Question

This assignment is based on the case Biosensors International Group: Valuation and Impairment Testing of Intangibles (HBSP No.: NTU053) and some related research. It is important that you read and understand the case before answering the assignment questions.

The case highlights that Matthew Tay, who is an analyst, is concerned about the significant increase in intangibles and goodwill from 4% to 62% of total assets of Biosensors International Group (BIG). Matthew wondered what the intangibles and goodwill represented, how they are recognized and how they should be interpreted. He also felt that the impairment review of the goodwill, which arose from the acquisition of JWMS, required special attention.

Prepare a report to solve Mathew Tay’s concerns about the significant increase in goodwill. In your report, critically analyse the accounting treatment of goodwill and the allocation of acquisition cost to goodwill. Also discuss whether the accounting treatment of goodwill in subsequent years could be a concern for financial reporting. Specifically, you could consider the following questions in your report.

1. Critically analyse the accounting treatment of goodwill by considering the following questions.

a. What is goodwill? How does goodwill arise?

b. What does the goodwill represent that arose from BIG’s acquisition of JWMS? In other words, what did BIG pay for (in addition to the total identifiable net assets)?

c. How is goodwill accounted for at acquisition and at subsequent financial statement date?

2. Critically analyse the allocation of acquisition cost to goodwill by considering the following questions

a. Is the allocation of acquisition cost to goodwill subjective? Discuss.

b. How does the allocation of acquisition cost to goodwill affect profit and cash flows in subsequent years? For your critical analysis, you could compare the effect of the accounting treatment of goodwill in subsequent years with the effect of the accountingtreatment of property, plant and equipment (or intangibles with finite useful lives) in subsequent years.

3. The reported goodwill on the Balance Sheet may reveal managers’ private information of a firm’s future cash flows. However, research argues that subsequent treatment of goodwill may provide opportunities for earnings management. Discuss whether the accounting treatment of goodwill in subsequent years could be a concern for financial reporting.

Answer 1

I)

a) Goodwill is an Intangible asset, An important property of an intangible asset is that, it cannot be touched, but its presence we can feel. goodwill becomes part of assets in balance sheet. it is very important to consider goodwill and on what basis it has been valued in the financial statements.

b) Considering the present case of BIG's Acquisition of JWMS, There is one additional element which is already involved in the amount that has been paid by BIG for Acquisition of JWMS.

"The purchase consideration involves the additional amount over the value of net tangible assets, which is known as goodwill"

for eg: assume purchase consideration is 100, net value of tangible assets is 80, the difference between is 20 (goodwill).

so in the above case, BIG paid additional amount to purchase JWMS considered as goodwill, here we can say that additional amount is value of reputation of JWMS at the time of purchase, where such reputation or name and fame of business are computed by considering some factors such as: location, quality, customer satisfaction etc.

c) Goodwill is accounted in the year of acquisition at cost and in the sub-sequent year at Reduced or Diminished Value.

II)

a) Accounting entry to recognise goodwill in the financial statements (in the year of purchase) is as follows.

Goodwill A/c ------------ Dr.

To Cash/Bank A/C

(when the amount of purchase consideration is paid by way of cash or bank)

Note: Goodwill has to be valued on cost ie, cost that the company incurred which it paid additionally over the value of net assets.

b) The Treatment of goodwill in sub-sequent years in profit and loss account is by providing amortisation.

Amortisation of Goodwill A/c----------Dr.

To Goodwill A/c.

( Amortisation has to be provided at specific percentage of cost every year untill the value reduced to "zero")

III)

Since the goodwill is an intangible asset, which is paid at the time of purchase (in this case it is not self generated) by BIG for purchase of JWMS, It involves significant Cash inflows in the sub-sequent years in the terms of revenue from sales in the increased manner as the operations of JWMS acquired by BIG.

So, Financial reporting is required to that effect of amount goodwill is presented in the financial statments of BIG, which does not provide scope for Earnings Management if reported Properly.

I hope this information is usefull, please provide your valuable feedback and like, Keep learning :-)