Intangibles and Impairment. 1. Using references to the relevant accounting stand

ID: 2601268 • Letter: I

Question

Intangibles and Impairment.

1. Using references to the relevant accounting standards explain the required or recommended accounting treatment of the following transactions or events.

a. A revenue generating unit comprising the following assets with a goodwill of $30,000 has been impaired by $50,000.

Instructions Required 1. Using references to the relevant accounting standards explain the required or recommended accounting treatment of the following transactions or events a. A revenue generating unit comprising the following assets with a goodwill of $30,000 has been impaired by $50,000 Original Cost $300,000 $150,000 $50,000 Asset Accum Depr & Carrying Impairment $80,000 Buildings Machiner Motor vehicles $80,000 Goodwill amount $220,000 $100,000 $50,000 $20,000 $30,000 $10,000 $30,000 In your answer you should set out the steps that you have taken and make reference to the relevant section of the accounting standard (5 Marks) b. Briefly explain the rationale for your treatment of goodw in the above example Marks) (2

Explanation / Answer

GOODWIL IMPAIRMENT

US companies are required to review Goodwill to check whether it is the true value.

This is to prevent companies from showing a value higher than the fair value less selling costs. When the recoverable amount is less than the carrying value the difference is impaired or ‘written off’ to the income statement.

All assets are tested and subject to impairment if need be. Intangible are anyway impaired annually even if there is no impairment indicator. Under IAS 36, Impairment of Assets, impairment testing of goodwill must be performed at a level no larger than an operating segment as defined in IFRS 8, Operating Segments.

IFRS 3, Business Combinations brings requirements for the allocation of impairment losses, when dealing with Goodwill.

For example under the ‘full goodwill’ method the following example shows the application:

Net assets

30m

Goodwill

18m

Total carrying value

48m

Less recoverable amount

43m

Impairment