Investment in Court Chambers Plc Finance Essay

That is incorrect to keep the goodwill in the balance sheet unchanged, as its value will decrease day by day. The products are sold less and decrease price during the product life time. For example, telephones are at high price at the beginning of the sell. After new and better telephones appear, the selling price and quantities of the old will decrease. The selling of the products represent the goodwill of the company, therefore, it is incorrect to keep the goodwill.

Capitalisation with annual impairment unchanged.

It is to include the value of purchased goodwill at its original price, and only make a charge to the income statement when it is impaired. For example, if a company buy plant which had a resale value of 5% of the costA¼Å’then depreciation should be 95% after it starts to use. It's not sensible, the charge should be over the life of the product.

Writing off directly to reserves in the year of acquisition

It is wrong to writing off the cost of the goodwill directly to reserves in the year of acquisition. Because at acquisition, the loss in value of the good which should be in income statement will does not happen. It happened over a long time and the goodwill decreases with time.

Writing off directly to the income statement in the year of acquisition

It is wrong to write off directly to the income statement in the year of acquisition. Because the loss in value of the goodwill does not happen at acquisition, it is over a longer period.

Amortising the goodwill over its expected life

It is a good way to make the charge in the income statement. For many companies, a life of about five years may be suitable, but some have much longer life. It is simple to us straight-line amortisation. The advantages are more in earlier years than later years. It could use 'actual sales'/'expected total sales'. It is difficult but accounts still this accounting method, which need to make some judgements when value the items in the balance sheet. Let's use McDonald's and Wendy's as an example. McDonald's decided to buy Wendy, spend a total of $3,000,000,000. Since the book value of Wendy's is only $1,000,000,000, and McDonald's paid $3,000,000,000, McDonald's paid a premium of $2,000,000,000 which is going to the balance sheet as goodwill. It should be amortized for 40 years. It means that every year, 1/40 of the goodwill amount should be subtracted from McDonald's earnings, therefore by the 40th year, there is no goodwill left on the balance sheet.

b.

Goodwill is recognised as an asset at acquisition. Initially measurement. Purchased goodwill should be capitalized as assets. Goodwill should be tested for impairment at least one year and treated as if it has an indefinite life. (a) Leases and insurance contracts should be based on the classification of contract terms and other factors at the beginning of the contract .Contingent liabilities of a business combination that are a present obligation and measured reliably can be recognized. Some assets and liabilities are required to be recognized or measured in accordance with other IFRSs, rather than at fair value. Indemnification assets are recognized and measured on a basis that is consistent with the item that is subject to the indemnification, even if that measure is not fair value. The acquirer should identify any difference between: the aggregate of the consideration transferred, non-controlling interest in the acquiree and, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree; and the net identifiable assets acquired. The difference is goodwill. If the acquire earn from a bargain purchase that gain is recorded in profit or loss. Sufficient information is disclosed in the financial statements to enable users to determine the impact of goodwill on the financial position and performance of the reporting entity

Question 3:

A related party transaction is defined as resources or obligations transfer between parent and subsidiaryA¼Å’no matter if a price is charged. Examples of transactions that may lead related party disclosures areA¼Å¡ purpose or sale of goods, property or other assets, providing or receiving services, agency arrangements, leasing arrangements, transfer of research and development, licence agreements, finance and management contracts. 'Disclosure of related party transactions in consolidated financial statements provides no useful information' is unreasonable. There are some inter-company transactions which should be adjusted in consolidated financial statements in order to not double count the asset or liabilities as follows:

Preferred shares and Bonds

When preferred shares are held by a parent company in its subsidiary, which means they are acquired on the acquisition and have to in calculation of goodwill. The cost of parent company purchase the preferred shares are included in the cost of investment. So do the bonds, should be recorded as the net assets acquired by parent and included in the calculation of goodwil. But the part of preferred shares which are not required may be considered as minority interest, while for bonds, the parts which are not required are regarded as long term loan. (Elliott and Elliott 2007)

Inter-company Dividends payable/receivable

When dividend declared by subsidiary but not paid, then record in subsidiary's current liabilities as Dividend Payable and in Parent's current Assets as dividend Receivable. In consolidated financial statement, the transactions should be cancelled off.

Inter-company sales

Transactions between the parent and subsidiary company can be seen from their respective financial statements, if the profit is only for one party but not for the group. These kinds of transactions have to be cancelled off in consolidated financial statement, because the transactions have not really happened. It's only the intra-group transactions, not transacted with the third party. For instance, when parent company sell A¿A¡500 goods to its subsidiary company, there will be recorded A¿A¡500 debtor to parent company and A¿A¡500 creditor to subsidiary company, then both of them should be cancelled off. If the goods have not been sold on to a third party before the year-end, the profit should be eliminated when preparing the consolidated financial statement. The adjustments are reducing retaining earning and reducing the inventory. For an example, the cost of goods of the parent company was A¿A¡600A¼Å’then parent company sold to its subsidiary company for A¿A¡800, it seems that parent company have a profit of A¿A¡200. But half of the goods are still in subsidiary company's inventory at the end of the year. So A¿A¡400 (A¿A¡800* 1/2) of goods are still in company 's balance sheet as inventory, which included a profit A¿A¡100 (A¿A¡200*1/2 ). The parent company can get all the profit after the subsidiary company sold all the goods to a third party. And now A¿A¡400 goods are still in company's balance sheet as inventory and the A¿A¡100 is the unrealised profit. At last, A¿A¡100 should be removed from the group balance sheet by reducing parent company's retained earnings and subsidiary company's inventory. (Benedict and Elliott 2008) To conclude, it is necessary to disclose the related party transactions in consolidated financial statements and the information is useful.

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