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Business Finance Financial Reporting, Financial Statement Analysis and Valuation

a. Introduction: Goodwill is recorded as an intangible asset of the company which arises when one company purchases another for an amountthat is greater than the fair value of the assets of the acquired company. The goodwill is tested for impairment. To calculate: The amount of press impairment if any, under the GAAP and IFRS. GAAP: Under GAAP, when the undiscounted future cash flows are below the carrying value of the asset, then the asset is impaired. Estimated cash inflows = $160,000 per year Time period = 12 years The total amount of undiscounted cash flows is calculated as follows: Total cash inflows = cash inflows per year × time period = $ 160 , 000 × 12 = $ 1 , 920 , 000 Carrying value of the asset = $1,200,000 Since the carrying value of the asset is less than the future cash inflows, there will be no impairment under GAAP. IFRS: Under IFRS, the greater of market sale value and discounted future cash flows from the asset are taken as the fair value of the asset. When the fair value is below the carrying value of the asset then the asset is impaired. Future cash inflow = $160,000 per year Time period = 12 years Discount rate = 10% Present value interest factor annuity at 10% for 12 years = 6.8137 The discounted value of future cash inflows is calculated as follows: Discounted cash inflows = future cash inflows per year × PVIFA = $ 160 , 000 × 6.8137 = $ 1 , 090 , 192 Sale value of the asset = $1,000,000 Costs to sell = $50,000 Net market sale value of the asset is calculated as follows: Net market sale value = sale value − cost to sell = $ 1 , 000 , 000 − $ 50 , 000 = $ 950 , 000 The greater of market sale value and discounted cash inflows is the discounted cash inflows. Therefore, Fair value of the asset = $1,090,192 Carrying value of the asset = $1,200,000 Since the fair value of the asset is less than the carrying value of the asset, the asset will be impaired. Amount of impairment = carrying value − fair market value = $ 1 , 200 , 000 − $ 1 , 090 , 192 = $ 109 , 808 b. Introduction: Goodwill is recorded as an intangible asset of the company which arises when one company purchases another for an amount that is greater than the fair value of the assets of the acquired company. The goodwill is tested for impairment. To calculate: The amount of S company’s goodwill impairment. Fair value of the identifiable assets = $1,600,000 Carrying value of the identifiable assets after tested for impairment = $1,500,000 Since the carrying value is less than the fair value of the assets, there will be no impairment to the assets and no impairment on goodwill. c. Introduction: Goodwill is recorded as an intangible asset of the company which arises when one company purchases another for an amount that is greater than the fair value of the assets of the acquired company. The goodwill is tested for impairment. To state: The recording of goodwill impairment in the financial statements. The goodwill impairment is recorded in the financial statement as follows: Income statement: The amount of goodwill impairment is recorded as a loss in the income statement of the company. Balance sheet : Goodwill is recorded as an intangible asset. The goodwill impairment is recorded as a decrease in the value of goodwill and therefore, it decreases the total assets of the company. The total income is recorded in the equity section of the balance sheet and goodwill impairment reduces the total income of the company. Therefore, goodwill impairment reduces the total equity of the company.

a. Introduction: Goodwill is recorded as an intangible asset of the company which arises when one company purchases another for an amountthat is greater than the fair value of the assets of the acquired company. The goodwill is tested for impairment. To calculate: The amount of press impairment if any, under the GAAP and IFRS. GAAP: Under GAAP, when the undiscounted future cash flows are below the carrying value of the asset, then the asset is impaired. Estimated cash inflows = $160,000 per year Time period = 12 years The total amount of undiscounted cash flows is calculated as follows: Total cash inflows = cash inflows per year × time period = $ 160 , 000 × 12 = $ 1 , 920 , 000 Carrying value of the asset = $1,200,000 Since the carrying value of the asset is less than the future cash inflows, there will be no impairment under GAAP. IFRS: Under IFRS, the greater of market sale value and discounted future cash flows from the asset are taken as the fair value of the asset. When the fair value is below the carrying value of the asset then the asset is impaired. Future cash inflow = $160,000 per year Time period = 12 years Discount rate = 10% Present value interest factor annuity at 10% for 12 years = 6.8137 The discounted value of future cash inflows is calculated as follows: Discounted cash inflows = future cash inflows per year × PVIFA = $ 160 , 000 × 6.8137 = $ 1 , 090 , 192 Sale value of the asset = $1,000,000 Costs to sell = $50,000 Net market sale value of the asset is calculated as follows: Net market sale value = sale value − cost to sell = $ 1 , 000 , 000 − $ 50 , 000 = $ 950 , 000 The greater of market sale value and discounted cash inflows is the discounted cash inflows. Therefore, Fair value of the asset = $1,090,192 Carrying value of the asset = $1,200,000 Since the fair value of the asset is less than the carrying value of the asset, the asset will be impaired. Amount of impairment = carrying value − fair market value = $ 1 , 200 , 000 − $ 1 , 090 , 192 = $ 109 , 808 b. Introduction: Goodwill is recorded as an intangible asset of the company which arises when one company purchases another for an amount that is greater than the fair value of the assets of the acquired company. The goodwill is tested for impairment. To calculate: The amount of S company’s goodwill impairment. Fair value of the identifiable assets = $1,600,000 Carrying value of the identifiable assets after tested for impairment = $1,500,000 Since the carrying value is less than the fair value of the assets, there will be no impairment to the assets and no impairment on goodwill. c. Introduction: Goodwill is recorded as an intangible asset of the company which arises when one company purchases another for an amount that is greater than the fair value of the assets of the acquired company. The goodwill is tested for impairment. To state: The recording of goodwill impairment in the financial statements. The goodwill impairment is recorded in the financial statement as follows: Income statement: The amount of goodwill impairment is recorded as a loss in the income statement of the company. Balance sheet : Goodwill is recorded as an intangible asset. The goodwill impairment is recorded as a decrease in the value of goodwill and therefore, it decreases the total assets of the company. The total income is recorded in the equity section of the balance sheet and goodwill impairment reduces the total income of the company. Therefore, goodwill impairment reduces the total equity of the company.

Financial Reporting, Financial Statement Analysis and Valuation

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN: 9781285190907

Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher: Cengage Learning

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Financial Reporting, Financial Statement Analysis and Valuation

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