Financial Reporting on Goodwill and Intangible Assets

fiscal Reporting on Goodwill and Intangible AssetsQuestion 1Under International Financial Reporting Standards (IFRS), grace and intangible assets must be treated separately during a business combination in accord with IFRS3. Prior to IFRS 3, companies, during a business combination situation, intangible assets and goodwill could be accounted for as goodwill1.Under IFRS 3, acquired intangible assets ar treated separately to goodwill. With recognised intangible assets, the apprize of the intangible asset can be amortised over the utile life of the asset. Goodwill is the prize difference between the price paid for a business on acquisition and the value of the assets. Unlike intangible assets, goodwill cannot be amortised still needs to be re-measured for impairment, on an annual basis. This impairment value can be included in the income statement as an expense, on an annual basis. This is the critical difference between intangible assets and goodwill2.Upon acquiring a business, the acquiring company must assess the fair value of the relevant assets and liabilities including some identifiable intangible assets. This is the only time that these assets can be recognised on the balance sheet. Internally created intangible assets cannot be amortised in a true line and reduced in this way on the balance sheet unless they are identifiable in terms of a useful life expectancy. Intangible assets that have an indefinite life span cannot be amortised on a bully line basis and must be re-measured for impairment, instead. All internally created intangible assets are re-measured for impairment, regardless of whether or not they are able to ascertain the useful life expectancy of the asset3.Goodwill is generally considered as a type of intangible asset however, for the purposes of IFRS 3, it must be accounted for separately, during a business acquisition, with goodwill neer being amortised and intangible assets that can be recognised to have a specific life expectancy can be amortised on a straight line basis. This is not the same for internally created intangible assets which will never be amortised.Question 2(a) Gearing is calculated by considering the dimension of debt to justice, which is considered as debt divided by capital employed (or debt divided by debt plus shareholder funds). Intangible assets are often added back on to the shareholders funds as intangible assets such(prenominal) as goodwill and are a measure of the history of the company and not its current financial strength4.CalculationGearing metrical composition reported in companys balance sheet(733 + 8585) which is total borrowings divided by shareholder equity / (9318 + 4013) total debt plus shareholder equity69.90%Adjusted to make goodwill valueless(733+8585) / (4013 + 9318 4514) goodwill is taken off the shareholder equity105.68%Adjusted to treat both goodwill and intangible assets as valueless(733+8585) / (4013 + 9318 9974) goodwill and intangible assets are added bac k on277.57%The higher the ratio or gearing percentage, the greater the company favours debt over equity. A ratio of 100% would indicate that the company has an equal preference for both the use of equity and debt5. Therefore, the higher the percentage the greater the dependence and the greater the perceived financial risk. Shareholders will only obtain a return on their equity once all interest payments have been made. Therefore, the higher the reliance on debt, the to a greater extent volatile the shareholder earnings are going to be. However, the debt repayment is set and, therefore, the higher the gearing ratio, the greater the risk but also the greater the emf return for the existing shareholders6.The figure for Allied Boots, for the purposes of this analysis is 105.68%. Any figure over 100% is considered high, which means that there may be volatility for the shareholders, but the profit growth will also be higher.In this case, the figure with goodwill ignored, has been used as this takes into account the fact that goodwill is largely a measure of historic value. The reason for this is that goodwill is entirely a reference to historic value generated in the business and should not, therefore, be taken into account as part of the shareholder equity. Intangible assets are continued value generating assets and should, therefore, remain in the calculation. For example, the intangible assets could include intellectual property which continues to add value to the business, whereas goodwill at the point of business acquisition is simply a ringion of the value of the business name at that point no further value will be generated by virtue of this figure7.Question 3In an entirely efficient market, all analysts will have all relevant reading available to them, allowing them to makes suitable adjustments to give them the best possible information in relation to the value of the business. Truly efficient figures imply that all figures within the accounts reflect al l known information8. However, in reality, markets are not entirely efficient as there is information that is not reflected in the financial data. Financial data, by its very nature, is historic and simply reflects what has happened in the past. Values for intangible assets such as intellectual property and goodwill can vary very apace and are extremely subjective in nature. Goodwill and intangible assets are often based on information that is not publicly available such as internal know-how and, therefore, cannot be suitably analysed to see how realistic they are this potentially offers considerable discretion for managers in terms of how these figures are reflected in the accounts9. referable to the potential discretion in this area, regulators need to lay down certain manipulation rules to ensure that the information being provided by the financial accounts is as pen up to full, true and fair as is possible. This then allows the analysts to make the most suitable decisions fo r their chosen position.BibliographyBlake, John, Lunt, Henry, Accounting Standards, Pearson Education, 2001Dunse, Neil A., Hutchison, Norman E., Goodacre, Alan, Trade-related valuations and the treatment of goodwill, Journal of Property Investment Finance, 22, 3, 2004Elliott, Barry, Elliott, Jamie, Financial Accounting and Reporting, Pearson Education, 2006Mard, Michael J., Hitchner, pile R., Hyden, Steven D., Zyla, Mark L., Valuation for Financial Reporting Intangible Assets, Goodwill, and Impairment Analysis, SFAS 141 and 142, John Wiley and Sons, 2002Reilly, Robert F., Schweihs, Robert P., Valuing Intangible Assets, McGraw-Hill Professional, 1999Seetharaman, A., Sreenivasan, Jayashree, Sudha, Raju, Yee, Tey Ya, Managing impairment of goodwill, Journal of Intellectual Capital, 7, 3, 2006Seetharaman, A., Balachandran, M., Saravanan, A.S., Accounting treatment of goodwill yesterday, today and tomorrow Problems and prospects in the international perspective, Journal of Intellectual Capital, 5, 1, 2004Weetman, Pauline, Financial Accounting An Introduction, Pearson Education, 2006Wines, Graeme, Dagwell, Ron, Windsor, Carolyn, Implications of the IFRS goodwill method of accounting treatment, Managerial Auditing Journal, 22, 9, 2007Footnotes1 Weetman, Pauline, Financial Accounting An Introduction, Pearson Education, 20062 Mard, Michael J., Hitchner, James R., Hyden, Steven D., Zyla, Mark L., Valuation for Financial Reporting Intangible Assets, Goodwill, and Impairment Analysis, SFAS 141 and 142, John Wiley and Sons, 20023 Blake, John, Lunt, Henry, Accounting Standards, Pearson Education, 20014 Seetharaman, A., Sreenivasan, Jayashree, Sudha, Raju, Yee, Tey Ya, Managing impairment of goodwill, Journal of Intellectual Capital, 7, 3, 20065 Elliott, Barry, Elliott, Jamie, Financial Accounting and Reporting, Pearson Education, 20066 Dunse, Neil A., Hutchison, Norman E., Goodacre, Alan, Trade-related valuations and the treatment of goodwill, Journal of Property Investm ent Finance, 22, 3, 20047 Seetharaman, A., Balachandran, M., Saravanan, A.S., Accounting treatment of goodwill yesterday, today and tomorrow Problems and prospects in the international perspective, Journal of Intellectual Capital, 5, 1, 20048 Reilly, Robert F., Schweihs, Robert P., Valuing Intangible Assets, McGraw-Hill Professional, 19999 Wines, Graeme, Dagwell, Ron, Windsor, Carolyn, Implications of the IFRS goodwill accounting treatment, Managerial Auditing Journal, 22, 9, 2007