ACC201 Reorganization Of Goodwill And Brands As Per AASB 136 And AASB 137 Assessment 3 Answer

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Question :

Assessment Type: Individual assessment – research report.

Purpose: Assess students' knowledge of relevant accounting standards. Students are required to prepare a research report which evaluates their interpretation of accounting standards. This assessment relates to learning outcomes a, b, c, d and e.

Value: 20% Due Date: Week 10 Topic: Australian Accounting Standards Analysis. Task Details: Students are required to attempt the following questions. Question 1  

Wayne Upton (2001, p. 71) in his discussion of the lives of intangible assets noted that the formula for Coca-Cola has grown more valuable over time, not less, and that Sir David Tweedie, former chairman of the IASB, jokes that the brand name of his favourite Scotch whisky is older than the United States of America — and, in Sir David's view, the formula for Scotch whisky has contributed more to the sum of human happiness.

Required: Outline the accounting for brands under AASB 138/IAS 38, and discuss the difficulties for standard setters in allowing the recognition of all brands and formulas on statements of financial position.

Question 2

Gu and Lev (2011) argue that the root cause of many goodwill write-offs is that the shares of the buyer are overpriced at the acquisition date. Figure 7.8 presents eBay's cumulative stock return against the S&P 500 index from 2003. In mid-September 2005, eBay acquired the internet phone company Skype for $2.6 billion. On 1 October 2007, it announced a massive goodwill write-off of $1.43 billion (55% of the acquisition price) related to the Skype acquisition.

Gu and Lev argue that the root cause of this behaviour is the incentives of managers of overvalued firms to acquire businesses, whether to exploit the overpricing for shareholders' benefit or to justify and prolong the overpricing to maintain a facade of growth. Goodwill write-offs are accordingly an important business event signalling a flawed investment strategy.

cumulative stock return

Required: a) Explain the circumstances under which goodwill is recognised and how any subsequent write-off occurs under AASB 136. b) Explain why a significant goodwill write-off may signal a 'flawed investment strategy.

Question 3
Tooth Ltd acquires Nail Ltd, effective 1 March 2020. At the date of acquisition, Tooth Ltd intends to close a division of Nail Ltd. As at the date of acquisition, management has developed and the board has approved the main features of the restructuring plan and, based on available information, best estimates of the costs have been made. As at the date of acquisition, a public announcement of Tooth Ltd's intentions has been made and relevant parties have been informed of the planned closure. Within a week of the acquisition being affected, management commences the process of informing unions, lessors, institutional investors and other key shareholders of the broad characteristics of its restructuring program. A detailed plan for the restructuring is developed within 3 months and implemented soon thereafter.
Required a) Explain the accounting for restructuring provisions with reference to AASB137. b) Under AASB137, Should Tooth Ltd create a provision for restructuring as part of its acquisition accounting entries? c) How would your answer change if all the circumstances are the same as those above except that Tooth Ltd decided that, instead of closing a division of Nail Ltd, it would close down one of its own facilities?
Presentation: 1000 words (+/- 10%); short report format. Title page, executive summary, table of contents, appropriate headings and sub-headings, recommendations/findings/conclusions, in-text referencing and reference list (Harvard — Anglia style), attachments if relevant. Single spaced, font Times New Roman 12pt, Calibri 11pt or Arial 1Opt. In text referencing and reference list are excluded from the word count.

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Answer :

< align="justify" style="text-align:justify;">ACC201 Financial Accounting T219                                  Assessment 3- Individual Assessment

Australian Accounting Standards Analysis

Executive Summary

This report reflect the reorganization of the goodwill and brands in the books of account of company as per the AASB 136 and AASB 137. According to AASB 138 Recognition of insubstantial resources like trade name and goodwill are not accountable as they are dependent on the approximate flow of cash linked with them. The value of these assets is difficult to measure since they require management decision for estimating upcoming financial conditions. 


The report explains about the state when the good will can be withered off and also highlights that the poor good will is due to poor financial planning and over valuing the shares of the organization. This report reveals the key aspects of the implication for the AASB 138 and AASB 137 for the recording and recognition of the brands in the books of accounts. However, write of the goodwill in the books of accounts has also been given in this report as per the transition accounting entries according to the AASB 137 and AASB 136. 

1. Brands Accounting under AASB 138/IAS 38

The para 9 of AASB 138 cover the brands under the trademark. It is essential to make the brand as a specialized asset for considering the asset as exclusive and to be taken into account discretely than the goodwill. The brand should be made to rise as the outcome of lawful or contractual to the unit or should be competent enough to act as a separate entity which can be independently transferred or sold (Finch, 2016).  The recognition of brand is based on following two conditions-

  1. The probability of economic profits in future to the unit due to the brand name is high.
  2. The measurement for brand name value is reliable. (AASB para 21)

Measuring the brand value is a challenging task. The formula for acknowledging the brands is difficult to be formed since it depends upon the projected upcoming economic profits by using the rational assumptions. This depends upon the managements’ approximation about the upcoming economic circumstances. The formula for measuring the brand value is not easy to be formulated, as for determining the estimate the entity has to use hypothesis (Guthrie and Pang, 2013).

2. Write-off and recognition of Good will (AASB 136)

The goodwill is not capable of generating the flow of cash independently and therefore, it is assigned to the cash producing entities where it gives its contribution (AASB 136, para 81). The good will amount is the expense done by the acquirer for exchange of upcoming profits which are predicted to be accumulating out of the assets which are unidentifiable and unrecognized distinctively asset (AASB, 136).

On the basis of the predicted upcoming flow of cash from the asset, the linked good will and amount of cash producing entities is not certain. The prominent write off of the goodwill in the coming year reflects that to validate the asset the investment was over-valued, which resulted in faulty investment planning (Carlin, & Finch, 2008). Till there is no change in the financial strategy of technological set up to the unit, the major change in the value of cash generating entity will show fault in the early acknowledgement of the asset (AASB, 136).

3. Reformation under AASB 137

According to AASB 137, dependent assets and dependent liabilities demands for the fiscal statements of a unit has to make sure that the due credit is given and disclosure is made for the upcoming investments and liabilities which can come in the future keeping into account the current situation in the date of balance sheet (Guthrie, & Pang, 2013).  However, According to AASB 138 recognition of insubstantial resources like trade name and goodwill are not accountable as they are dependent on the approximate flow of cash linked with them. Therefore, if there is any decision which has to be taken by the unit in the upcoming time which would affect the economic position or earning capability of the unit as compares to the nature of the business (Cheung, Evans, and Wright, 2008). In reference to AASB 137 para 70, if it is sure that due to the outcome of the past happening there would be any requirements than the stipulation for reframing the costs is required to be done (Wines, Dagwell, and Windsor, 2017). In addition to this, The prominent write off of the goodwill in the coming year reflects that to validate the asset the investment was over-valued, which resulted in faulty investment planning will be done as per the AASB 136.  

In the study conducted here, the case of companies Tooth Ltd and Nail Ltd has been taken. Nail Ltd was acquired by Tooth Ltd. On March 1, 2020, it was decided by the management of Tooth Ltd to shut a unit of Nail Ltd on the same date when the acquisition happened. This was completed before the financial year ended. It is clear that due to this event, there will certainly be an obligation in the near future. This obligation will also result in the spending of the funds that will be required by Tooth Ltd for the acquisition of Nail Ltd. 

After assessing the case, it could be inferred that the organization has calculated the estimated cost of reframing strategy precisely with the information that was available. 

In this study, in spite of shutting down a unit of acquired company Nail Ltd, the acquirer Tooth Ltd. Thought of closing down its own unit. Therefore, it does not require stipulating the funds required in shutting the unit. This closing down of own unit was not the result of any event occurred in past or any negative past effect. However, to decide upon the provisions to be made for the expenses the upcoming and present requirements must occur from the event occurred in past which was considered while framing the unit’s financial statements. 


 It is considered that recognition of the transaction it the books of accounts must be made with the proper accounting and application of the AASB standards. As all the acknowledging parameters are fulfilled, Tooth Ltd should form the condition for reframing cost as a measure of the entries of accounting done in acquisitions.