4-1 Consolidation as of the Date of Acquisition 4 Baker / Lembke / King.
Consolidation Subsequent to Acquisition
description
Transcript of Consolidation Subsequent to Acquisition
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Subsequent to Acquisition
Passage of time affects revaluations of subsidiary assets and liabilities Triggers effects on
Income statement amounts The investment account on the parent’s
books due to use of the complete equity method
1
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Complete Equity Method Used internally by parent company Differs from the equity method used for
external reporting
2
Impairment losses on indefinite life
intangibles including goodwill
Impairment losses on indefinite life
intangibles including goodwill
No equity in net income
adjustment for impairment
Unconfirmed profits on
downstream sales
Unconfirmed profits on
downstream sales
Internal ReportingInternal Reporting External ReportingExternal Reporting
Equity in net income reduced for impairment
losses
All unconfirmed downstream profits are deducted
Deducted to the extent of the
investor’s ownership interest
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Goals of the Consolidation Elimination Process
Eliminates equity method income on the parent’s books and declared dividends on the subsidiary’s books
Eliminates stockholders’ equity accounts on the subsidiary’s books against the investment account on the parent’s books
Adjusts the subsidiary’s assets and liabilities for remaining acquisition date revaluations and eliminate the remainder of the investment balance
Adjusts reported expenses for current year revaluation write-offs
3
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Eliminating Entries4
Current – Eliminate the current year equity method entries
Equity – Eliminate subsidiary’s beginning-of-year equity balances
Revalue – Recognize the beginning-of-current-year fair value revaluations
Write-Off – Recognize current year revaluation write-offs
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Process ExampleSuppose Time Warner pays $75 million for Midwest Cable on January 1, 2010. Midwest’s book value is $10 million. Book and fair values are the same except for equipment with fair value $15 million higher than book value. Midwest has unreported identifiable intangibles valued at $2 million.
5
Acquisition cost $75,000,000Book value of Midwest Cable 10,000,000Cost in excess of Midwest Cable's book value 65,000,000Differences between fair value and book value: Equipment $15,000,000 Identifiable intangibles 2,000,000 17,000,000
Goodwill $48,000,000
Acquisition analysis:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Process Example continued
6
Midwest reports net income of $5 million and declares and pays cash dividends of $1 million to Time Warner in 2010. Revalued equipment has a remaining life of 20 years. Identifiable intangibles have 4 years of remaining life. Straight-line depreciation and amortization is used. Goodwill is not impaired.
Complete equity method:
Midwest Cable's reported income for 2010 $5,000,000.Adjustments for revaluation write-offs: Equipment ($15,000,000/20) (750,000)Identifiable intangibles ($2,000,000/4) (500,000)
Equity in income of Midwest Cable $3,750,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Process Example continued
Time Warner’s booksTo record equity in net income for 2010:
7
Investment in Midwest Cable 3,750,000 Equity in income of Midwest Cable 3,750,000
To record dividends received in 2010:Cash 1,000,000 Investment in Midwest Cable 1,000,000
Investment in Midwest Cable75,000,000
3,750,000 1,000,000
77,750,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Process Example continued
8
Eliminating entries at December 31, 2010:To eliminate equity in net income on the parent's books, dividends on the subsidiary's books, and restore the investment account to its beginning-of-year value:
(C) Equity in income of Midwest Cable 3,750,000 Dividends 1,000,000 Investment in Midwest Cable 2,750,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account:
(E) Common stock, par 100,000 Additional paid-in capital 400,000 Retained earnings, January 1 9,500,000
Investment in Midwest Cable 10,000,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Process Example continued
9
Eliminating entries at December 31, 2010:To recognize the beginning-of-year revaluations and eliminate the remainder of the investment account balance:
(R) Plant and equipment, net 15,000,000 Identifiable intangibles 2,000,000 Goodwill 48,000,000
Investment in Midwest Cable 65,000,000
To write off equipment and identifiable intangibles revaluations for the current year, by recognizing additional depreciation and amortization expense:(O) Operating expenses 1,250,000
Plant and equipment, net 750,000 Identifiable intangibles 500,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Working Paper for Time Warner and Midwest Cable
10
Exhibit 4.1
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidated Financial Statements for Time Warner and Midwest Cable
11
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidated Financial Statements for Time Warner and Midwest Cable
12
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Complete Equity Method Also known as ‘one-line consolidation’
13
=
=
Equivalence of parent’s net income and consolidated net income Exhibit 4.2
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
One-Line Effects on Investor’s Books14
Investee’s assets and liabilities
Investor’s Balance SheetAssets: Investment in subsidiary…….$ xx
Investee’s revenues
and adjusted expenses
Investor’s Income StatementOther revenue: Equity in income………..…….$ xx
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Revaluations in Subsequent Years
Requires recognition of write-offs of reported revaluations over time
Inventories Write off in year of reported sale
Plant and equipment Write off each year of useful life
Previously unreported intangibles Write off each year of useful life, or if impaired
Long-term debt Write off premium/discount over remaining life
Reported in eliminating entry ‘O’
15
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Revaluations of InventoriesThe book value of a subsidiary’s inventory acquired on January 1, 2011 is $800,000, with its fair value at $1 million. FIFO is used.
16
Subsidiary’s accounting records:
Cost of goods sold 800,000 Inventory 800,000
Cost of goods sold on consolidated income statement $1,000,000Cost basis of beginning inventory 800,000Eliminating adjustment on working paper $ 200,000
Consolidation working paper: Eliminating entry to revalue cost of sales to acquisition cost:
To record sale of beginning inventory during 2011:
Calculate the adjustment to be made:
(O) Cost of goods sold 200,000 Inventory 200,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Revaluations of Depreciable Assets17
The book value of a subsidiary’s equipment on January 1, 2011 is $50 million, with its fair value at $70 million, with a remaining useful life of 10 years and no residual value. Straight-line depreciation is used.
Annual depreciation recorded by subsidiary ($50 M ÷ 10 yrs) $5,000,000Depreciation at fair value ($70 M ÷ 10 yrs) 7,000,000Additional depreciation on working paper $2,000,000
Consolidation working paper: Eliminating entry to revalue depreciation to reflect fair value at date of acquisition:
(O) Depreciation Expense 2,000,000 Plant and equipment, net * 2,000,000
*or accumulated depreciation
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Revaluations of Long-Term Debt
The subsidiary reports $100 million of 5% bonds payable at January 1, 2011, issued in 2010 at par, and due on December 31, 2020. The fair value of the bonds is $90 million on January 1, 2011.
18
Bond discount amortization: $10,000,000 ÷ 10 years = $1,000,000
Consolidation working paper: Eliminating entry to amortize bond discount for 2011:
(O) Interest expense 1,000,000 Bonds payable (or bond discount) 1,000,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Previously Reported Intangibles With Limited Lives
Amortized over estimated useful life Amortized amount equal to recorded
amount of the asset less estimated residual value (usually zero)
Amortization method reflects the pattern in which the economic benefits are consumed Generally straight-line method
19
Examples: Favorable lease agreements and customer lists
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Previously Reported Intangible Assets with Indefinite Lives
If no factors appear to limit the intangible asset’s life, the life is deemed to be indefinite
Examples Brand names Franchises Goodwill Acquired in-process research and
development
20
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Impairment Testing for Intangibles Other Than Goodwill
If carrying amount of the asset exceeds its fair value Recognize an impairment loss
Once impairment loss is recorded, no reversal is allowed for increases in value
Guided by SFAS 144
21
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Impairment Testing for Intangibles Other Than Goodwill
Two step process
22
Step 1: Undiscounted cash flows expected from the future use of the asset and its subsequent
dispositionLess Than
Asset’s carrying value?
Impairment has incurred
Yes
No impairment
No Step 2: Amount of loss = Book value of intangible asset
less Present value of the future
cash flows
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Goodwill
An indefinite life intangible Per SFAS 142, must be regularly tested for
impairment Impairment losses reported in the operating
section of the income statement If material, reported as a separate line item
Goodwill has meaning only in the context of a business unit Represents a variety of intangible benefits
connected with that business, beyond its tangible and identifiable intangible net assets
23
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Goodwill Impairment
Testing required at least annually unless circumstances indicate the likelihood of impairment is remote
More frequent testing needed for A significant downturn in the business climate Adverse legal or regulatory outcomes Unanticipated new competition Loss of key personnel Expectation that a reporting unit will be sold
24
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Impairment Testing for GoodwillTwo step process
25
Step 1: Is fair value of the reporting unit
Less ThanCarrying value?
Impairment may be incurred
Yes
No impairment
No Step 2: Estimate implied fair value of the reporting unit’s goodwill.
Is the implied fair value Less Than
its carrying amount?
Impairment is incurred
Yes
No
Write-off is required
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Amortization of Specific IntangiblesExample
On January 1, 2012, Primus Telecommunication Group acquires all of the voting stock of Matrix Internet. Previously unrecorded intangibles at acquisition are:
26
Intangible asset (in millions) Fair Value Useful LifeCustomer Lists $150 5 yearsBrand names 240 4 years
Customer lists $150 ÷ 5 = $30Brand names $240 ÷ 4 = $60Total amortization expense $90
2012 amortization (in millions):
Must be assessed for impairment at least annually
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Impairment of Specific Intangibles Example continued
The following information is provided by Primus at December 31, 2012:
27
Intangible asset (in millions)
Total expected future cash inflows,
undiscounted
Total expected future cash inflows, discounted
Customer lists $100 $80Brand names 200 125
Impairment loss (in millions):
Impairment loss of $40 million must be reported.
Identifiable intangible
(in millions) Book value
Step 1 Step 2 Book value greater than undiscounted
cash flow?
Impairment loss = Book value less
discounted cash flowCustomer lists $150 - $30 = $120 Yes ($120 > $100) $120 - $80 = $40Brand names $240 - $60 - $180 No ($180 < $200)
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Impairment of Goodwill ExamplePrimus Telecommunication Group acquires all of the voting stock of Matrix Internet with goodwill as follows:
28
Impairment testing at the end of the year:Step 1 - Compare the fair value to the book value of each reporting unit.
Intangible asset Fair Value Useful Life
Goodwill $3,200 million Indefinite
Goodwill assigned to Broadband unit $1,920 millionGoodwill assigned to Wholesale Carrier unit 1,280 millionTotal goodwill $3,200 million
Broadband Wholesale CarrierFair value of unit $17,600 million. $8,640 million.Book value of unit (15,040) million (8,960) millionDifference $ 2,560 million. $ (320) million
Goodwill may be impaired
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Impairment of Goodwill Example continued
Step 2 - Compare fair value of the unit to the fair value of the identifiable net assets of the unit:
29
Fair value of Wholesale unit $8,640 millionFair value of identifiable net assets of Wholesale 7,520 millionCurrent fair value of goodwill 1,120 millionCarrying amount of goodwill 1,280 millionDifference $ 160 million
Goodwill assigned to Wholesale Carrier is impaired by $160 million.
To record amortization expense and impairment losses on previously unreported intangibles and goodwill for 2012:(O) Amortization expense 90,000,000 Impairment loss on identifiable intangibles 40,000,000 Goodwill impairment loss 160,000,000
Customer lists 70,000,000 Brand names 60,000,000 Goodwill 160,000,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation in Subsequent Years Illustration
IBM buys all of the voting stock of DataFile, Inc. on July 1, 2010 for $25 million cash. DataFile’s book value was $5.3 million.
30
Goodwill calculation:Acquisition cost $25,000,000Book value of DataFile 5,300,000Cost in excess of DataFile's book value 19,700,000Differences between fair value and books value:
Current assets $ (300,000) Plant and equipment;, net 10,000,000
Patents and copyrights 4,000,000 Brand names 1,000,000
Lease agreements 600,000
Customer relationships 3,000,000
Long-term debt (2,000,000) 16,300,000Goodwill $ 3,400,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation in Subsequent Years Illustration continued
Exhibit 4.3
31
Revaluation Write-Off information for DataFile Acquisition:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
32
DataFile reports income of $3 million and paid dividends of $400,000 to IBM during its fiscal year ending June 30, 2011.
Equity in income calculation:DataFile's reported income for fiscal 2011 $ 3,000,000 Adjustments for revaluation write-offs of:
Current assets (cost of goods sold) 300,000 Plant and equipment (depreciation expense) (400,000)Patents and copyrights (amortization expense) (800,000)Brand names (impairment loss) (100,000)Lease agreements (amortization expense) (300,000)Customer relationships (amortization expense) (1,000,000)Long-term debt (Interest expense) 500,000
Equity in income of DataFile $ 1,200,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
33
DataFile reports income of $3 million and paid dividends of $400,000 to IBM during its fiscal year ending June 30, 2011.
Equity method entries on IBM’s books during fiscal 2011:
To record equity in net income for fiscal 2011:
To record dividends received in fiscal 2011:
Investment in DataFile 1,200,000 Equity in income of DataFile 1,200,000
Cash 400,000 Investment in DataFile 400,000
Investment in DataFile25,000,000
1,200,000 400,000
25,800,000
Balance in investment account
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation Working Paper after One Year Illustration continued
34
Exhibit 4.4
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
35
Eliminating entries:
To eliminate equity in net income on the parent's books, dividends on the subsidiary's books, and restore the investment account to its beginning-of-the year value:
(C) Equity in income of DataFile 1,200,000 Dividends 400,000 Investment in DataFile 800,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account balance:
(E) Common stock, par 500,000 Additional paid-in capital 2,000,000 Retained earnings, July 1 2,800,000
Investment in DataFile 5,300,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
36
Eliminating entries:
To recognize the beginning-of-year revaluations and eliminate the remainder of the investment account balance:
(R) Plant and equipment, net 10,000,000 Patents and copyrights 4,000,000 Brand names 1,000,000 Lease agreements 600,000 Customer relationships 3,000,000 Goodwill 3,400,000
Current assets 300,000 Long-term debt 2,000,000 Investment in DataFile 19,700,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
37
Eliminating entries: To adjust current year cost of goods sold to reflect inventory revaluation:
(O-1) Current assets 300,000 Cost of goods sold 300,000
To adjust current year depreciation expense to reflect plant and equipment revaluation:
(O-2) Operating expense (depreciation) 400,000 Plant and equipment, net 400,000
(O-3) Operating expense (amortization) 2,100,000 Patents and copyrights 800,000 Lease agreements 300,000 Customer relationships 1,000,000
To adjust current year amortization expense to reflect revaluations of limited life intangibles:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
38
Eliminating entries: To adjust current year interest expense to reflect long-term debt revaluation:
(O-4) Long-term debt 500,000 Operating expense (interest) 500,000
To record brand names impairment for the current year:
(O-5) Operating expense (impairment loss) 100,000 Brand names 100,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
39
Consolidated financial statements:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after One Year Illustration continued
40
Consolidated financial statements:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration
41
DataFile reports income of $3.5 million and pays dividends of $200,000 for its fiscal year ending June 30, 2012. Year-end impairment testing reveals no impairment loss for brand names, and $700,000 impairment to goodwill.
Calculation of equity in income of DataFile for 2012:
DataFile's reported income for fiscal 2012 $ 3,500,000 Adjustments for revaluation write-offs of:
Plant and equipment (depreciation expense) (400,000)Patents and copyrights (amortization expense) (800,000)Lease agreements (amortization expense) (300,000)Customer relationships (amortization expense) (1,000,000)Long-term debt (Interest expense) 500,000 Goodwill (Impairment loss) (700,000)
Equity in income of DataFile $ 800,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration
42
DataFile reports income of $3.5 million and paid dividends of $200,000 to IBM during its fiscal year ending June 30, 2012.
Equity method entries on IBM’s books during fiscal 2012:
To record equity in net income for fiscal 2012:
To record dividends received in fiscal 2012:
Investment in DataFile 800,000 Equity in income of DataFile 800,000
Cash 200,000 Investment in DataFile 200,000
Investment in DataFile25,800,000
800,000 200,000
26,400,000
Balance in investment account
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
43
Exhibit 4.5
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
44
Eliminating entries:
To eliminate equity in net income on the parent's books, dividends on the subsidiary's books, and restore the investment account to its beginning-of-the year value:
(C) Equity in income of DataFile 800,000 Dividends 200,000 Investment in DataFile 600,000
To eliminate the subsidiary's beginning-of-year equity accounts against the investment account:
(E) Common stock, par 500,000 Additional paid-in capital 2,000,000 Retained earnings, July 1 5,400,000
Investment in DataFile 7,900,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
45
Eliminating entries:
To recognize the beginning-of-year revaluations and eliminate the remainder of the investment account balance:
(R) Plant and equipment, net 9,600,000 Patents and copyrights 3,200,000 Brand names 900,000 Lease agreements 300,000 Customer relationships 2,000,000 Goodwill 3,400,000
Long-term debt 1,500,000 Investment in DataFile 17,900,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
46
Eliminating entries:
To adjust current year depreciation expense to reflect plant and equipment revaluation:
(O-1) Operating expense (depreciation) 400,000 Plant and equipment, net 400,000
(O-2) Operating expense (amortization) 2,100,000 Patents and copyrights 800,000 Lease agreements 300,000 Customer relationships 1,000,000
To adjust current year amortization expense to reflect revaluations of limited life intangibles:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
47
Eliminating entries: To adjust current year interest expense to reflect long-term debt revaluation:
(O-3) Long-term debt 500,000 Operating expense (interest) 500,000
To record goodwill impairment for the current year:
(O-4) Operating expense (impairment loss) 700,000 Goodwill 700,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
48
Consolidated financial statements:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Consolidation after Two Years Illustration continued
49
Consolidated financial statements:
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
IFRS for Acquired Specific Intangibles
IAS 38 criteria to be reportable Intangible must be either separable or
contractual Similar to U.S. GAAP
Generally carried at cost less accumulated amortization and impairments IFRS allows fair value reporting in limited
circumstances
50
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Intangibles Reported Using the Cost Model Under IFRS
Intangibles with limited lives Amortized over the period the intangible is
expected to produce cash flows Amortization methods same as for plant and
equipment Estimates used in reporting periodic
amortization must be reviewed regularly Estimated changes reflected in future periods only
Intangibles with indefinite lives Not amortized Assumptions must be reassessed each period
51
Same as U.S. GAAP
Same as U.S. GAAP
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Intangibles Reported Using the Cost Model Under IFRS
All identifiable intangibles reported at cost are subject to impairment testing
Impairment testing differs from U.S. GAAP IAS 36 impairment testing
52
Book value
Asset’s ‘Value-in-use’ (Generally present value of future expected cash flows)
Net market value (fair value less selling costs)
Compared toor
Greater of
One-Step Test
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Intangibles Reported Using the Cost Model Under IFRS Example
53
The following information is provided by Primus at December 31, 2012:
There is no active market for the intangibles.
Impairment loss:
U.S. GAAP impairment loss = $40 million
IFRS impairment loss = $95 million
Customer lists$120,000,000 – $80,000,000 = $40,000,000
Brand names$180,000,000 – $125,000,000 = 55,000,000
Total impairment loss $95,000,000
Intangible asset (in millions)
Book valueTotal expected
future cash inflows, undiscounted
Total expected future cash inflows,
discountedCustomer lists $120 $100 $80 Brand names 180 200 125
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Intangibles Reported Using Revaluation Model Under IFRS
54
IAS 38 defines fair value as market value Mark-to-market allowed under IFRS
Limited to intangibles traded in an active market Examples: Liquor licenses in some states,
franchise rights Increases in value reported directly in equity
Except for reversals of previously reported impairment losses
Decreases in value reported directly in equity Except for reductions exceeding previous
increases which are reported in income
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Intangibles Reported Using Revaluation Model Under IFRS Example
55
Generic computer software valued at $10 million with an active trading market is acquired in a business combination on January 1, 2011. The software has a 5-year estimated life, and no residual value. Straight-line amortization is used. Fair value at December 31, 2011 is $12,000,000.
To record amortization on the computer software for 2011:Annual amortization = $10,000,000 ÷ 5 years = $2,000,000
Amortization expense 2,000,000 Computer software 2,000,000
Computer software 4,000,000 Revaluation surplus (OCI) 4,000,000
To revalue the computer software to fair value as of December 31, 2011:$12,000,000 – [$10,000,000 – $2,000,000] = $4,000,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Intangibles Reported Using Revaluation Model Under IFRS Example continued
56
Fair value at December 31, 2012 is $8,000,000. The adjusted basis is $12,000,000 fair value at end of 2011.
To record amortization on the computer software for 2012:
Amortization expense 3,000,000 Computer software 3,000,000
Revaluation surplus (OCI) 1,000,000 Computer software 1,000,000
To revalue the computer software to fair value as of December 31, 2012:
$8,000,000 – [$12,000,000 – $3,000,000] = ($1,000,000)
Annual amortization = $12,000,000 ÷ 4 years = $3,000,000
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Goodwill Impairment Under IFRS57
Differs from U.S. GAAP in two ways
1.Goodwill is allocated to ‘cash generating units’ (CGUs), not operating units
2.One step computation of impairment loss Book value less fair value of the CGU Loss limited to carrying value of goodwill
IFRS impairment loss likely to be higher than under U.S. GAAP.
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Goodwill Impairment Under IFRS
58
Primus Telecommunication Group acquires all of the voting stock of Matrix Internet on January 1, 2012. Information on December 31, 2012 values is as follows:
Amounts in millionsBook value of goodwill
Fair value of CGU
Book value of CGU
Fair value of identifiable net
assetsBroadband internet $ 320 $ 8,000 $ 4,800 $ 7,040 Broadband data 1,600 9,600 10,240 8,640 Wholesale VoIP 960 4,800 5,440 4,480 Wholesale data services 320 3,840 3,520 3,040 Totals $3,200 $26,240 $24,000 $23,200
©Cambridge Business Publishing, 2010©Cambridge Business Publishing, 2010
Goodwill Impairment Under IFRS continued
59
Comparing each unit’s book value with its fair value:
Book value exceeds fair value so impairment loss of $1,280,000,000 must be recognized
(in millions)Broadband
InternetBroadband
DataWholesale
VoIP
Wholesale Data
ServicesFair value of CGU $8,000 $9,600 $4,800 $3,840Book value of CGU 4,800 10,240 5,440 3,520Impairment? No Yes Yes NoImpairment loss - $640 $640 -
U.S. GAAP impairment loss = $160,000,000IFRS impairment loss = $1,280,000,000