Goodwill Case Study

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1- Define consolidation of financial statements? First of all it's required when investor’s ownership exceeds 50% of an organization’s outstanding voting stock. Definition of consolidated financial statements: One set of financial statements prepared to consolidate all accounts of the parent company and all of its controlled subsidiaries as a single entity. In another way, Consolidated financial statements are the "Financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent (company) and its subsidiaries are presented as those of a single economic entity", according to International Accounting Standard 27. 2- Describe how Goodwill could be calculated as a result of merger or…show more content…
Any determined impairment loss is reported currently in the income statement. This represents a significant change from the accounting required under IAS 22 as amortization of goodwill is no longer permitted. Because goodwill is not going to be amortized any more, the reported amounts of goodwill will not decrease at the same time as under the previous regulation. - Goodwill amortization under prior accounting standard was a constant and relatively small charge over an extended time period (over its useful life period). The new accounting approach is based on the premise that very rarely goodwill declines in value on the straight-line basis. In contrast to goodwill amortization, goodwill impairment loss can be relatively large (Duangploy et al., 2005: 23). As follows we can expect more volatility in reported income, because impairment losses could occur irregularly and in different amounts. As stated impairment write-offs create earnings volatility, although they do not have effects on the cash flow. Nevertheless the impairment amounts are signal of a loss in economic value. They have a significant effect on assets and the…show more content…
4) Impairment tests are complex and subjective and this makes them no less arbitrary than amortization over a finite life. 5) Identification of acquired goodwill is difficult following the restructuring and combination of existing businesses. 6) Conducting a detailed test for impairment on every asset and associated goodwill from initial acquisition at the end of each reporting period may be time consuming and costly. 7) As a result of the introduction of IAS 36, there is much scope for creative accounting by keeping the goodwill as an asset in the balance sheet without writing it off and therefore not affecting the reported profits. The management would prefer no write-off of goodwill because of the potential negative impact on share prices. 8) The impairment test may lead to volatility in reported earnings because it involves assumptions about future cash-flows, discount rates and ‘is likely to result in more ‘lumpy’ profit and loss figures when compared to straight line amortization; losses will be recognized in years with a bleak future outlook, and there will be no goodwill expense at all in years with positive future

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