $20,553 $15,808 $14,910 Washington Mutual 11,742 23,941 9,062 2.4% 14,879 0 9,062 E Trade Financial 1,639 4,104 2,035 5.6% 2,069 0 2,035 Total $26,007 (c) As indicated in the expanded spreadsheet above, unless their market values increases dramatically, each of these companies is likely to recognize a goodwill impairment. For Washington Mutual and E-Trade, the impairment will result in a complete write-off of the goodwill asset. Apparently, the prior acquisitions from which the goodwill was recorded did not pan out for these companies. Loss on Impairment 26,007 Goodwill 26,007 (d) Impairment losses are reported in operating income. Thus, the impair¬ments will reduce the numerator in the return on asset ratio. Without recognition of the impairments, these companies’ operating performance is overstated relative to other...
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...created significant differences in the accounting treatment of intangible assets. Both IFRS and GAAP view intangible assets as a non-monetary asset that do not have physical substance but can be identified. This paper will review the similarities and differences within GAAP and IFRS regarding the following: intangible asset impairments, research and development (R&D), advertising cost, and goodwill impairment. Intangible Asset Impairment Testing IFRS and GAAP contain similar indicators for testing impairment of intangible assets. Differences arise in testing, recognition and presentation. GAAP requires a two-step impairment test for intangible assets. Step one requires companies to determine if the carrying amount of the assets exceeds undiscounted future cash flows. If it meets this requirement, step two can be used to calculate the necessary impairment loss. An impairment loss is measured as the difference between the carrying amount and fair value. Under GAAP, fair value is defined as the price that would be received to sell an asset. IFRS requires a one step approach, the recoverable amount exceeds the carrying amount this excess is the impairment loss. The recoverable amount is either the asset’s fair value less costs to sell or the asset’s value in use depending on which is higher (Geld & Siegel, 2000)....
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...semiconductor repair services cannot be determined using the LIFO because the IFRS does not permit the use of LIFO. b. Impairment. IFRS requires reversal of inventory impairments in the period in which an impairment condition reverses (with the reversal limited to the amount of the original write-down). 3. Property, Plant, and Equipment a. Cost. After initial recognition, IFRS permits two measurement alternatives: at cost less accumulated depreciation; or, if fair value can be measured reliably, at a revalued amount that equals its fair value at the date of the revaluation less any subsequent accumulated depreciation. An entity must make an accounting policy choice to use either the cost model (that would be consistent with U.S. GAAP) or the revaluation model to measure each class of PP&E. The accounting policy that is selected must be applied to the entire class of PP&E. b. Depreciation. IFRS requires that each part of an item of PP&E with a cost that is significant in relation to the total cost of the item shall be depreciated separately. c. Impairment. IFRS requires that an impairment loss is calculated as the excess of the asset’s carrying amount over its recoverable amount. The recoverable amount is the higher of the asset’s (1) fair value less costs to sell and (2) value in use. U.S. d. Impairment reversal. Under IFRS, long-lived assets (other than goodwill) must be reviewed for any indication that a...
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...– IAS 36 Impairment of Assets A. The purpose of this project is to provide an understanding on the process of impairment of assets and determining how it affects the financial statement and its users. B. The main purpose of standard IAS 36 is to ensure that the assets reported of Balance Sheet are recorded at no more than its recoverable amount. An asset or cash-generating unit will be considered impaired if the carrying amount is greater than the value of the sale of the asset or amount that could be recovered through use of the asset. The standard provides procedures that an entity must apply to properly measure the recoverable amount, recognize and measure impairment loss, reversing an impairment loss and proper disclosures. The standard applies to all assets except: * Inventories * Assets arising from construction contracts * Employee benefit assets * Deferred tax assets * Financial assets under IAS 39 * Investment property measure at fair value * Biological assets based on fair value * Deferred acquisition costs and intangible assets covered in IFRS 4 * Non-current assets as it pertains to IFRS 5 Identifying Impaired Assets Asset: Entities must assess if there are any indications that an asset may be impaired at the end of every reporting period. If any indicators are discovered must test for impairment. Intangibles with indefinite useful life or asset not yet available for use and goodwill: Must be tested on the annual...
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...|FRAMEWORK | | |U.S. GAAP |IFRS |Similarities | |Purpose of Framework |The FASB framework resides lower in hierarchy. |Management is explicitly required to |Both the frameworks are similar in | | |Management is not required to prioritize it if no|prioritize the IASB framework if there is |their purpose to assist in developing| | |standard is available. |no standard or interpretation available. |and assisting standards. | |Objectives of |It provides different objectives for business |It gives one objective for different |Both frameworks have a broad focus to| |financial statement |entities versus non business entities. |business entities. |provide relevant information to a | | | | |wide range of users. | |Underlying assumptions|Although it recognizes, but not given much |Give importance to accrual and going | | | |prominence is given to accrual and going concern |concern basis...
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