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Goodwill amortization and impairment

Question:

Discuss About The Control Of One Or More Than One Businesses?

Business Combination – It is defined as the contract or the happening by which any person receives the control of one or more than one businesses (AASB, 2015). The person or the entity which controls the business is known as acquirer and the entity whose business is being obtained is known as acquire. AASB 3 as prescribed the acquisition method of accounting in case of the business combination. Following are the steps involved in the acquisition method: An acquirer shall be identified. Though it is very clear and precise but in some cases it requires the provisions of the standards to identify the same. For instance two existing Companies decide to form new company to acquire both the companies. he date of acquisition of the business shall be identified. All the assets acquired and all the liabilities considered shall be recognized and measured along with any non controlling interest. After that the either the goodwill be recognized or gain from bargain purchase will be recognized.

  • Goodwill – Yes, the company has reported the goodwill of $17240 thousands as on 30th of June 2016 and $11266 thousands as on 30th of June 2015 (Company official Website; Fridson, 2015). Goodwill is defined as the asset which is recognized after the business combination and it represents the amount of the economic benefits that will arise in future from the assets acquired in business combination which are unidentifiable and non separable. Following are the circumstances in which goodwill can be recognized:
  • If there is probability that the economic benefits will accrue to the company in future and
  • It consists of the value which can be easily and reliably measured.
  • Gain from Bargain Purchase – The event of the bargain purchase is the very rare phenomena. As per Paragraph 34 of AASB3, the gain from bargain purchase is the amount equal to the fair value amount of net assets over the purchase cost that acquirer is ready to pay including the non controlling interest. The situation generally occurs when the seller is under pressure to sell the entity.

No, the goodwill has not been amortized as per note number 11 of the annual report and it cannot be amortized as per the statement number 142 of the Financial Accounting Standards Board (FASB, 2012). As per the statement amortization of goodwill is against the conceptual framework of accounting.

Yes, goodwill is subject to the impairment. As per note number 11 of the annual report, the goodwill is tested for impairment on an annual basis or on frequent basis depending upon the nature of business and market conditions. It is tested when events indicates that the carrying value of the goodwill is impaired. The company has not impaired the goodwill (Company official Website).

No, as per the paragraph number 124 of the International Accounting Standards number 36, the reversal of impairment loss on goodwill has been prohibited (IAS, 2004). The reversal has been prohibited even when the indicators exists that impairment loss recognized earlier are now does not exist. The reason for prohibition that the International Accounting Standard Board has given is that increase in the goodwill after recognizing the impairment loss will not be considered as the increase in the purchased goodwill rather it will considered as increase in the internally generated goodwill. 

Business Combination is defined as the transaction or the event through which any person receives the control of one or more than one businesses. The business combination also includes the two terms as true mergers and mergers of equals but they are very rare in the normal practice. (AASB, 2015).

Financial Statements and Consolidation

Financial Statements in the consolidated form are prepared in case where the one entity has the control over other company in terms of the voting rights and have the significant influence through which it can affect the decision of the company (AASB, 2011) The Company carrying the control and power is the holding company and the another one is the subsidiary company.

  • Company A obtains control through the purchase of all equity shares of Company B. In this case the AASB 10 on consolidated financial statements shall apply because the company A has not acquired the company rather gained the control over the other company in terms of the voting rights.
  • Company A purchased all the assets and assumed all the liabilities of Company B. In this case the AASB 3 on business combination shall apply as the company A has acquired the company B in all respects.
  • Consolidated Group

Yes the company is a part of the Consolidated Group. As per note number 17 of the financial statements of the company, there are nine group companies which have comprised the group. The note number 16 of the financial statements has mentioned the parent entity information containing the financial position of the parent entity as on 30th of June 2016 and other related disclosures (Company Official Website)

Control is authority to administrate and manage the financial and non financial policies including operating policies of one organization by another organization so that the later one can have benefits and advantages from its business operations.

On the other hand, Significant Influence is command to take part in financial and non financial procedures and policies including operating policies decision making of one entity by another entity.

In the company under consideration, near map has control over other entities and does not have any significant influence in any other entity.

Financial Statements in consolidated form are formed by Investor entity by combining all the items of financial statements of subsidiary company in line by line manner by simply adding the values as on reporting date. As per AASB 127, the following is the process involved in consolidating the financial statements of the holding entity and subsidiary:-

  • Value of investments in subsidiary shown in the Assets of the parent company along with value of equity hold by main company in the accounting books of wholly owned company should be removed and not taken into account while preparing the same.
  • Recognition of minority interest in the statement of income and expenditure for the period under reporting.
  • Separate recognition of the interest of holding in the subsidiary’s net assets from the parents shares in the equity. The minority interest in net assets includes amount calculates as per AASB 3 as on the date of acquisition and share in equity by minority as on the date of business combination
  • Common balances for Assets, Liabilities, Income & Expenses will be presented in the financial statements.
  • Preparing the Consolidated Financial Statements

Acquisition analysis plays important role in the preparation of the consolidated financial statements of the company. The analysis consists of not only indentifying the value of the net assets of the company so decided to purchase but also to identify whether it is feasible for the parent entity to make the company as its subsidiary and takes it into the consolidated group. The analysis provides the market insights and image of the company and the value of the shares that the parent entity will have to pay.

  • When the parent entity loses control over the subsidiary.
  • The parent entity will recognize the fair value of the amount of the share that the parent entity still holds after losing control. The fair value is measured in accordance with AASB9.
  • Associates-

As per the AASB, 128, an associate is defined as company upon which the investor investing in the company gains control over the company. The control is defined as the investor’s exercising the significant influence over the decision made by the company (AASB, 2011)

Associates and Equity Method

No the company does not have any associates as reported in the financial statements of the company. The information is as per the annual report of the company.

As per AASB 128, the Equity Method of accounting is used by Investor Company to recognize and present the investment in associates. As per this method, initial recognition of the investment is associates is done at the cost and after that revaluations have done to increase or decrease the carrying amount of investment to record the profit or loss of investor in investee, to record the dividends and to record the interest from other comprehensive income. 

Equity method is used in every situation to record the investment in associates apart from the following:

  • When the investment in associate is recognized as per AASB 5 and held for sale
  • Exception has been provided as per AASB 127 to a parent company who also has investment in associate to prepare consolidated financial statement
  • When the investor has informed by voting and no objection has been received from any investor for not applying equity method and the investor’s securities are not listed or traded in any market and investor has not filed any application for new issue in the public and the investor is preparing and presenting the consolidated financial statements as per AASB and IFRS

Yes, as per AASB 128, the equity method need not to follow as exception has been given to the parent investor.

Joint arrangement as per IFRS 11 is defined as the arrangements where the two or more entities have the joint control over the operations of other entity. No the company is not the party of any joint arrangement (IFRS, 2012).

  • Joint Control and Joint Operations - Joint control means sharing of control through contract or agreement or arrangement in which any decisions about the activities of arrangement can be taken with the consent of both the parties on unanimously basis.

Joint venture is the joint arrangement in which parties have a right over the net the assets of the arrangement and on the other hand joint operation is the joint arrangement whereby parties to joint arrangement has rights over the assets of the arrangement and have obligations for the liabilities of the arrangement. Judgment of the parties bifurcate a joint arrangement as joint venture or joint operation.

A joint operator in the joint arrangement accounts for all the assets, liabilities, incomes and expenses in relation to the degree of the participation in the joint venture and joint operations so concerned.

References

AASB, (2010), “AASB 1013 Accounting for Goodwill” retrieved from https://www.aasb.gov.au/admin/file/content102/c3/AASB1013_6-96.pdf  on 12/09/2017.

AASB, (2011), “AASB 10 Consolidated Financial Statements” retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf   accessed on 11/09/2017.

AASB, (2011), “AASB 128 Investments in Joint Ventures and Associates” retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-11.pdf accessed on 11/09/2017.

AASB, (2015), “AASB 3 Business Combination” retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf   accessed on 11/09/2017.

AASB, (2015), “AASB 138 Intangible Assets” retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf accessed on 11/09/2017.

Company official Website ,available on https://www.nearmap.com.au/about accessed on 10/09/2017

FASB, (2012), “Goodwill and Other Intangible Assets” retrieved from https://www.fasb.org/summary/stsum142.shtml  accessed on 11/09/2017.

Fridson M, (2015), “Financial Statement Analysis”, retrieved from https://books.google.co.in/books?id=Iha4OzyPN48C&printsec=frontcover&dq=online+free+books+on+presentation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false  accessed on 11/09/2017.

Hove M, (2016), “Consolidated Financial Statements – An International Perspective”, retrieved from https://books.google.co.in/books?id=BcgtnlDHsXcC&printsec=frontcover&dq=online+free+books+on+consolidation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false  accessed on 11/09/2017.

IFRS,(2012), “Joint Arrangements”, retrieved from https://www.iasplus.com/en/standards/ifrs/ifrs11  accessed on 11/09/2017.

IAS Official Website, (2004), “IAS 36 – Impairment of Assets” retrieved from https://www.iasplus.com/en/standards/ias/ias36 accessed on 11/09/2017

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