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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).
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 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 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.
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-
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:
Impairment loss Dr 75000
Goodwill Cr 25000
Accumulated depreciation and
impairment losses –Plant Cr 18196
Accumulated amortisation and
impairment losses –Equipment Cr 19504
impairment losses –Fittings Cr 12300
(Allocation of impairment loss)
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.
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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