Goodwill for Impairment
CLAUDIA Inc. has an internally generated goodwill and did not amortize or tested for impairment. They cannot amortize because measuring the components are complex and associating the costs incurred with future benefits are too difficult. Goodwill cannot generate cash flows independently and is made as a combination with other assets making up a business; it needs to be assigned to a reporting unit or cash-generating unit in order to test for impairment. Under ASPE, the impairment test is applied when events or changes in circumstances indicate it. Under IFRS, the impairment test is applied annually and whenever there is an indication that the cash-generating unit may be impaired.
CLAUDIA Class B Common Shares price…show more content… Jeffery thinks these costs do not matter from an accounting point of view, however, that is false. It is very important to recognize these costs, otherwise, CLAUDIA Inc’s asset would be underestimated. Expenses that either increase the productivity of the equipment or increase the economic life of the equipment needs to be capitalized. When calculating depreciation, carrying on value needs to be reconsidered.
The depreciation method Jeffery uses is straight-line depreciation method. Even though it is easy to use, it is not the best suitable depreciation method for CLAUDIA Inc because, with the constant repairs on the machines, it is difficult to determine the useful life of the machine. Thus, unit of production depreciation method is better suitable for CLAUDIA because total production units are predictable or separating the machinery into components, major parts that require constant replacement will record as a sub-component of the machinery with its own useful life based on the historical record. (Appendix JE3) my recommendation is to record major repairs as asset and change from straight-line depreciation method to the unit of the production method for…show more content… When all development costs were incurred as expenses, it would drag down the net income of the business and the total assets will be smaller. This would affect the debt-to-equity ratio reaching closer to the specified maximum ratio allowed in the current year. However, profitability can be boosted in the long term if there are no other development costs incurred in the near future. With capitalizing under historical cost model, it would allow the business to generate higher net income by incurred amortization based on useful life of the intangible asset and will increase the total asset of the