Question

I need project for impairment of goodwill , I need to look for a decline in the value of goodwill or in one of the issues below

Individual student needs to prepare a paper on one reporting issue. The paper shall consist of a proper description of issue, literature review, theory and empirical evaluation of actual companies data. Students are encouraged to discuss the forms, types and factors related to the issue. Examples of the issues include (but not limited to): -

1. Write off vs capitalizing In Process R & D especially in technology companies.

2. Gain on subsidiary stock sales.

3. Pushdown accounting

4. Goodwill write-off / impairment - recognition of loss in value, earnings power?

5. The effects of no par value shares.

6. Are impairments relevant for security valuation? And resulting earnings can predict future earnings better?

7. Whether fair value can explain stock price?

8. Use of special or non-recurring items

Answer 1

Solution 1:Write off vs capitalizing In Process R & D especially in technology companies

Under GAAP, firms are required to expense R&D in the year spent especially in technology companies.Under GAAP, firms are required to expense R&D in the year spent. For many firms, this leads to extensive volatility in profit and return calculations, and to an inadequate measure of assets or invested capital. This doubly impacts return on asset calculations, and not consistently so, thereby creating wildly different calculations of economic profit.

Solution 2. Gain on subsidiary stock sales.

Gain on entity's disposition of equity in securities of subsidiaries or 50 percent or less owned persons. Reflects the difference in the parent company's carrying amount of the equity interest in the subsidiary (or equity method investee) immediately before and after all stock transactions.

Solution 3:Pushdown accounting

Push down accounting is a convention of accounting for the purchase of a subsidiary at the purchase cost rather than its historical cost. This method of accounting is required under U.S. Generally Accepted Accounting Principles (GAAP), but is not accepted under the International Financial Reporting Standards (IFRS) accounting standards. Since the acquired company is consolidated into the parent company for financial reporting purposes, push down accounting appears the same on a firm's external financial reporting.

Solution 4: Goodwill write-off / impairment - recognition of loss in value, earnings power

The asset of goodwill does not exist in a vacuum; rather, it arises in the group accounts because it is not separable from the net assets of the subsidiary that have just been acquired.

The impairment review of goodwill therefore takes place at the level of a cash-generating unit, that is to say a collection of assets that together create an independent stream of cash. The cash-generating unit will normally be assumed to be the subsidiary. In this way, when conducting the impairment review, the carrying value will be that of the net assets and the goodwill of the subsidiary compared with the recoverable amount of the subsidiary.

When looking to assign the impairment loss to particular assets within the cash generating unit, unless there is an asset that is specifically impaired, it is goodwill that is written off first, with any further balance being assigned on a pro rata basis.

The goodwill arising on the acquisition of a subsidiary is subject to an annual impairment review. This requirement ensures that the asset of goodwill is not being overstated in the group accounts. Goodwill is a peculiar asset in that it cannot be revalued so any impairment loss will automatically be charged against income. Goodwill is not deemed to be systematically consumed or worn out thus there is no requirement for a systematic amortisation.

Solution 5).The effects of no par value shares

A no-par value stock is issued without the specification of a par value indicated in the company's articles of incorporation or on the stock certificate itself. Most shares issued are classified as no-par or low-par value stock. No-par value stock prices are determined by what investors are willing to pay for them in the market.

When companies issue a no-par value stock, this allows the price of the stock to experience variations naturally. A no-par stock’s sale prices can be determined by basic principles of supply and demand, fluctuating as necessary to meet market conditions without being misrepresented by the face value.

Business Risks Associated With Low-Par Value Stock

If a business releases stock with a low-par value of $5.00 per share and 1,000 shares are sold, the associated book value of the business can then be listed as $5,000. If the business is generally successful, this value may be of no consequence. If the business collapses while currently owing a creditor $3,000, the company in which the business is indebted may call for a review of various accounting statements. As the review progresses, it may be revealed the failed business was not fully capitalized. Subsequently, this can lead the owed business to require shareholders to contribute to payment of the debt as is within the owed company's legal right.

Solution 6:
Yes impairments are relevant for security valuation and resulting earnings can predict future earnings better

General approach

With the exception of purchased or originated credit impaired financial assets (see below), expected credit losses are required to be measured through a loss allowance at an amount equal to:

[IFRS 9 paragraphs 5.5.3 and 5.5.5]

• the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or
• full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument).

A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as to contract assets or trade receivables that do not constitute a financing transaction in accordance with IFRS 15

So;ution 7:

Yes fair value can explain stock price as .many investments have a fair value determined by a market where the security is traded.

The most reliable way to determine an investment’s fair value is to list the security on an exchange. If XYZ stock trades on an exchange, market makers provide a bid and ask price for XYZ stock. An investor can sell the stock at the bid price to the market maker and buy the stock from the marker maker at the ask price. Since investor demand for the stock largely determines bid and ask prices, the exchange is the most reliable method to determine a stock’s fair value.

Solution 8:

Non-recurring items

Definition: Non-recurring items are unusual or infrequent items that are reported separately as part of income from continuing operations. Examples that will typically be found in company accounts include gains or losses arising from:

• Discontinued operations and the disposal of a portion of a business segment

• Extraordinary items

• Unusual or infrequent items

• Asset impairments

Special Item

A special item is a large expense or source of income that a company does not expect to recur in future years. Special items are reported on the income statement and are separated out from other categories of income and expenses so investors can more accurately compare the company's numbers across accounting periods. Examples of special items include extraordinary expenses, restructuring charges, gains from the elimination of debt, and earnings from discontinued operations.