Annals of the University of Oradea: Economic Science (Jul 2014)
EVALUATION OF THE CHARACTERISTICS OF GOODWILL IN IFRS
Abstract
Assessment is one of the most debated areas in accountancy, since the choice of valuation procedures, methods directly influence an entity’s financial situation, alterations and performance. The applications of International Financial Reporting Standards are mandatory for quoted companies in the EU since 2005. In my study/paper I deal with a specifically treated area of accountancy, the regulation of goodwill’sevaluationin the IFRS system. Since this area is jointly regulated by several standards, my goal is to provide a comprehensive view of standards regarding the evaluation of goodwill, their consistency paying particular attention to the hypothetical approaches and evaluation philosophy of IAS 36 Impairment of Assets standard. Since goodwill acquired in a business combination does not represent independent cash flow from other asset and group of asset, therefore its valuation requires specific accounting treatment. Standards determine the concept, the criteria for recognizing, the rules applied in initial measurement of goodwill, and later the limits of the impairment to be recognised derived from the subsequent period’sprice reduction of the goodwill and the related tax effects. My thesis detailsa specific set of concepts, which is connected to the determination of thegoodwill’s value. Itincludesthe concepts of cash generating unit, recoverable amount, value in use and fair value less costs to sell. I give full details about impairment test, as a particular evaluation procedure, I introduce the internal and external source of information, which show evidence that the asset may be impaired, I also consider deferred tax effects resulted from the evaluation of goodwill and the identification of effects influencing the performance of the entity. Subsequently, I introduce the specific regulation of the goodwill’s evaluation with the help of corporate examples. Having analysed the IFRS reportsof three multinational companies, with different businessactivities, quoted in Budapest Stock Exchange I describe the corporate regulation in connection with the goodwill’sevaluation, the effects of the factors applied in the impairment test and the scenario analysis made by enterprises. Due to the characteristics of goodwill’sevaluation, it is a complex and complicated accounting procedure, which is considerably based on the estimations of the management, which comprises considerable uncertainty. Having used the financial data of the selected entities operating in different areas, I demonstrate what kind of specific indicators are used to determine the value of their cash generating units and which risks are being considered during the estimations.
