The New Accounting Policy Under IFRS for Goodwill, Essay Example

The IFRS policy requires that goodwill received through business combinations is tested for impairment, unlike the GAAPs process of amortization. Once the intangible assets is available for use, amortization is set to commence, unlike in the UK GAAP, where it begins immediately. Because goodwill is regarded as having an indefinite life under IFRS and is therefore not amortised; thus any UK GAAP goodwill amortisation has to be reversed (International Financial Reporting Standards, 2007).

The adoption of the new accounting policy for goodwill of impairment testing serves as a common financial language, thus opening up the company for more investors and markets. As a result investors and analysts interested in business ventures such as acquisitions can quickly judge the success of an acquisition. Additionally, annual impairment review will help investors as firm relief from taking huge goodwill cuts per year will mean that they will conduct proportional reviews annually considering that IFRS regards goodwill as having an indefinite life, hence not amortised. Through the reviews investors will determine whether the cost of an acquisition was justified or not (Deloitte, 2010).

According to Dunse, Hutchison and Goodacre (2004, p. 237), smaller companies that are financially incapacitated, will benefit from accessibility to capital cheaply due to increased profile diversification of the investor, that will reduce the companies’ cost of capital. Further, the adoption of international reporting standards will allow for multiple listings in various countries. The multiplicity in listing will ease the process of floating shares, unlike the previous standards that required the financial statements to be prepared in the local accounting standard; hence increased cost.

In the new accounting standards, the requirement for companies to report the assets and liabilities in the financial statements will likely affect securitisation by businesses. Previously companies through securitization cashed in on assets including trade receivables in their balance sheets, but will now be able to exhibit higher return on assets on same earnings and a slimmed balance sheet.

References

Deloitte, 2010, Business combinations: A guide to IFRS 3, viewed 10 November 2010, <http://www.deloitte.com/dtt/article/0,1002,cid %253D63411,00.html>.

International Financial Reporting Standards 2007, The International Financial Reporting Standards, viewed 10 November 2010, <http://ec.europa.eu/internal_market/accounting/ias_en.htm>.