SEGI BAC Adv. Financial Accounting & Reporting 2 Coursework Questions. 1. You are the financial...

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SEGI BAC Adv. Financial Accounting & Reporting 2  Coursework Questions.  1. You are the financial controller of DD which currently prepares financial statements in accordance with local GAAP. Your finance director has been in discussions with your corporate reporting advisors about whether to move to reporting under IFRS and has forwarded to you the following note received from them:    “There are a number of differences between the local GAAP and the IFRS recognition and measurement rules. Using information on our files, we have conducted a preliminary review of how your most recent financial statements might change if you had reported under IFRS. Below we show our estimates of the effect on equity at the end of the last year, together with brief notes on the different rules.  $’000 $’000  Equity as reported under local GAAP 6,688  Adjustments:  Amortisation of goodwill acquired in business combination  250  Valuation of property measured under revaluation model 1,200  Depreciation thereof  (350)    850  Development expenditure   180  Amortisation thereof   (40)    140  Equity as reported under IFRS 7,928    Recognition and           Local GAAP IFRS  measurement rules    Goodwill                 You, like most local companies, Goodwill amortisation is                          Amortise goodwill over 20 years prohibited    Property – revaluation    Existing use value, that is taking Fair value, that is the open  model –basis of          into account what you use it for market value taking into  valuation account all possible uses.    Development           You, like most local companies, Recognition as an asset is  Expenditure             choose to write off development compulsory when certain                         Expenditure as incurred conditions are met.    Your finance director is aware that those making economic decisions use financial information for various purposes, including for the assessment of financial performance. He is pleased that the introduction of IFRS increases equity, remarking: íf equity increases, then profit must increase both in the year of change and in future years. This will improve our performance. Shouldn’t we move to IFRS as soon as possible?    Requirement:  In advance of a meeting with your finance director to discuss his remark, prepare an essay about the likely effect on performance if DD adopts IFRS.

Robert · Accepted Answer

Executive Summary ....................................................................................................................................... 2 
Goodwill ........................................................................................................................................................ 2 
Property revaluation model – basis of valuation .......................................................................................... 3 
Development Expenditure ............................................................................................................................ 4 
Finance Director’s remark ............................................................................................................................. 4 
Reference ...................................................................................................................................................... 5
Executive Summary 
This paper discusses the impact on the financial performance of DD, if it opts to prepare its financial 
statement as per IFRS, specifically with respect to treatment of goodwill, property and development 
expenditure.   
Goodwill 
Local GAAP: Normally, over a period of time, the value of goodwill varies along with the performance of 
the business. If the demand for the product of the business purchased drops over a period of time, the 
corresponding value of goodwill will diminishes. Alternatively, if the business progresses, the potential 
benefit that could be derived from business would increase and accordingly the value of goodwill will 
increase. However, such goodwill is never recognized in books as it results in accounting of internally 
generated goodwill. So, the Malaysian GAAP advocates that goodwill should be amortized on a 
systematic basis over the estimated useful life (MASB ED 28, Goodwill).  
Accordingly, while following Malaysia GAAP for preparing financial statement, DD has amortized 
goodwill systematically over 20 years, which is regarded as estimated useful life and charged $250 
thousand to its profit and loss account. However, the useful life of goodwill must be reviewed by 
management based on factors like foreseeable business and industry life cycle, impact of economic 
factors, changes in product demand, impact of competitors’ strategy on DD’s goodwill and other factors 
(MASB ED 28, Goodwill). Thereby the useful life of goodwill is regarded as finite, and the goodwill is 
amortized over its estimated revised useful life. If in next financial years, if DD revises useful life of 
goodwill, it must accordingly change the goodwill amortization period.         
IFRS: The goodwill is not amortized under IFRS; instead it is tested for impairment. IAS 36 on impairment 
of Asset, states that an asset or cash-generating unit is regarded as impaired when it is carried in books 
at an amount higher than its recoverable amount. To identify whether the asset is impaired or not, the 
Company should assess and identify whether any indicator of impairment exists. If the asset has an 
indefinite useful life, then it must be tested for impairment at least annually. Accordingly goodwill must 
be impairment tested annually. While testing asset for impairment, the management compares the 
value at which the asset is carried in books with its estimated recoverable amount.

SEGI BAC Adv. Financial Accounting & Reporting 2 Coursework Questions. 1. You are the financial controller of DD which currently prepares financial statements in accordance with local GAAP. Your...

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