Relevance and Disclosures in Environment †Free Samples to Students

Question: Discuss about the Relevance and Disclosures in Environment. Answer: Introduction: According to IAS 36, it is necessary to test goodwill at least yearly for impairment at the lowest level monitored on the part of the management. It could not be more in contrast to the operating segment belonging to under IFRS 8 Operating Segments. If it is based on individual cash-generating unit (CGU), goodwill impairment needs to be carried out on individual basis (Baboukardos and Rimmel 2014). However, when goodwill is impaired based on a bigger group of CGU, the reflection needs to be made through the impairment testing of goodwill. In case, the carrying amount of the CGU group including goodwill is lower than the recoverable amount, there would be no recognition of impairment. However, if the recoverable amount is lower than the carrying value of the CGU and allocated goodwill, it is impaired. This particular charge of impairment is allocated initially to the balance of goodwill for minimising it to zero and after that, pro rata to the carrying amount of other assets within CGU group (Glaum, Landsman and Wyrwa 2015). The testing of goodwill is carried out for impairment when there is an impaired indicator or at the time, there is an indicator that the CGU to which it is distributed is impaired. At the time the indicator of impairment is associated with particular CGU, it needs to be tested distinctively for impairment before the testing of goodwill and the group of CGU together is conducted (Ifrs.org 2017).This method could be adjudged as impairment-only approach. Conversely, there is another approach associated with the IFRS Goodwill and Impairment Project, which is termed as amortisation and impairment approach. As amortisation has direct influence on the net income of an organisation, the investors need to dissect this significant component. If the current valuation of goodwill is greater in contrast to the fair value less the amortisation expense, the asset is termed as impaired. In such instance, the difference in current value and fair value is treated as impairment charge (Aschfalk-Evertz and Oliver 2013). This entry helps in adjusting goodwill to the fair market value on the balance sheet. In many situations, when an organisation acquires the assets of another organisation, the goodwill of the usurped organisation reduces in value. In this case, the cost of impairment is charged off the books of the new owning organisation to bring the value of goodwill to fair market valuation. As long as there is responsible management of impairment costs, the investors could obtain an insight of the correct company valuation. In addition, since many inferences and variables are associated with ascertaining amortisation and the life expectancy of goodwill, the cost of impairment could be used in manipulating the balance sheet. Thus, it could be stated that the amortisation and impairment-only approach could be used on the part of the organisations in relation to accounting for goodwill, since IFRS lays stress on disclosures of fair value. As per the IFRS project related to impairment of goodwill, it is necessary to conduct goodwill impairment testing, as the previously acceptable appraisals of goodwill might not pass the rules of fair value. Hence, not following this accounting rule might have legal ramifications with loan agreements and acquisition agreements. According to the annual report of the organisation, goodwill is recorded at $10 million due to purchase of a subsidiary five years ago. In addition, the profit has been obtained at $3 million every year. However, no goodwill impairment has been carried out after the asset is acquired. Since such testing is not conducted, it might have the following repercussions: The restatement of past income statements is necessary and there would be greater net income (Kabir and Rahman 2016). There would be no effect on goodwill, which would hinder the creation of deferred tax asset, if there is a reduction in deferred tax liability. As a result, there would be increase in the value of shareholders equity, since no impairment loss is recorded in the income statement. There would be decrease in current and future non-current asset turnover for the organisation. Debt-to-assets would be higher, which would bear direct impact on the cash flow ratios. There would be fall in future net income, due to higher asset value and greater depreciation expense (Lind and Arvidsson 2014). Thus, based on the above discussion, it is advised to Mr. Gilchrist to adopt the goodwill impairment testing for avoiding any lawsuit along with maintaining transparency in financial statements and disclosures. References: Aschfalk-Evertz, A. and Oliver, R., 2013.Goodwill impairment testing according to IFRS in the United Kingdom: An empirical analysis of the discount rates used by the thirty largest FTSE 100 companies(No. 75). Working Papers of the Institute of Management Berlin at the Berlin School of Economics and Law (HWR Berlin). Baboukardos, D. and Rimmel, G., 2014, March. Goodwill under IFRS: Relevance and disclosures in an unfavorable environment. InAccounting Forum, 38 (1), pp. 1-17. Glaum, M., Landsman, W.R. and Wyrwa, S., 2015.Determinants of Goodwill Impairment under IFRS: International Evidence. Working Paper, available at: https://ssrn. com/abstract= 2608425. Ifrs.org. (2017).IFRS. [online] Available at: https://www.ifrs.org/ [Accessed 13 Oct. 2017]. Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia.Journal of Contemporary Accounting Economics,12(3), pp.290-308. Lind, E. and Arvidsson, M., 2014. Indicators of goodwill impairments: Pre-and post-acquisition indicators ability to predict future impairments.