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The Difference In Accounting Treatment Between Ifrs And Us Gaap Thus Causes ...

The difference in accounting treatment between IFRS and US GAAP thus causes the results of the financial statements prepared under the two methods to vary considerably and calls for a detailed reconciliation. There is no immediate plan to bring about a convergence between these two modes of treatment, which is a matter of regret.

a) Goodwill under IFRS

Goodwill is not amortised any longer under IFRS procedures and is considered to be an asset with indefinite life. It however has to be subjected to a stringent impairment test, either annually, or at shorter notice if the need arises, to assess for erosion in value. In the event of impairment, the Profit and Loss Account is charged with the computed impairment amount to ensure the immediate highlighting of poorly performing acquisitions. Goodwill is thus not seen as a steadily wasting asset but one with indefinite life; and with a value linked to the performance of the unit.
Another significant change in the treatment of goodwill has arisen out of the requirement for treating all business combinations as purchases. This will eliminate the possibility of companies' not recording goodwill by pooling the assets and liabilities of various companies together for preparation of financial statements.

The test for impairment of goodwill under the IFRS is carried out at the level of the Cash Generating Unit or a group of CGUs representing the lowest level at which internal managements monitor goodwill. The IFRS also stipulates that the level for assessing impairment must never be more than a business or a geographical segment.

The test is a one stage process wherein the recoverable amount of the CGU is calculated on the basis of the higher of (a) the fair value less costs to sell or (b) the value in use, and then compared to the carrying amount. In case the assessed value is lesser than the carrying cost, an appropriate charge is made to the profit and loss account. The goodwill appropriated to the CGU is reduced pro rata. The IFRS requires detailed disclosures to be published regarding the annual impairment tests. These include the assumptions made for these tests, and the sensitivity of the results of the impairment tests to changes in these assumptions. M/s Radebaugh, Gray and Black, in their book International Accounting and Multinational Enterprises stress that these disclosures are intended to give shareholders and financial analysts more information about acquisitions, their benefits to the acquiring company and the efficacy and reasonableness of impairment reviews.

Negative goodwill arises when the cost of acquisition is less than the fair value of the identifiable assets, liabilities and contingent liabilities of the company.


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