Question 1

As part of adopting IFRS,goodwill acquired in a business combination is no longer amortised.Instead,the acquirer shall test goodwill for impairment (AASB 3 Business Combinations).When is goodwill considered to be impaired?

Accepted Answer

Goodwill is considered impaired when the recoverable amount of the cash generating unit is less than the unit's carrying amount. Recoverable amount is the higher of fair value less costs to sell and value in use.

Question 2

Buster Ltd had purchased goodwill to the value of $100 000 recorded in its consolidated financial statements.The goodwill has been determined to have an indefinite useful life.However,one year later Buster Ltd's cash generating units has been determined to have incurred an impairment loss of $13 000.What is the appropriate action for Buster limited to comply with AASB 138 Intangible Assets and AASB 136 Impairment of Assets?

Accepted Answer

Goodwill is not amortized but is tested annually for impairment. If an impairment loss is identified, it should be recognized by reducing the carrying amount of goodwill.

Question 3

Earth Ltd acquired Moon Ltd on 1 July 2009 for the sum of $100 000.On the same date Moon Ltd has the following assets and liabilities: $$\begin{array} { | l | r | r | r | } 
\hline & \mathbf { Carrying amount } & \mathbf { Recoverable~ amount } & \mathbf { Fair~ value } \
\hline \mathbf { Assets: } & & & \
\hline \text { Land } & 100000 & 130000 & 150000 \
\hline \text { Machinery } & 50000 & 30000 & 40000 \
\hline \text { Cash } & 20000 & & \
\hline\mathbf {Liabilities: } & & & \
\hline \text { Loan } & 105000 & & \
\hline \text { Contingent liabilities } & 80000 & & \
\hline
\end{array}$$ What is the value of goodwill,if any?

Accepted Answer

The answer of Earth Ltd acquired Moon Ltd on 1...

Question 4

During 2001 the Financial Accounting Standards Board in the United States indicated they would look to change a requirement for the treatment of goodwill.That change is:

Accepted Answer

The FASB did indeed change the requirement for the treatment of goodwill in 2001, and the change was to remove the requirement to amortize goodwill and replace it with a requirement to write down goodwill to reflect any impairment in value. This change was reflected in FASB Statement No. 142, which became effective for fiscal years beginning after December 15, 2001.

Question 5

Broadbeach Ltd is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Ltd for the year ended 30 June 2009: $$\begin{array} { | l | r | r | r | r | } 
\hline \text { (in dollars) } & \text { Goodwill } & \begin{array} { c } 
\text { Accumulated } \
\text { impairment loss }
\end{array} & \begin{array} { c } 
\text { Carrying amount } \
\text { of CGU }
\end{array} & \begin{array} { c } 
\text { Recoverable amount } \
\text { of CGU }
\end{array} \
\hline \text { Mantra Ltd } & 50000 & 10000 & 250000 & 270000 \
\hline \text { Oceania Ltd } & 40000 & \text { Nil } & 310000 & 250000 \
\hline \text { Wave Ltd } & 60000 & \text { Nil } & 450000 & 600000 \
\hline
\end{array}$$ What is the carrying amount of goodwill as at 30 June 2009 consistent with AASB 136 Impairment of Assets?

Accepted Answer

The carrying amount of goodwill is calculated by adding the goodwill amounts for each subsidiary and subtracting any accumulated impairment losses. For Mantra Ltd, the goodwill is $50,000 with an accumulated impairment loss of $10,000, leaving $40,000. Oceania Ltd has $40,000 in goodwill with no impairment loss. Wave Ltd has $60,000 in goodwill with no impairment loss. Adding these together ($40,000 + $40,000 + $60,000) gives a total carrying amount of $140,000.

Question 6

Which of the following statement(s)in regard to goodwill is/are correct in accordance with AASB 136 Impairment of Assets?

Accepted Answer

All the statements provided are correct in accordance with AASB 136 Impairment of Assets. A) outlines the requirement for recognizing an impairment loss, B) specifies that goodwill impairment losses cannot be reversed, and C) defines value in use according to the standard.

Question 7

Which of the following statements in regard to goodwill is/are correct in accordance with AASB 136 Impairment of Assets?

Accepted Answer

According to AASB 136 Impairment of Assets, goodwill cannot be amortised and must be tested for impairment annually or whenever there is an indication that the carrying amount may not be recoverable. Upward revaluation of goodwill is not permitted under this standard. Therefore, none of the given statements are correct.

Question 8

Prior to the introduction of AASB 138 companies had found ways to circumvent the requirements of the revised (1996)version of AASB 1013.These methods included:

Accepted Answer

The answer of Prior to the introduction of AASB 138...

Question 9

The argument by Pacific Dunlop (1994)is that the accounting treatment of goodwill,particularly the requirement to amortise it over 20 years,places Australian companies at a competitive disadvantage internationally.Miller (1995)analyses this view and argues that:

Accepted Answer

Sophisticated users understand that amortisation of goodwill does not affect cash flows, but the lack of tax deductions for this amortisation in Australia can negatively impact companies.

Question 10

Which of the following intangible assets should be recognised in the statement of financial position?

Accepted Answer

Both licences with active market and purchased trademark are intangible assets that meet the recognition criteria according to IFRS. Intangible assets, such as these, are recognised in the statement of financial position when they are probable to generate future economic benefits and they can be measured reliably. Internally generated goodwill in excess of recoverable amount is not recognised as an intangible asset, as it does not meet the criteria for recognition.

Question 11

The approach to accounting for intangibles raises some issues because:

Accepted Answer

The approach to accounting for intangibles may not recognise many intangible assets, particularly those that are internally generated. This is because it can be challenging to measure the fair value of internally generated intangible assets. Therefore, entities may choose not to recognise them as assets, which leads to issues in accounting for intangibles.

Other choices mentioned in the options have some validity too. Option A is also correct, as assets are now subject to impairment testing, which takes away the professional judgment required for amortisation. Option B is not correct because consistency in the accounting treatment of R&D expenses does not mean entities cannot claim to have expended resources on potential benefits. Option D is not entirely correct. Suppose there is an active market for a particular type of intangible asset. In that case, the active market criteria for determining the fair value of the asset may be appropriate. However, in cases where there is no active market, determining the fair value can be challenging and result in overstatement of asset values.

Question 12

Broadbeach Ltd is a manufacturing company with three subsidiaries.The following information relates to the goodwill account of Broadbeach Ltd for the year ended 30 June 2009. $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Goodwill } & \begin{array} { c } 
\text { Accumulated } \
\text { impairment loss }
\end{array} & \begin{array} { c } 
\text { Carrying amount } \
\text { of CGU }
\end{array} & \begin{array} { c } 
\text { Recoverable amount } \
\text { of CGU }
\end{array} \
\hline \text { Mantra Ltd } & 50000 & 10000 & 250000 & 270000 \
\hline \text { Oceania Ltd } & 40000 & \text { Nil } & 310000 & 250000 \
\hline \text { Wave Ltd } & 60000 & \text { Nil } & 450000 & 600000 \
\hline
\end{array}$$ In accordance with AASB 136,what is the net effect of above goodwill accounts on the statement of comprehensive income and statement of financial position of Broadbeach Ltd?

Accepted Answer

Oceania Ltd's carrying amount of CGU exceeds its recoverable amount, indicating an impairment loss. This decreases comprehensive income (due to the recognition of impairment loss) and decreases the financial position (due to the reduction in the carrying amount of goodwill).

Question 13

AASB 138 contains some elements that seem to be reactions to opportunistic behaviour by preparers of accounts and to the degree of uncertainty surrounding goodwill as an unidentifiable intangible asset.These elements include:

Accepted Answer

AASB 138 includes the prohibition on recording internally generated goodwill and the specification of impairment testing as measures to address opportunistic behaviour by preparers of accounts and uncertainty surrounding goodwill as an unidentifiable intangible asset. However, the standard does not mandate the use of a specific rate of amortisation. Therefore, options A and B are incorrect.

Question 14

Prior to the introduction of impairment testing companies had attempted to manipulate their accounts through amortisation:

Accepted Answer

Both options A and B are justifications for why companies would want to manipulate their accounts through amortisation. Therefore, choice D, which includes both A and B, is the most accurate answer. Option C is also a potential motivation, but it is not as comprehensive or significant as A and B.

Question 15

Which of the following combination best demonstrates the value of goodwill?
I.purchase consideration of subsidiary
II.book value of net assets held by subsidiary
III.fair value of net identifiable assets
IV.contingent liabilities

Accepted Answer

Goodwill represents the premium paid for the acquisition of a subsidiary, which is a result of factors like brand recognition, customer loyalty, and strategic advantages. The fair value of net identifiable assets represents the current value of the assets and liabilities acquired, and the contingent liabilities are potential future obligations that may or may not materialize. Therefore, to calculate goodwill accurately, we need to deduct the fair value of net identifiable assets and contingent liabilities from the purchase consideration. Hence, the best combination to demonstrate the value of goodwill is I less (III-IV).

Question 16

The release of AASB 138 has had what impact on the methods of amortising goodwill?

Accepted Answer

The release of AASB 138 removed the option to amortise goodwill and replaced it with annual impairment testing.

Question 17

After initial recognition,the acquirer shall recognise goodwill at:

Accepted Answer

Goodwill is initially recognized at cost, but after initial recognition, it is measured at cost less any accumulated impairment losses. Goodwill is not amortized but is tested annually for impairment.

Question 18

Which of the following expenses are likely to satisfy the definition of an asset,and hence may be capitalised as an intangible asset?

Accepted Answer

According to the International Financial Reporting Standards (IFRS), specifically IAS 38 Intangible Assets, expenses incurred to develop a brand name, advertising expenses, and research expenses generally do not qualify for recognition as intangible assets. These expenses are typically expensed as incurred because they do not meet the criteria for capitalization, such as the ability to demonstrate future economic benefits and the cost of the asset can be measured reliably.

Question 19

Which of the following statements is correct with respect to intangible assets?

Accepted Answer

Internally generated brands are not recognised as intangible assets under accounting standards because the costs associated with developing them are not separable from the cost of developing the business as a whole. This makes it difficult to measure the cost of the brand reliably.

Question 20

Big Ltd has purchased 100% of Little Ltd for a cash payment of $800 000.The additional costs to Big Ltd to complete the purchase were $3000.An extract from the statement of financial position for Little Ltd at the date of acquisition shows: $$\begin{array} { | l | r | r | } 
\hline & \mathbf {\$} & \mathbf {\$} \
\hline\mathbf {Assets } & & \
\hline \text { Current assets } & & \
\hline \text { Cash } & 12000 & \
\hline \text { Net accounts receivable } & 25000 & \
\hline \text { Inventory } & \underline { 80000 } & \
\hline \text { Total current assets } & & 117000 \
\hline & & \
\hline \text { Non-current assets } & & \
\hline \text { Land and buildings (net) } & 200000 & \
\hline \text { Vehicles (net) } & 90000 & \
\hline \text { Equipment (net) } & \underline { 157000 } & \
\hline \text { Total non-current assets } & & 447000 \
\hline & & \
\hline \text { Total assets } & & 564000 \
\hline & & \
\hline \mathbf { Liabilities } & & \
\hline \text { Accounts payable } & 8000 & \
\hline \text { Loan } & \underline { 100000 }& \
\hline & & \
\hline \text { Total liabilities } & & 108000 \
\hline & & \
\hline \mathbf {Net~ assets } & & \underline { 456000 }\
\hline
\end{array}$$ Additional information:
The assets and liabilities of Little Ltd are stated at fair value except that:
Land and buildings have a fair value of $300 000
Accounts receivable have a fair value of $20 000.
Little owns a licence that has not been recorded in the accounts.Its fair value is $150 000.
What is the amount of purchased goodwill that has been acquired by Big Ltd?

Accepted Answer

The answer of Big Ltd has purchased 100% of Little...

Quiz 8: Accounting for Intangibles

As part of adopting IFRS,goodwill acquired in a business combination is no longer amortised.Instead,the acquirer shall test goodwill for impairment (AASB 3 Business Combinations) .When is goodwill considered to be impaired?