ACC201 Reorganization of Goodwill and Brands As per AASB 136 and AASB 137 Assessment 3 Answer
ACC201 Financial Accounting T219
Assessment 3- Individual Assessment
Australian Accounting Standards Analysis
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-
- The probability of economic profits in future to the unit due to the brand name is high.
- 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.