Dissertation Creation - The UK's original provider of custom dissertations and dissertation help...

Free Dissertations - Accounting Dissertations

Under Accounting Standard 142, It Became Necessary To Review Goodwill For ...


Under accounting standard 142, it became necessary to review goodwill for impairment, either at the operating level, meaning a business segment, or at a lower organisational level. Impairment must also necessarily be an annual accounting exercise, and can occur at even shorter intervals, if events indicate that the recoverability of the carrying amount needs reassessment.
The procedure for assessment of impairment under IFS 142 comprises of two steps.

The fist step involves a comparison of the computed fair value of a business segment with the carrying amount of the concerned unit, including the goodwill. In cases where the book value of the unit exceeds its fair value, no further exercise needs to take place and valuation of goodwill remains unchanged. If, however, the fair value of the reporting unit is lesser than its carrying amount, the procedure for treatment of impairment of goodwill requires application of a second step. Calculation of goodwill impairment, under US GAAP, occurs through the determination of the excess of the carrying amount of goodwill, over its fair value.

The computation for this is simple and constitutes of determining the fair value of goodwill by allocating fair value to the various assets and liabilities of the reporting unit, similar to the procedure used for the determination of goodwill in a business combination. The calculated erosion in goodwill needs reflection in income statement as an impairment charge in the computation of income. In certain cases, negative goodwill can arise because of the fixation of a price less than that warranted by valuation of physical assets.

US accounting procedures categorically specify the treatment of negative goodwill. The excess of fair value over the purchase price, requires its allocation, on a pro rata basis, to all assets, other than current assets, financial assets, assets that have been chosen for sale, prepaid pension investments, and deferred taxes. Any negative goodwill remaining after this exercise finds recognition in financial statements as an extraordinary gain.

b. The Position under IFRS

Goodwill, in accounting treatment under the IFRS, has evolved through stages similar to US GAAP, and is not amortised any longer, as was the case in the past. While the basic principle of treatment of goodwill has become similar under both the methods, differences do exist in the nuts and bolts treatment of the issue at the ground level, in the actual preparation of financial statements.
IFRS procedures, like US GAAP, have phased out the method of pooling of interests for accounting of acquisitions and business combinations, and require the application of the purchase accounting concept.

Please note: The above dissertation snippet was written by a student and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.