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

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