...Joe Expert Senior Reviewed by: Manager XWZ CPA Adam Smith ISSUE: Grouping of long-lived assets to be held and used for impairment testing purposes. BRIEF BACKGROUND OF HISTORY A2 Auto Corporation (“A2 Auto”) is one of the world’s largest manufacturers and distributors of automobiles and automobile ancillary parts. In its Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”), A2 Auto has disclosed within Note 24, Segment Information, that it has four operating segments: (1) A2 Americas, (2) A2 Asia Pacific, (3) A2 Others, and (4) Financial Services. Note 12, Goodwill and Other Intangibles, disclose that A2 Auto has the same four reporting units. ACCOUNTING QUESTIONS 1. What are the appropriate criteria for the grouping of long-lived assets to be held and used for impairment testing purposes? 2. On the basis of the information in A2 Auto’s 2010 Form 10-K, what is the appropriate grouping for purposes of recognizing and measuring an impairment loss? 3. What audit considerations should be made when testing the appropriate grouping of long-lived assets for purposes of recognition and measurement of an impairment loss? 4. Is A2 Auto’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used appropriate? 5. After the A2 Americas $1.76 billion impairment loss was recognized, strategy refocus effort began which has resulted in an improved forecast...
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...FASB 144 Impairment of Assets Assets held for use Includes land, building, equipment, natural resources, and intangible assets FASB 147 specifies that intangibles from the banking industry are covered by FASB 144 rules: Long-term customer relationship assets such as Depositor-relationships intangible assets Borrower-relationships intangible assets Credit card holder Intangible assets When should impairment be recognized? Testing each asset each period would be too costly Events or changes in circumstances indicate that its carrying amount may not be recoverable TRIGGERING EVENTS: Decline in market value Change in way asset is used or physical change in asset Adverse changes in legal factors or business climate Accumulated costs in excess of amounts originally expected to construct or acquire asset Current expectation that, more likely than not, a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life Current period losses with history of operating or cash flow losses associated with asset To apply impairment tests A long-lived asset shall be grouped with other assets and liabilities at the lowest level for which identifiable...
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...ACCOUNTING 260 IMPAIRMENT QUIZ QUESTIONS 1. When should an entity conduct an impairment test? (2 Marks) The following assets require an impairment test every year: • Intangible assets with indefinite useful lives • Intangible assets not yet available for use • Goodwill acquired in a business combination The impairment test is undertaken when there is indication that an asset may be impaired. This means that, at the end of each reporting period, an entity has to test for the probability that an asset has been impaired. An entity, therefore, has to determine after analysing certain sources of information whether there is sufficient evidence to suspect that an asset may be impaired. It is not automatically undertaken at the end of each reporting period or at the end of any set of period of time. 2. How is an impairment test undertaken? (2 Marks) The first step is to determine the fair value, costs of disposal, and value in use. Having determined the fair value less costs of disposal and the value in use, these two amounts are compared and the recoverable amount is the higher of these two amounts. The second step is then to compare the recoverable amount with the carrying amount of the asset as recorded by the entity. The second step is then to compare the recoverable amount with the carrying amount of the asset as recorded by the entity. If the recoverable amount is less than the carrying amount, an impairment loss has occurred;...
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...XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate accounting treatment for patents. 2014 Accounting Regulation and Treatment of Patents XYZ Research Company Case Study You have been hired as a consultant for XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate accounting treatment for patents. 2014 Research Memorandum To: XYZ Research Company From: Christine Quiñones Date: August 26, 2014 Re: Accounting Regulations and Treatment of Patents Case Studied: XYZ Research Company was incorporated in...
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...TeCHniCal THiS aRTiCle diSCuSSeS and SHowS boTH wayS of meaSuRing goodwill following THe aCquiSiTion of a SubSidiaRy, and How eaCH meaSuRemenT of goodwill iS SubjeCT To an impaiRmenT Review. IMPAIRMENT RelevanT To aCCa qualifiCaTion papeRS f7 and p2 Required 1 Calculate the goodwill arising on the acquisition of High on a proportionate basis. 2 Calculate the gross goodwill arising on the acquisition of High, ie using the fair value of the NCI. Solution 1 The proportionate goodwill arising is calculated by matching the consideration that the parent has given, with the interest that the parent acquires in the net assets of the subsidiary, to give the goodwill of the subsidiary that is attributable to the parent. Parent’s cost of investment at the fair value of consideration given $500 Less the parent’s share of the fair value of the net assets of the subsidiary acquired (80% x $400) ($320) Goodwill attributable to the parent $180 2 The gross goodwill arising is calculated by matching the fair value of the whole business with the whole fair value of the net assets of the subsidiary to give the whole goodwill of the subsidiary, attributable to both the parent and to the NCI. Parent’s cost of investment at the fair value of consideration given $500 Fair value of the NCI $100 Less the fair value of the net assets of the subsidiary acquired (100% x $400) ($400) Gross goodwill $200 Given a gross goodwill of $200 and a goodwill attributable to the parent of $180, the goodwill attributable...
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...development 3 Affection on SFAS 141 and SFAS 142 4 The definition of goodwill 4 Contribution to the creation of goodwill 5 Goodwill inclusion and exclusion 6 Identification of goodwill and intangible assets 7 Calculation of goodwill 7 Goodwill impairment 10 Comparison IFRS with U.S. GAAP for goodwill 11 Conclusion 13 References 14 Introduction: When one company gains control over the others, a business combination is established. As a part of this process, reciprocal accounts and intra-entity transactions must be adjusted or eliminated to ensure that all reported balances truly represent the single entity and current financial reporting standards require the acquisition method to account for business combinations. However, in many cases, the parent records both the consideration transferred and the individual amount of the identified assets acquired and liabilities assumed at their acquisition-date fair values are difference. Thus, GAAP requires the acquirer recognizes the asset goodwill as the excess of the consideration transferred over the collective fair values of the net identified assets acquired and liabilities assumed. Nevertheless, in a business combination, assets of the purchase price and book value of assets varies greatly. Such as the 1989 Time and Warner merged the two companies to pay the $ 14 billion, 80% of goodwill. In the 21st century, a number of mergers and acquisitions around the world occur in the case, the...
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...represents: A cash-generating unit (CGU) under IFRSs and a long-lived asset classified as held and used under U.S. GAAP. In December 2012, Donna’s competitor sold an identical commercial building much less than asking price. Information about the building is as follows. Donna’s Building 12/31/12 ($’000) Carrying amount $4,500 Value in use $4,000 Fair market value less cost to sell $3,800 Fair market value $3,900 Undiscounted future cash flows $4,200 Italian operation: Donna acquired an Italy company in 2010 and goodwill was recorded. The Italy operation represents a cash-generating unit (CGU) under IFRSs and a long-lived asset classified as held and used under U.S. GAAP. Information about the Italy operation before impairment analysis is as follows. Carrying Value Before Impairment Analysis 12/31/12 ($’000) Cash 50 Property, plant, and equipment (PP&E) 3,000 Land 150 Goodwill 300 Total assets 3,500 Liabilities (1,300) Carrying value 2,200 At the end of 2012, the newly elected government passed legislation that will adversely affect Donna. Donna’s management noted the following at 12/31/2012: 12/31/12 ($’000) Value in use of CGU 1,800 Present value of future cash flow from CGU 2,100 Fair value of CGU 2,100 Fair value of PP&E 3,100 Fair value of other assets and liabilities carrying value Cost to sell the CGU 400 The remaining useful life of Donna’s identifiable assets is six years as of the beginning of 2012, and Donna uses straight-line...
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...IMPAIRMENT Depreciation, depletion, and amortization reflect a gradual consumption of the benefits inherent in an operational asset. An implicit assumption in allocating the cost of an asset over its useful life is that there has been no significant reduction in the anticipated total benefits or service potential of the asset. Situations can arise, however, that cause a significant decline or impairment of those benefits or service potentials. An extreme case would be the destruction of a plant asset—say a building destroyed by fire—before the asset is fully depreciated. The remaining carrying value of the asset in that case should be written off as a loss. Sometimes, though, the impairment of future value is subtler. The way we recognize and measure an impairment loss differs depending on whether the operational assets are to be held and used or are being held to be sold. Accounting is different, too, for operational assets with finite lives and those with indefinite lives. We consider those differences now. Operational Assets to Be Held and Used An increasingly common occurrence in practice is the partial write-down of operational assets that remain in use. For example, in the second quarter of 2001, American Airlines reduced the carrying value (book value) of certain aircraft by $685 million. The write-down reflected the significant reduction in demand for air travel that occurred even before the September 11, 2001, terrorist attacks on the World Trade Center and...
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...Assignment BUSN2036 Financial Accounting Issues 1.Determine if the assets of the CGU are impaired and, if so, by how much. Show all workings The total assets; Fixed Assets Land $150,000 Buildings $280,000 Machinery $140,000 $570,000 = $570,000 Less : Accumulated Depreciation Buildings depreciation $120,000 Machinery depreciation $60,000 -$180,000 Less : Accumulated Amortization Goodwill -$12,000 = -$192,000 Total Fixed Assets $378,000 Current Assets Cash $40,000 Inventories $60,000 Receivable $75,000 Less; Allowances for doubts debtors Doubtful debtors -$10,000 = $65,000 Total Current Assets $...
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...often required. These assets are often referred to as fixed assets or capital assets. There are two types of assets included in the cost of basis in long lived assets. The first is real property. Real property consists of land, land improvements (such as sidewalks and parking lots), building, and other structures attached to the land. The second type of asset is tangible personal property. An important thing to remember when determining tangible personal property is that the term personal means that the property has a physical substance and is something other than real estate. Personal property must be owned by the business not by the individual owners. This includes machinery, equipment, furniture, and fixtures that can be removed and used elsewhere. The property, plant, and equipment classification doesn’t include assets purchased for investment reasons. These assets are classified as other assets or investments. When recording assets, you first determine which assets should be classified in as a capitalized cost. Capitalized costs are all costs recorded as part of the asset’s cost. The cost of equipment, other tangible property, land and building, and other assets constructed by or for the business is all part of the capitalized assets. Some asset’s such as property, plant, and equipment depreciate because they have limited life, unlike land, these assets will get used up or deteriorate over time. Depreciation is the allocation of the cost of an asset over the asset’s useful...
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... JOHNSON & JOHNSON CASE ASSIGNMENT This memorandum has been created to investigate the long-lived assets and implications associated with Johnson and Johnson’s accounting methods. In this memo we would like to cover five main topics: long-lived assets, depreciation and amortization, J&J policies regarding intangible assets, cash flow statements, and asset turnover/ return on assets. In 2013, J&J reported three different types of long-lived assets on their Consolidated Balance Sheet. The first kind reported was Plant, Property, and Equipment. The second one was Intangible Assets and third was Goodwill. We will be investigating these three assets in further detail. J&J reported $16,710 million net worth of PP&E. Within this major asset category are many sub accounts: Land & Improvements, Building & Building Equipment, and Construction in Progress, Machine & Equipment, and Depreciation. Johnson & Johnson uses the straight-line depreciation method for its assets. In 2013, there was $2.7 billion of accumulated depreciation and amortization of capitalized interested; it increased about $.2 billion since 2012. Table 1 lays out the estimated useful lives of the assets. The company capitalizes certain computer software and development cost which are amortized over the span of 3-8 years. Next, we will be discussing Intangible Assets of the company. J&J reports $1,363 million worth of amortization expense. In 2012, they reported about $1...
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...following topics: * Adjusting lower cost of market inventory on valuation * Capitalizing interest on building construction * Recording gain or loss on asset disposal * Adjusting goodwill for impairment Recording Gain or Loss on disposal of Assets Any asset, such as land, a factory or equipment purchased by Evenbetternow, LLC for business purposes is called a capital asset. When a company disposes of capital assets, it is required by the Financial Accounting Standards Board (FASB) that the financial records account for any gain or loss incurred during the disposal. As capital asset items are used, they will lose value and depreciate. Evenbetternow, LLC recently disposed of two assets. In order to be in compliance with the Financial Accounting Standards Board Statement No. 121 (Accounting for the Impairment or Disposal of Long-Lived Assets) we need assess the disposal of these two items and account for the gain and or loss received. We will first need to determine the original value of the asset and minus the accumulated depreciation to date to discover the book value for each item. By comparing the book value to the amount received for each item, we can determine if Evenbetternow, LLC incurred a gain or loss on each asset (Luecke, 2002). Recording a gain or loss on the disposal of your capital assets is vital as there are related tax implications. For example, any gains (profit) will be taxable as an investment income. If the company experienced a loss, you will...
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...accounts are in compliance with Generally Accepted Accounting Principles (GAAP). This review is being done to protect our clients and make sure fair reporting and valuation of business is attained. Please provide the requested information based on these following four areas: adjusting lower of cost or market on valuation, capitalizing interest on building construction, recording gain or loss on disposal of an asset, and adjusting goodwill for impairment. Following is a detailed explanation of each of these four areas and an explanation of their importance in fair value of a business. Lower of Cost or Market Lower of cost or market is one approach for inventory valuation that may be preferred by some companies. This methodology accounts for current assets to be valued at the current market rate or purchase price, whichever is lower. The theory behind this is if the value of inventory goes down, it is more than likely that the sale price of such inventory will go down as well (Schroeder, Clark, & Cathey, 2011). One identified issue with this practice is that it revalues assets based on losses on market value but the practice is not consistent with price increases. Schroeder, Clark, & Cathey went on to explain that when there is a sale of inventory "normal profits" are reported, and there is an understatement of expenses for the transaction. Unfortunately, this may cause confusion to external parties. Capitalizing Interests on Building Construction The next issue that needs...
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...and sold, mergers take place, and partnerships are formed all over the world. Once the purchaser and the seller have come to an agreement on a price or the merging companies come to an agreement, accounting needs to have a way to account for the difference between the tangible assets and the sales price and that is where goodwill comes into play. In a business combination, goodwill is measured as the difference between the price paid for an acquired company and the sum of the fair value of the identifiable net assets. In other words, goodwill is a residual asset, the amount remaining after fair values have been attached to the identifiable assets and liabilities of the purchased or merged company. The measurement of goodwill can also be described as having mixed attributes: it is a residually calculated amount derived both from assets and liabilities that are measured at fair value and others that are not measured at fair value. Since it is hard to place an exact value on a reputation of a brand or company, or to know how much revenue will be made after a business combination, estimates are made as to future profits. Goodwill may be an intangible asset but that doesn’t mean that it is not a saleable asset, plus in most cases goodwill is almost indestructible. One of the only ways to destruct goodwill is by indiscretion. Goodwill is typically built painstakingly over years of doing business. Some of the general ways to generate goodwill are with the creation and upkeep of customer...
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...and|Definition | | |3 with your own |Acquisition of PP&E: | | |material here, or |General | | |throughout as |Self-constructed assets | | |desired |Interest costs during construction | | | |Initial cost of natural resources | | | |Valuation at acquisition: | | | |Exchange of non-monetary assets | | | |Lump-sum purchases | | | |Deferred payment contracts | | | |Purchase paid for using company stock ...
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