Advantages and Disadvantages of the IFRS 3 Requirement to Apportion Acquisition Cost to Identifiable Intangibles - Assignment Example

Advanced Financial Accounting: Retail PLC Case Study Evaluate, from the perspective of preparers and users, the advantages and disadvantages of the IFRS 3 requirement to apportion acquisition cost to identifiable intangibles. International Financial Reporting Standards (IFRS) 103 is applicable in companies’ assets during takeover or acquisition (Anonymous, Nd., Week 3). It also includes intangible assets that must be recognized separately in the statement of financial position in accordance to International Accounting Standards (IAS) 38. The excess of the business combination over the acquirer’s interests is recognized as goodwill as specified by IASB 2004, (Hines, N.d., Week6, p. 8). The recognition of intangible assets during acquisition of the business has altered the previous position held by UK GAAP in which the intangible assets such as goodwill were never recognized separately (Anonymous, Nd., Week 3). Advantage The use of IFRS has led to quality improvement of the financial report (Hines, 2012, p. 2). According to William’s view the changes in accounting standards can “improve the quality of auditing and the independence of auditors” (Anonymous, p. 11 par.1). The implementation of IFRS provides a room for accommodating different views of the board members and auditing committee rather than complying with a specific procedure. Disadvantages The use IFRS has resulted to complications involving imbalanced opinion that may require the auditor to use the opinion of a third party from another department other than accounting department such as property experts (Hines, 2012, p. 3). However, even with the use of third party there is a problem in case the third party used by chief finance officer gives contradicting opinion from the one given by the auditor’s third party (Hines, N.d., Week6). Terry argues that the use of IFRS does not result to harmonious value of the intangible assets since different businesses will apply various approaches to determine the value of the intangible assets (Anonymous, Nd. p. 12). In his view the companies will have a problem in differentiating intangible assets from goodwill. For example, Retail PLC the auditors and financial officers agreed that the assets can be valued at the acquisition value or use market value (Anonymous, Nd., Week 3). Therefore, IFRS undermines the perception of fair and true assessment quality accounting standards. In order to recognize intangible assets for inclusion in the financial statement IFRS requires the value of such assets to be material (Anonymous, Week4, 2014). However, determination of materiality is subjective, and there is no agreed method to determine the materiality of assets at fair value during the acquisition process. IFRS are rule based as opposed to UK GAAP that was the logic based thus it may increase the complexity when making judgment and has the assurance of quality financial report (Anonymous, Week4, 2014). IFRS results to volatility of findings and subsequent challenges in obtaining harmonious audit report for the users of the financial report. Such disagreements and negotiations result to waste of time and conflicts that may never be resolved (Hines, 2014). For example, in Retail PLC the auditors changed their mind concerning the treatment of valuation at the time when auditing committee was completing valuation and the auditors decided to add value to the assets (Anonymous, Nd., p. 15). 2. Evaluate the advantages and disadvantages of the composition of Retail PLC’s main board and audit committee and consider the impact of the CEO’s attendance on audit committee meetings. The Retail PLC board of directors was composed of executive members and a few non-executives directors comprising the chairman while the audit committee was composed of two members both with accounting background. The company failed to comply with UK Corporate Governance Code provisions that require each of the board of directors and audit committees members be composed of half of non-executive members (Anonymous, P.1). Advantages The audit committee discusses the issues affecting the company and shares their findings with the auditors. The committee shares with the auditors all issues both resolved and unresolved issues and even how they were resolved. Such an arrangement help in establishing stable procedure for solving issues in the future and can lead to an agreement on what value is to be attached to particular assets or how to separate various intangible assets for valuation. As William stated the members of the audit committee helps each other to solve various accounting issues and adhere to the accounting process (Anonymous, p. 9). In addition, the non-executive members of the audit committee assist the executive members with professional skills in handling accounting issues. Furthermore, the non-executive members have an objective view of the company and can make a better judgment about a situation than what an executive member can perceive of situation (Anonymous, Nd., Week5). Therefore, having both executive and non-executive members can help identify detailed issues affecting the company. Disadvantages Having the audit committee and composed of fewer non-executives members than the executive members can cause challenges such as wastage of time in case the executive members differ with non-executives (Anonymous, Nd., Week 3). Similar situation occurred in Retail PLC whereby the audit committee differed with the external auditors and the CEO concerning the valuation of tangible assets and the method of valuation that would be used. The consequences of the disagreement were delay in providing a certified audited report (Anonymous, Nd., Week5). The presence of the CEO can cause more complications to the conclusion about fair and true value of the company’s assets. CEO may fail to reason with others and instead may opt to convince them to the side with his opinion although that may never happen (Anonymous, p.18). Therefore, the presence of the CEO can divert the attention of the discussion to create another conflicting idea. 3. Terry, the audit committee chair, describes the audit committee as ‘the place of last resort’. What does he mean by this and discuss whether this view is justifiable? Terry states that the audit committee is the place of last resort because in his view all the issues concerning financial accounts should be settled between the auditors and the managers (Anonymous, p. 7). He implied that some technical issues cannot be solved at the audit committee’s meetings, but instead there is need to involve technical experts long before the audit committee’s meeting in order to get an amicable solution. The audit report presented to the audit committee’s meeting should involve the challenges dealt with, and they were resolved. In the meeting, the committee discusses the technical issues that were dealt with in the course of the auditing and examines the judgment made by the committee and how it impacts the company’s accounts. Therefore, presenting unsolved issues to the audit committee meeting can result to significant disagreements and waste of time (Hines, 2014). Such issues can be extremely difficult to solve in the meeting and can result to loss of credibility of the audit committee. 4. All three key parties refer to the importance of identifying and raising issues in a timely manner. Explain, with reference to the case, why they consider this to be so important. The preparation of the financial report assists the users of such information in decision making (Hines, 2014).Therefore, the preparers of such information should avail it in time in order to serve the intended purpose. Identification of fair value of the assets is very essential for the firms during acquisition because it help investors to determine the goodwill of the firms (Anonymous, Nd., Week5). William perceives delays as ill intended to hinder revelation of true value of the assets for inclusion in the valuation of the firm during acquisition. Fixing issues in time can benefit the stakeholders because they continue getting (Anonymous p. 15). According to Terry (Anonymous, p. 16) delays would result to undervaluing of the firm’s assets, and that would not benefit the users of the financial report. Therefore, early identification of the issues can allow for changes to be made before the final report is submitted to the users for decision-making (Anonymous, Nd., Week5). Ben believes that it is a waste of time to identify issues when it is too late because there are no chances for making follow up to ensure the issues are fixed (Anonymous, p. 19). The essence of identifying issues in the financial report is to ensure they are fixed in order to reflect true and fair value of the assets. Therefore, it is of the essence if those issues are identified early enough to offer the chance for making follow-up ensure their implementation. 5. A critical audit interaction occurred at the meeting with the CEO. Discuss the 
position is taken, and area of limits William had the opinion that even after the discussion the outcome were not necessary and they should not rely on the accounting details or even ask questions since that would result to serious waste of time. His suggestion was focusing on other things instead of dwelling on intensive discussion. On the other hand, Terry believed there was no other option apart from following the due process in determining the true value of the assets in accordance to IFRS requirements. Ben held the same view with Terry that any issue arising in the accounting report should be resolved before the report is presented to the accounting committee. He expected other to resolve the issue since he considered it irrelevant to continue arguing with people unwilling to understand the issue. However, he opted to speak in order to avoid losing his client. Terry requested his colleagues’ members to take time to resolve the issues because failure to do so would cause conflicts with the audit committee, and the committee would eventually request for the fixation of the identified issues. He avoided laying blame on anyone for the issues that were identified in the report since he believed human beings cannot avoid making mistakes (Anonymous, p. 21). In his view, Ben had provided a discrete idea although to his colleague Ben’s view was probabilistic. 6. Evaluate the outcome of the interaction in terms of quality and ease of agreement and consider what the consequences of it are likely to be on future financial reporting decisions and relationships between the key parties? The interaction of executives and non-executives members of the board and audit committee has both advantages and disadvantages (Hines, Nd. slide 19). For example, it helps the members to discuss various issues arising in the financial report and provide a solution to such issues in order to make the report useful to the users. Also, the discussion can result to early detection of the issues and establishment of solution to the problem thus giving the committee an opportunity to request for changes and a follow-up to ensure they are implemented. Finally, the committee can establish a procedure for solving future issues and implementing the IFRS to reduce various flaws that may occur in the implementation process (Hines, 2014, p. 3). However, sometimes disagreement may arise and hinder fast and effective implementation of the standards. Furthermore, the committee may fail to make follow-up of the recommended changes in the financial report especially where the issues are not identified in time hence reducing the quality and credibility of the report (Hines, 2012). List of References Anonymous, (Nd.). Case Study: Retail PLC. Pp. 23. Anonymous, (Nd.). Week 3. Accounting Theory and Conceptual Framework. Pp. 1-9. Anonymous, (13th October, 2014). Week4: Advance Financial Accounting: Conceptual Framework 2; Critical appraisal of IASB Conceptual Framework. Pp. 1-11. Hines, T. (Nd.). Week1: The Regulation of Financial Reporting. ppt. (slides 1-20). Hines, T. (29th September, 2014). Week2: Global Harmonization of Accounting. Pp. 1-5. Anonymous, (Nd.). Week5: Intangible Assets and Goodwill. Pp. 1-5. Hines, T. (N.d.). Week6: Impairment: Pp. 1-19. Hines, T. (February 7, 2012). Finalisation of Accounts 1. Pp. 1-5 Read More