Business Combinations, Intangible Assets and Leases - Assignment Example

Question a) An intangible asset is an identifiable non-monetary asset without any physical existence according to AASB 138. The definition identifies three characteristics of an intangible asset; identifiable, non-monetary asset and without any physical existence. Goodwill is a non-monetary asset without any physical existence but it is not identifiable. To be identifiable, the asset should be separable which implies that it should be sold, transferred, licensed or rented. In addition to that, identifiable also implies that it should arise from any legal right or contractual obligation. Thus, goodwill does not meet the definition provided by AASB 138 as it lacks the property of being identifiable. b) Goodwill is an asset which represents the excess payment made by the acquirer in turn for future economic benefits and it arises when an entity integrates with another entity or it acquires another firm. Goodwill is recognized at the date of acquisition as an asset by the acquirer. According to AASB 3, Goodwill is measured as the excess of the cost of acquisition (purchase consideration plus incidental expenses) incurred by the acquirer over the fair value of the assets, liabilities, equity and contingent liabilities assumed at the date of acquisition. According to the case presented, the excess cost over the $ 6.3 billion purchase of the New Plan shopping in United States represented the goodwill for Centro Group. c) Goodwill is written-down usually for several reasons. For this specific case, we can infer that the flagging economic condition was the major reason which led to write down of the goodwill. The net assets of the New Shopping plan might have been overestimated when it was acquired since the economy was booming at that time. The current sluggish economic environment provided a cogent reason for writing down the goodwill. d) In the past, goodwill was amortized over a period of time which didn’t depict the true value of the net assets of the company. The current financial standards do not allow amortization of goodwill rather it states that organizations should check goodwill for impairment at least annually. This AASB’s treatment of goodwill is far more superior than amortizing the goodwill. Impairment of goodwill does not imply that a specific amount will be expensed rather it checks to what extent the goodwill has impaired which represents its true value at a particular point of time. Question 2) From: Mr. ABC To: Chief Financial Officer RE: Classifying a lease as finance lease rather than operating lease With reference to the subject, I would like to explain the impact of classifying the lease as finance rather than operating lease on our financial statements. Finance lease as the term implies its financing the purchase of an asset from the seller (lessee) and it results in transfer of ownership of the asset. Contrast to that an operating lease is simply an agreement between the lessor (seller) and lessee (buyer) to use an asset for a specific period of time and it is as similar to renting an asset. On the balance sheet, we will classify a finance lease as an asset since it is identical to borrowing money and buying an asset while it is adjusted through debt (lease payable) on the other side of the balance sheet. Whereas, an operating lease is not classified as an asset on the balance sheet since it does not result in transfer of ownership. For a finance lease, the income statement records an interest expense and depreciation expense since the asset is owned and it needs to be depreciated. On the other hand, an operating lease simply records a lease expense on its income statement. The essential difference in both the methods of lease results in different net profit and cash flows. In a finance lease, the expenses (includes both depreciation and interest expense) are generally higher in the earlier years and they decrease over the life time of the asset. Hence, for a finance lease, tax benefits and higher cash inflows are noticeable in the earlier years and they decrease over the period of time. I believe this information will help you in understanding the subject matter. Your further queries on this topic will be highly appreciated. Best regards, Mr. ABC, Perkin Ltd b) The lease will be classified as a finance lease for lessee since the asset ownership is transferred at the end of the lease term as the ship will be returning to International Ltd at the end of the period (AASB 117). The lessor (Perkin Ltd.) will classify the lease as an operating lease since it does not own the asset. Question 3) (a) An intangible asset is an identifiable non-monetary asset without any physical existence according to AASB 138. Patents are granted to protect the intellectual property therefore they have no physical existence. Patents are also identifiable as they represent a legal right granted to the owner by the government. Therefore, a patent meets the definition of AASB 138. (b) The definition of AASB 138 warrants that an intangible asset should be valued at its cost less any accumulated amortization and any accumulated impairment losses. It comprises of amortization and impairment since empirical evidence shows that patents can be impaired due to certain circumstances. Creative computers are only amortizing their patent over a period of 10 years. However, AASB 138 requires that impairment losses should also be incorporated. Creative computers need to assess the amount of amortization and impairment losses, while they are only recording a fixed amortization expense of $10,000 without taking into account any impairment losses. The new product developed by the competitor has rendered Creative Computer’s LCD obsolete therefore it should be taken into account as an impairment loss. So we conclude that Creative Computers is not in compliance with AASB 138 since it has not taken into account the impairment losses.   Question 4) The statement made by the manager does not seem to be correct since carrying forward tax losses result in a future benefit for the entity. An asset by definition is something which provides you economic benefits now or in the future. Tax losses are benefits for the company since they are added to the income statement and provide economic benefits thus they should be deemed as Deferred Tax Assets. References AASB, 2009. AASB 117 - Leases . [online] Available at: [Accessed 30 October 2010]. Read More