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Impairment Of Goodwill And Deferred Taxes

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Question:

Discuss about the Impairment of Goodwill and Deferred Taxes.
 
 

Answer:

Introduction

In this report a complete study has been prepared over the impairment test of under AASB 136 on the assets of The Longreach group Ltd. This company is private equity firm typically invest in mature industrials and financial services around the globe. There are various recent economic changes which have thrown a spotlight on the impairment test. As such many entities around the globe considered to evaluate their impairment testing process, identified models and assumptions. AASB 136 as amended is equivalent to IAS 136 which is used for implication of impairment test on the items shown in the financial statement of organization. In this report complete study has been prepared over how impairment test could be performed by The Longreach group Ltd in accordance with IAS 36.

Purpose of impairment test

An impairment test is newly adopted mechanism started in Australia to measure whether the items in financial statement is shown at its true values . By using the impairment test in accordance with AASB 136 could reduce the amount shown in balance sheet by either its intangible or tangible assets if impairment test indicates lower value. Impairment testing can be applied for different accounting process named commercial accounting and tax accounting. However, various countrie have different accounting standards and justifications for implication of impairment test. It is observed that international financial accounting standard have been followed by several countries for impairment test of amount stated in balance sheet. The mainly purpose of this test is to make changes accordingly to identify whether assets are put at not more than their recoverable amount. Common mistakes in impairment test include calculation of wrong impairment amount, discount rate and terminal value.

Impact on the impairment test with the existence of goodwill

Ideally in the business functioning of the organization there is needed to identify the true value of items stated in Balance Sheet. Therefore company has to use impairment test if on the reporting date an assessment made indicates that carrying amount of an assets exceeds its recoverable amount. However, goodwill will be taken for impairment test on annual basis (Godfrey, et., al., 2009)

Testing of goodwill for impairment

For impairment test, acquired goodwill in business will affect the impairment test on CGU (group of assets that generate cash inflow).  Goodwill must be given to CGU that are expected to take benefits from the synergy of combination of two businesses. In this case yearly impairment test for the CGU to which goodwill was allocated must be performed at reporting time.

It is observed that wile implementation of impairment test CGU needs to be undergone with the impairment test without containing goodwill in its business functioning. Then individual test would be done to identify the true value of all the asset of The Longreach group Ltd.  By using this test it could be evaluated that whether company has created value or not by acquiring goodwill in its business functioning. In this impairment testing IAS 36 needs entities to compare their past value of cash inflow to actual cash inflow in assessment (Hart, et., al., 2008).

If good will exists in the business functioning of The Longreach group Ltd then recoverable value of intangible assets in impairment test would be based on either enterprises value or equity value. At the time of recoverable amount based on enterprises value the results should be compared with invested capital.  In case of equity value it should be based on common shareholder equity. If the recoverable amount based on enterprises value is less than investment amount of company then impairment test would be implemented to reduce the value of goodwill to the certain computed amount. However, carrying amount of assets should not be reduced below the highest of fair value less cost of capital or value in use or zero (Sorros, et., al., 2015).

 

Basis steps for introducing impairment test

AASB 136 prescribes procedure for Longreach group Ltd to ensure whether assets are carried out or recorded at no more than their recoverable amounts. However standards applied to all the assets except for the following types of assets has shown as below.

For the effective impairment test Longreach group Ltd would indulge in recoverable test for identifying the true values of items shown in balance sheet. This test identifies the sum of undisclosed proposed future cash inflows with the carrying amount of assets. If carrying amount is greater than the amount computed then assets would be considered not recoverable. Longreach group Ltd has to check following basic steps for applying impairment test (Sorros, et., al., 2015).

  • Identification of recoverable amount of assets.
  • Present and future cash inflows from the business functioning while acquiring goodwill.
  • Application of all accounting standard in accordance with IAS 36 for implementing impairment test.
  • Benefits to different set of CGUs in business functioning of Longreach group Ltd

This above graph depicts how company has to implement impairment test for identifying the impairment benefits and loss for the true and fair value of assets shown in the balance sheet (Li, et., al., 2011).

Conclusion

In this essay various facts and figure of assets shown in the balance sheet of Longreach group Ltd has been taken into consideration. This impairment test has been followed in this report which provides key aspects to evaluate the true value of assets of organizations.  Now in the end it would be said valuation in assets are found consistently due to various reasons. Therefore company should apply impairment test on annual basis to identify true exact value of assets stated in balance sheet of the company.

 

References

Detzen, D., Stork genannt Wersborg, T. & Zülch, H. 2016, "Impairment of Goodwill and Deferred Taxes Under IFRS", Australian Accounting Review, vol. 26, no. 3, pp. 301-311

Godfrey, J.M. & Koh, P. 2009, "Goodwill impairment as a reflection of investment opportunities", Accounting and Finance, vol. 49, no. 1, pp. 117-140.

Li, Z., Shroff, P.K., Venkataraman, R. & Zhang, I.X. 2011, "Causes and consequences of goodwill impairment losses", Review of Accounting Studies, vol. 16, no. 4, pp. 745-778

PETERSEN, C. & PLENBORG, T. 2010, "How Do Firms Implement Impairment Tests of Goodwill?", Abacus, vol. 46, no. 4, pp. 419-446.

Sorros, J., Belesis, N. & Karagiorgos, A. 2015, "The Reliability of Impairment Tests: The Case of Vessels", Procedia Economics and Finance, vol. 32, pp. 1787-1793.

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