FRSIC Consensus 4 – Accounting Treatment For Impairment Of Goodwill In Situation Where Court Approval Has Been Obtained To Write It Off Against Reserves (27 March 2008)

The effective date of the application of this FRSIC CONSENSUS was 27 March 2008.

The release of FRSIC Consensus 4 – Accounting Treatment For Impairment Of Goodwill In Situation Where Court Approval Has Been Obtained To Write It Off Against Reserves provides guidance, on accounting treatment of impairment of goodwill in the situation where court approval has been obtained to write off goodwill against reserves account, for example, share premium account as allowed under Section 64 of the Companies Act, 1965.

You can download FRISC Consensus 4 here: http://www.frsic.my/consensus_consensus.asp

Sample Disclosure – Note On Goodwill (27 September 2009)

INTANGIBLE ASSET – GOODWILL

Note On Goodwill

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For the purpose of impairment testing, goodwill is allocated to the subsidiary which represents the lowest level within the Group at which the goodwill is monitored for internal management purpose.

During the financial year, the Group has recognised impairment loss on goodwill on consolidation of RM30,000 (2008 – Nil) due to the deterioration of the financial position and financial performance of a subsidiary in property development segment.

The balance of the goodwill on consolidation of RM500,000 (2008 – RM530,000) is related to the manufacturing segment and the recoverable amount is determined based on the value-in-use calculations. The calculations performed are based on the pre-tax cash flow projections derived from financial budgets approved by the Directors covering the coming 5 financial years. This method of calculations is consistent with that adopted in the previous financial year. The key assumptions used in the calculations are as follows:-

(a) Sales growth rate of 10% for the first two financial years from the 2010 budget, which is the base year for the cash flows projections, and 12% for the subsequent financial years.

(b) Discount rate of 10%, being the estimated weighted average cost of capital of the Company.

(c) Terminal value representing the projected carrying amount of the net assets of the manufacturing segment as at the end of Year 5.

The Directors determined budgeted gross margin and results based on past performance and its expectations of market development. The discount rate used are pre-tax and reflect specific risks relating to the relevant segments. Based on the recoverable amount determined, goodwill on consolidation related to the manufacturing segment is not impaired for the current financial year. With regard to the assessment of value in use, the Directors believe that no reasonably possible change in any of the above key assumptions would cause the carrying value of the unit to be materially different from its recoverable amount.

Sample Disclosure – Significant Accounting Estimates and Judgements (10 December 2008)

 

Significant Accounting Estimates and Judgements

Critical Judgements Made in Applying Accounting Policies

The Company has developed certain criteria based on IFRS 140 in making judgements whether a property qualifies as an investment property. Investment property is a property held to earn rentals or for capital appreciation or both. Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply foods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), the Company would account for the portions separately. If the portions could not be sold separately, the property is an investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgement is made on an individual property basis to determine whether ancillary services are so significant that a property does not qualify as an investment property.

Key Sources of Estimation Uncertainty

The key assumption concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as stated below:-

1.      Impairment of goodwill

The Company determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value-in-use of the cash generating units (“CGU”) to which goodwill is allocated. Estimating a value-in-use amount requires management to make an estimation of the expected future cash flows from the CGU and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

2.      Impairment of investment in subsidiaries

The Company determines whether investments in subsidiaries are impaired at least on an annual basis. This requires an estimation of the value-in-use of the Cash Generating Units (“CGU”) to which investments in subsidiaries are allocated. Estimating a value-in-use amount requires management to make an estimation of the expected future cash flows from the CGU and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

3.      Property development

The Company recognises property development revenue and expenses in the income statement by using the stage of completion method. The stage of completion is determined by the proportion that property development costs incurred for work performed to date bear to the estimated total property development costs. Significant judgement is required in determining the stage of completion, the extent of the property development costs incurred, the estimated total property development revenue and costs, as well as the recoverability of the development projects. In making the judgement, the Company evaluates based on past experience and by relying on the work of specialists.

4.      Deferred tax assets

Deferred tax assets are recognised for all unabsorbed tax losses and unutilised capital allowances to the extent that it is probable that taxable profit will be available against which the losses and capital allowances can be utilised. Significant judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

5.      Useful lives of property, plant an equipment

The Company estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property, plant and equipment are based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property, plant and equipment would increase the recorded expenses and decrease the non-current assets.

6.      Construction contracts

The Company recognises contract revenue and expenses in the income statement by using the stage of completion method. The stage of completion is determined by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. Significant judgement is required in determining the stage of completion, the extent of the contract costs incurred, the estimated total contract revenue and costs, as well as the recoverability of the contracts. In making the judgement, the Company evaluates based on past experience and by relying on the work of specialists.

7.      Allowance for doubtful debts

The Company makes allowance for doubtful debts based on an assessment of the recoverability of receivables. Allowances are applied to receivables where events or changes in circumstances indicate that the carrying amounts may not be recoverable. Management specifically analysed historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms when making a judgement to evaluate the adequacy of the allowance of doubtful debts of receivables. Where the expectation is different from the original estimate, such difference will impact the carrying value of receivables.

8.      Allowance for inventories written down

Reviews are made periodically by management on damaged, obsolete and slowmoving inventories. These reviews require judgement and estimates. Possible changes in these estimates could result in revisions to the valuation of inventories.