英国国际会计研究生毕业论文.doc

Department of Accounting and FinanceLiterature Review on New IFRS Treatment of Goodwill Dissertation Submitted in Part Fulfillment of the Requirements for the award of the Degree of MAcc in International Accounting & Financial Management September 2008AbstractSince IASB issued IFRS 3 and related amended version of IAS 36 and IAS 38 to replace the IAS 22, the accounting for goodwill has changed significantly. Instead of systematic amortise goodwill over a certain period, it should be tested for impairment at least annually. This amendment has caused many debates. There are both argument and agreement on this amendment. This literature aims to discuss these debates in depth in the academic area and find out whether the new treatment is prior to the former method, and its likely future development. This paper will firstly introduce the conceptual background of the goodwill accounting. And then discuss the argument against and the agreement on the revise. In the last section, it will compare and contrast the advantages and disadvantages of two treatments. Then analysis them in depth and apply to the different situations. The findings are the new standard made some achievement in goodwill accounting, and improved financial reporting. It can be seen as prior to the old one at the extent that more close to the business reality and promptly capture any changes in the market. The standards setters are liable to have more detailed principles on how to determine the fair value less cost to sell and the value in use.Key Words: goodwill, annual impairment testing, systematic amortization, creative accounting, management incentive, advantage and disadvantage Word count: 10147Table of contentChapter 1 Introduction-1Chapter 2 Research Method and Methodology-32.1 Research Method-32.2 Methodology-3 Chapter 3 Conceptual background-53.1 Definition, recognition and valuation of goodwill-5 3.2 The old treatment-63.3 The new treatment-7Chapter 4 Argument against the revise-94.1 Goodwill impairment-9A) Creative accounting-9B) Additional cost burden-11C) Reliability-13D) Purchase consideration-144.2 Auditing challenge-15Chapter 5 Agreement on the revise-17 5.1 Impairment testing is more meaningful-175.2 Benefit for users-20 5.3 Benefit for reporting entity-23Chapter 6 Comparison, Analysis, Application and Findings-266.1 Compare and contrast-266.2 Analysis-306.3 Application-326.4 Findings-336.5 Likely future development-35Chapter 7 Conclusion-367.1 Limitation-367.2 Conclusion-36Appendix-38Bibliography-41Chapter 1 IntroductionThe International Accounting Standards Board (IASB) issued IFRS 3 Business Combination and related amended version of IAS 36 Impairment of Asset and IAS 38 Intangible Assets to replace IAS 22 Business Combination in 31 March 2004, with effect on or after this date. It requires the goodwill valuation base on the impairment-only approach, i.e. goodwill acquired in the business combination is no longer amortised, but tested for impairment at least annually. Since the adoption of International Financial Reporting Standards, IASBs amendment result in the accounting treatment of goodwill changed significantly in many countries. There are many debates arising on this amendment in recent years. Some people think it could increase the uncertainty and lessen of transparency as the increasing of relying on the professional judgement. (Gowthorpe and Amat, 2005; Beatty and Weber, 2006) However, if the new treatment is inferior to its precedents, why did IASB make this change? On these bases, this literature review will investigate these discussions in depth in the academic area and aims to find out whether this new treatment prior to the former method, and its likely future development. This literature review is consisting with four main parts. Initially, it will introduce the conceptual background of the goodwill accounting. This includes the definition, recognition, and valuation of goodwill which associated with a short discussion of fair value, the principle of the old and the new treatment. The following will be the argument against the revise, which include areas imposed by the impairment testing like creative accounting, additional cost burden, reliability, and purchase consideration as well as the auditing challenge. Then it will talk about the reasons of agreement which is focusing on the advantages of impairment testing, benefits to users and benefits to reporting entity. In the latter section is the compare and contrast the differenced and similarities of two treatments, and followed by the detailed analysis of advantages and disadvantages of both standards and the application within different business situations. At last, the findings of this literature review and the likely future development of the new standards will be given out. Chapter 2 Research Method and Methodology2.1 Research MethodThe initial research will focus on the areas related to the goodwill, which identified at first place. Then the desk-based literature research will be used to collect a considerable amount of academic journal articles which relevant to these areas by searching electronically for goodwill or impairment review, etc. The quality of the article is highly depending on the quality of the research carried out. Therefore, a selection of the most relevant one is crucial. By considering the research findings should reflect to the business reality, all the articles selected will be published after 1990, majority of them will after 2000. After studying the selected articles, their opinions will be induced with no bias and objective. Then divide these opinions as positive and negative two different categories followed by different reasons as sub-categories, and group in the same or similar reasons under them. On the other hand, the articles gathered will mainly from the computer-aided Internet information and database. The database and the website chosen will include the academic journals. The most common used sources are the database from University of Glasgow library, G, EBSCO Host research database, etc. 2.2 Methodology The nature of literature review is to identify and summary what researches have been already done and what models and theories have been developed. (Ryan, et al., 2002) As described by Ryan et al. (2002), phenomenology is a paradigm used frequently to identify some ones view to our society and human activities. Therefore, phenomenology paradigm will be used for research. Research will see reality as a concrete structure, which people are the adapter, responder and information processor to achieve efficiency and the goal of an organisation. (Morgan and Smircich, 1980) In this case, managers and professional accountants are the people who conduct the financial reporting under the new IFRS treatment. Chapter 3 Conceptual background3.1 Definition, recognition and valuation of goodwill According to IFRS 3 Business Combination, goodwill is defined as “the future economic benefits arising from assets that are not capable of being individually identified and separately recognised.” (IFRS 3, Appendix A) It should be calculated as follows: “The acquirer shall, at the acquisition date, allocate the cost of a business combination by recognising the acquirees identifiable assets, liabilities and contingent liabilities at their fair values at that date. The difference between the cost of the business combination and the acquirers interest in the net fair value of the identifiable assets, liabilities and contingent liabilities so recognised shall be accounted for as goodwill.” (Alexander et al., 2007, p. 300-301) After the calculation, the acquirer should recognise this goodwill figure as an asset in the companys balance sheet. From above definition we can see that: Firstly, companies cannot recognise the goodwill in the balance sheet unless there is an acquisition occurred for one entity with another entity because it cannot be purchased or sold as a separate item. (Pacham and Zhang, 2006) It represents the future economic benefits of the assets that the acquirer in anticipation, and not capable of being individually identified and separately recognised. (Lewis and Pendrill, 2004)Secondly, the recognition of goodwill requires mangers to value all the identifiable assets from both tangible and intangible assets at fair value. (Mauro and Chiara, 2007) Then goodwill is the balancing figure between the purchase consideration given (cost of the business combination) and the fair value of all the identifiable net assets acquired. (Wines et al., 2007) Under the IASB definition, fair value is “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arms length transaction.” (IASB glossary) However, determine the fair value of an asset is not that simple. According to Horton and Macve (2000), the fair value estimation is a subjective assumption and judgment. Further, in the imperfect market, the measurement and valuation of fair value becomes ambiguous, and for one single circumstance there could be several fair value exits. (Bradbury, 2000) This is because in the imperfect market, the “entry value (replacement cost), exit value (market/liquidation value), and value-in-use (earnings capitalisation/present value of future cash flows) will consist of the alternative fair value.” (Wines et al., 2007, p. 863) And these values tend to differ under the imperfect market. (Barth and Landsman, 1995) As a result, an error could occur in estimation of fair value. (Donnelly and Keys, 2002)3.2 The old treatmentIAS 22 the precedent of IFRS 3 requires that the goodwill incurred in acquisition should be recognised as an asset and normally amortised on a straight-line basis over its useful life up to 20 years through the income statement unless there is an indication of goodwill impairment. The non-amortisation of goodwill which has an infinite life is not permitted. () In some rare cases, “the useful economic life exceeds 20 years, the recoverable amount must be calculated annually, even if there is no indication that it is impaired.” (IAS 22, para. 56) The negative goodwill must be recognised in the balance sheet as “the full difference between the acquirers interest in the fair values of the identifiable assets and liabilities acquired less the cost of acquisition.” (IAS 22, para. 59) 3.3 The new treatmentAfter the implementation of IFRS 3, goodwill shall not be amortised, the acquirer shall test the goodwill acquired in a business combination for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, in accordance with IAS 36 Impairment of Assets. (Details of indications see appendix 1) This treatment also applies to the identifiable intangible assets with indefinite lives which outlined in IAS 38. (Alexander et al., 2007)IAS 36 outlines two steps for the impairment testing. First is to identify the carrying amount of the asset, which is defined as “the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses.” (IAS 36, para. 6) Secondly, determine the recoverable amount of the asset which is “the higher of fair value less costs to sell and the assets value in use to the existing entity.” (Black, 2005, p. 132) During the impairment testing, if the carrying amount of an asset or a cash generating unit exceeds its recoverable amount, then the carrying amount should be lowered to the recoverable amount, and this excess figure should be recorded as an impairment loss in the income statement. (Lewis and Pendrill, 2004) Further, IFRS 3 derecognised the negative goodwill in the financial statements, it states that “if the acquirers interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised exceeds the cost of the business combination, the acquirer shall reassess the fair value of total net assets and the cost of the combination, and recognised immediately in profit or loss any excess remaining after the reassessment.” (Alexander et al., 2007, p. 301) As a result, the term negative goodwill will not appear in the IFRS group balance sheets any more, its derecognised from balance sheet, and transferred into retained earnings. After all, under the new treatment, goodwill amortisation will no longer be used, the infinite life of goodwill which prohibited by IAS 22 could exist as long as the recoverable amount is greater than the carrying amount. However, the fair value concept is still kept in the new treatment, i.e. the valuation will base on the estimation of fair value. (other useful terminologies related to goodwill see appendix 2)Chapter 4 Argument against the reviseThe major argument of the replacement arises on the drawbacks imposed by annual impairment testing which include creative accounting, additional cost burden, reliability and purchase consideration. Other factor like auditing challenge is also discussed. 4.1 Goodwill impairmentA) Creative accountingAs identified by many scholars (Wines et al., 2007; Gowthorpe and Amat, 2005; Horton and Macve, 2000), impairment testing heavily rely on the fair value estimation which allows considerable possibility for uncertainty. Because managers and professional accountants will have to “use their valuation and measurement expertise and skills to estimate fair values rather than refer to verifiable transaction amounts.” (Wines et al., 2007, p. 861) Especially the estimation of fair value less cost to sell and the value in use introduced extensive amount of uncertainty and raised a lot difficulty in the valuation progression. This gives manager the chance to make biased decisions on whether goodwill is impairment or not. The new treatment brought subjectivity and ambiguity into financial reporting. Therefore increase the opportunity for creative accounting. In order to prove above view, Beatty and Weber (2006) tested 867 firms accounting choices of goodwill under the different economic incentives such as: equity market consideration, debt contracting, bonus, turnover and exchange delisting, etc. Their results of test showed that “firms equity market considerations affect their preferences for above-the-line versus below-the-line accounting treatment, and firms debt contracting, bonus, turnover, and exchange delisting incentives affect their decisions to accelerate or delay expense recognition. Overall, both contracting and market incentives affect firms accounting choices relating to the trade-off between the timing and the presentation of expense recognition on the income statement” (Beatty and Weber, 2006, p. 288) This means when adopting new standards, managers accounting choices are likely to affect the decision of whether to make an impairment or not, and how to record it in the financial statements. If managers could keep the recoverable amount greater than the carrying amount, then they will avoid ever having to make goodwill impairment charges.Sevin and Schroeder (2005) random selected 202 firms including 120 firms reported impairment losses and 82 did not, divided them into two groups, and compared the financial metrics of impaired and non-impaired firms especially on the magnitude of the impairment loss under the new treatment. Their results suggest that companies could involve in the earnings management which terms “big bath accounting” under the new treatment, in particular, the small size company which is adversely affected by the impairment loss are more likely involved in the big bath accounting than the large firms. This result provides the evidence that management has the incentive to manipulate the earnings figure towards the impairment testing. Similarly, Seetharaman et al. (2006) studied the nature of the new accounting treatment, their practical applications on goodwill impairment, and the effects after adopt it. They think that “the valuation of goodwill impairment is not easy; it is not merely measuring the difference between market capitalisation and net book value. It requires a thorough knowledge of tangible and intangible asset valuation methodology and purchase price all