1. As explained within the Chapter 8, intangible asset, Australian accounting standards now prohibit goodwill from being subject to amortisation. Rather, there is a requirement that goodwill be subject to impairment testing. In relation to impairment testing of goodwill, Petersen and Plenborg (2010, p.420) state:
Many argue that an impairment test only approach seems a logical step in the development of accounting for goodwill. First, the underlying logic for removing the traditional amortization methodology is that the amortization on a straight-line basis over a number of years contains no information value for those using financial statements (Jennings et al., 2001). Moreover, IFRS 3 (IASB, 2004b) no longer requires that companies perform the almost impossible task of estimating the useful life of goodwill (Jansson et al. 2004). Second, the impairment approach should provide users of financial statements with better information, as goodwill is not automatically amortized (Colquitt and Wilson, 2002; Bens and Heltzer, 2005). Finally, goodwill impairment tests would be operational and capture a decline in the value of goodwill (Donnelly and Keys, 2002).
You are to provide a clear argument as to why you agree or disagree with the perspectives provided in the paragraph above.
Background on Goodwill Accounting
Solution 1
The IFRS 3 requires that the items of financial statements like, assets, liabilities, incomes and expenses should be recognized at their fair value during the acquisition or business combination. Thus, as per IAS 36 and IFRS 3, the goodwill should be tested for impairment yearly and should be recorded at fair value.
Earlier, there were broadly two method for recognizing goodwill, one is amortization and other is impairment. Under amortization, the goodwill is amortized or charged off to the P&L on the basis of its useful life. We agree with the contention that estimating useful life is a difficult task which many a times leads to incorrect results, further it is also true that under this method the goodwill is amortized on a straight line basis. So, this method does not reflects the fair value of goodwill, hence the true and fair value concept fails (Ifrsbox.com, 2018).
The other method requires, the goodwill to be reviewed periodically for any indicators of impairment. If impairment exists, then the goodwill is impaired by the amount of impaired value. The Impairment arises when the recoverable amount falls below the carrying amount. Thus, this method helps in reflecting the fair value of the goodwill and is thus a more reliable method. Further, it also reflects the true picture of financial statements, and helps the users of the financial statement to make correct decisions. Although, this method is more typical and complex as compared to the first method, but it leads to more accurate results as compared to amortization method (Iasplus.com, 2018).
Solution 2
Coupon Rate per annum (given) = 6%
Coupon Rate half yearly (given) = 6% / 2
= 3%
Rate of return in Market per annum (given) = 4%
Rate of return in Market half yearly (given) = 4% / 2
= 2%
Face value of Debentures = $1,000,000
Interest payments (half yearly) = 1,000,000 x 3%
= $30,000
Period (in years) = 6
Number of interest payments = 6 x 2
= 12
Issue price of Debentures
= Present value of Interest payments + Present value of debentures face value
= (30,000 / 2%) (1 - (1+2%)^(-12)) + 1,000,000 / ((1+2%)^12)
= (1,500,000) (1 - (1.02)^(-12)) + 1,000,000 / ((1.02)^12)
= (1,500,000) (1 - 0.788493) + 1,000,000 / 1.268242
= (1,500,000) (0.211507) + 1,000,000 / 1.268242
= $1,105,754
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Journal Entries
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Date
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Particulars
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Dr./ Cr.
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Amount ($)
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Amount ($)
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1st Jul-15
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Cash
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Dr.
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1,105,754
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To Debentures
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Cr.
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1,105,754
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31st Dec-15
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Interest Expense (Note 1)
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Dr.
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22,115
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Debentures
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Dr.
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7,885
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To Cash (Note 1)
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Cr.
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30,000
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30th Jun-16
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Interest Expense (Note 2)
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Dr.
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21,957
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Debentures
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Dr.
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8,043
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To Cash (Note 2)
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Cr.
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30,000
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Note 1
Interest expense (1st payment) = 1,105,754 x 2%
= 22,115
Semi Annual interest payment = 1,000,000 x 3%
= 30,000
Note 2
Interest expense (2nd payment) = (1,105,754 - 7,885) x 2%
= 21,957
Solution 3
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Particulars
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2015 ($m)
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2016 ($m)
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2017 ($m)
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Total Contract Price
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50
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50
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50
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Less:
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Cost for the year
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10
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28
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40
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Estimated costs to complete
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28
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12
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0
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Estimated total cost
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38
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40
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40
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Estimated Gross Profit
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12
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10
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10
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Percentage of completion
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26.32%
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70.00%
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100.00%
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Particulars
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2015
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2016
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2017
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Estimated Gross Profit
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12,000,000
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10,000,000
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10,000,000
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Percentage of completion
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26.32%
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70.00%
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100.00%
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Gross Profit Recognised for the year
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3,158,400
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3,841,600
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3,000,000
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Particulars
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2015 ($m)
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2016 ($m)
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2017 ($m)
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Cash collected
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11
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19
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20
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Journal entries for the 2015 financial year using the percentage-of-completion method
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Particulars
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Dr./ Cr.
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Amount ($)
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Amount ($)
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Construction in progress A/c
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Dr.
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10,000,000
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To Expenses A/c
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Cr.
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10,000,000
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(Contract cost recognised)
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Construction in progress A/c
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Dr.
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3,158,400
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Construction expenses A/c
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Dr.
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10,000,000
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To Income from Contract A/c
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Cr.
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13,158,400
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(Revenue & Profit recognised)
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Accounts receivable A/c
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Dr.
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12,000,000
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To Construction in progress A/c
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Cr.
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12,000,000
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(Amount receivable from client)
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Cash A/c
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Dr.
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11,000,000
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To Accounts receivable A/c
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Cr.
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11,000,000
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(Cash received from client)
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Journal entries for the 2015 financial year, assuming the stage of completion cannot be reliably assessed
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Particulars
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Dr./ Cr.
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Amount ($)
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Amount ($)
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Construction in progress A/c
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Dr.
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10,000,000
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To Expenses A/c
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Cr.
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10,000,000
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(Contract cost recognised)
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Construction expenses A/c
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Dr.
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10,000,000
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|
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To Income from Contract A/c
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Cr.
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|
10,000,000
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(Revenue from contract recognised)
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|
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Accounts receivable A/c
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Dr.
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12,000,000
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|
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To Construction in progress A/c
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Cr.
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12,000,000
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(Amount receivable from client)
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Cash A/c
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Dr.
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11,000,000
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To Accounts receivable A/c
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Cr.
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11,000,000
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(Cash received from client)
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Construction in progress A/c
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Dr.
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2,000,000
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To Contract Liability A/c
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Cr.
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2,000,000
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(Difference of revenue over cost recognised as liability)
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Solution 4
- a) Revaluation of assets
For the revaluation of assets, carrying values of the assets needs to be adjusted to fair value. It means carrying value will be increased or decreased to match its fair value.
Revaluation Surplus = Fair value - Carrying amount
Revaluation Loss = Carrying amount - Fair value
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Investments in companies
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Carrying Value ($)
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Current fair value ($)
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Revaluation Surplus
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Revaluation Loss
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Property, plant and equipment
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Factory (NSW)
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Land
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100,000
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150,000
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50,000
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-
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Buildings
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– Cost
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70,000
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80,000
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30,000
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-
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– Accumulated depreciation
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- 20,000
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-
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Factory (Qld)
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Land
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150,000
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120,000
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-
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30,000
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Buildings
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|
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– Cost
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125,000
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70,000
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10,000
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– Accumulated depreciation
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- 45,000
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-
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- b) Journal Entries
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Particulars
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Dr./ Cr.
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Amount ($)
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Amount ($)
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Accumulated Depreciation - Building (factory NSW)
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Dr.
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20,000
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To Building - Cost (factory NSW)
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Cr.
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20,000
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(Accumulated depreciation transferred to building)
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Land - Cost (factory NSW)
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Dr.
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50,000
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Building - Cost (factory NSW)
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Dr.
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30,000
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To Revaluation Surplus A/c
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Cr.
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80,000
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(Revaluation surplus recorded)
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Accumulated Depreciation - Building (factory QLD)
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Dr.
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45,000
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To Building - Cost (factory QLD)
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Cr.
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45,000
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(Accumulated depreciation transferred to building)
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|
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Revaluation Surplus A/c
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Dr.
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40,000
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To Land - Cost (factory QLD)
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Cr.
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30,000
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To Building - Cost (factory QLD)
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Cr.
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10,000
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(Revaluation loss recorded and adjusted in surplus)
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References:
Iasplus.com. (2018). IAS 36 — Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 24 Aug. 2018].
Ifrsbox.com. (2018). How to Test Goodwill for Impairment – IFRSbox – Making IFRS Easy. [online] Available at: https://www.ifrsbox.com/impairment-goodwill-ifrs-testing/ [Accessed 24 Aug. 2018].
