英文会计论文国际准则的趋同

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CONVERGENCEOFACCOUNTINGSTANDARDS

„AnexaminationofthetreatmentofbusinesscombinationsundertheUKandUSGAAPandtheIFRS

„ AreviewofthereconciliatoryBalanceSheetsof10

Europeancompanies

POOJAKAUSHIKABSTRACT

Thisthesissupportsglobalconvergenceofaccountingstandardsi.e.adoptionoftheInternationalFinancialReportingStandards.IhavechosentheaccountingtreatmentofintangibleassetstocompareandanalyzetheincreasedtransparencythatIFRSprovidesinrelationtothepre-IFRSUKGAAPandUSGAAP.Analysisofthe‘reconciliationofUKGAAPtoIFRS’balancesheetsof10companiesintheUnitedKingdomwhohaveadoptedIFRSandtheirpreviousGAAPnumbershasbeenusedtoprovetheeffectivenessandusefulnessoftheIFRS.Inthisthesis,Ihaveusedthestakeholdertheorytosumup

thebenefitsofincreasedtransparencytostakeholders.

INTRODUCTION:THESISGOALSANDPURPOSE

Withincreasedglobalizationintoday’sworld,thereisalotoftalkintheaccountingworldforaunifiedsetofstandardsthatwouldserveinvestorsandotherusersoffinancialstatementsworldwide.Besidescuttingfinancialreportingcostsandhelpingfundraisingforcorporations,analystssaythatthestandardswouldalsoprovideinvestorswithabetterglobalinsightintheircompany’sperformance.TheIFRSwhich

promulgatedbytheIASBinLondonarepredictedbymanytobetheadoptedglobalsetofstandardsbymany.

MythesissupportstheglobalconvergenceofstandardsortheadoptionoftheIFRS.Ihavechosentoconcentrateononearea-theaccountingforbusinesscombinationsunderthepre-IFRSUKGAAP,USGAAPandtheIFRStoprovethattheadoptionoftheIFRSincreasestransparencyinreporting.

Theincreasedtransparencyhasbeenproven-

„ ByacomparisonandevaluationoftheaccountingtreatmentundertheUSGAAP,pre-IFRSUKGAAPandtheIFRS.

„Bythesampletestingofthereconciliatory‘UKGAAPtoIFRS’BalanceSheets

of10companies.

Thestakeholdertheoryhasbeenappliedtosummarizethebenefitsoftheincreasedtransparencytodifferentstakeholders.ThestakeholdertheoryhasbeenappliedtotheIFRSasawholetoprovethebenefitsoftheIFRSusingsurveysconductedbyKPMGandPWC.Idividedthethesisbodyintothreestagesinordertoorganizemyfindings.Stage1-Comparisonandevaluationofaccountingforbusinesscombinations,Stage2-SampleanalysisandStage3-Applicationofthestakeholdertheory.

BACKGROUNDINFORMATIONONTHEIFRS,USGAAP,UKGAAPANDAREASOFDIFFERENCESINACCOUNTING.

INTRODUCTIONTOTHEIFRS

InternationalAccountingStandards(IASs)wereissuedbytheIASCfrom1973to

2000.TheIASBreplacedtheIASCin2001.Sincethen,theIASBhasamendedsomeIASs,hasproposedtoamendotherIASs,hasproposedtoreplacesomeIASswithnewInternationalFinancialReportingStandards(IFRSs),andhasadoptedorproposedcertainnewIFRSsontopicsforwhichtherewasnopreviousIAS.Throughcommittees,boththeIASCandtheIASBalsohaveissuedInterpretationsofStandards.FinancialstatementsmaynotbedescribedascomplyingwithIFRSsunlesstheycomplywithalloftherequirementsofeachapplicablestandardandeachapplicableinterpretation.(DeloitteToucheTohmatsu,2006)

IASB’sframework,IFRSandInterpretationsprovidesguidelinesandexplanationsforthemethodsofaccounting.TheFrameworkwaspublishedbytheIASCin1989toprovideanoutlineandexplanationsforfinancialreportingconcepts.TheFrameworkservesasaguidetobothinternationalandnationalstandardsetterstosetconsistentaccountingstandardsandassistspreparersandauditorsininterpretingstandardsanddealingwithissuesthatthestandardsdonotcover.Thereare34IFRScurrentlyineffect.TheStandardsprovideguidanceforpreparerstodealwiththerecognition,measurement,presentationanddisclosurerequirementsfortransactionsandevents.MostIFRSareintendedforapplicationacrossindustries,withonlyonestandardoutliningdisclosurerequirementsforbanksandotherfinancialinstitutions.Asecondtier

ofguidancecomesfromtheInterpretationsdevelopedbytheStandingInterpretationsCommittee,nowIFRIC.Thesepronouncementsclarifyorinterpretthestandardswherethepreparercommunityidentifiestheneedforimprovedguidance.(PricewaterhouseCoopers,2002).TheadoptionofInternationalFinancialReportingStandards(IFRS),whichwasrequiredforlistedcompaniesofall25EUcountriesonJanuary1,2005,isbeingwitnessedthroughouttherestoftheworldatanincreasingrate,withJapan,Australia,Russia,Canada,HongKongandseveralMiddleEastandAfricancountriesalreadyhavingdecidedonacomprehensive,mandatorychange.Todate,themoresignificantholdouts,includingtheUnitedStates,SouthAfrica,SingaporeandMalaysiaarecommittedtomodifyinglocalstandardstotheseinternationalstandards(BahalandRoss,1,2002).

Internationalaccountingstandardsregulatemultinationalbehaviortoacertainextent.Theyensureefficientfunctioningofcapitalmarkets.Mostimportantly,theyfacilitategreatercomparabilityofinformationaswithoutthesestandardsafinancialstatementfromIndiaandU.KwouldbeverydifferentfromonefromtheUnitedStates.Theyprovideabasisonwhichperformanceofamultinationalcanbeevaluatedandcomparednotjustnationallybutinternationally.Thesestandardsalsoleadtobettercommunicationbetweenaccountantsallovertheglobeandthesharingofinformationcouldalwaysleadtoideasforamelioratingaccountingreportingstandardsandtechniques.Theabove-mentionedreasonsultimatelyleadtoinvestorconfidence.Investorspossessabetterunderstandingofinternationalfinanceandstockmarketsandthisinturnhelpsthemmakebetterportfoliodecisions.

IFRSINEUROPE

AllEuropeanquotedcompanieswererequiredtopreparetheirconsolidatedfinancialstatementsinaccordancewiththeInternationalFinancialReportingStandardssince

2005.Thetransitiondatesfordifferentcompaniesrangedfrom31December2003to30

December2004.

TheEUpolicyisaimedattheremovalofbarrierstocrossbordertradinginsecuritiesbyensuringthatcompanyfinancialstatementsthroughouttheEUaretransparentandcomparable.TheeconomicgainstobederivedfromanintegratedEuropeanfinancialandcapitalmarketareconsiderable.(Lian,2,2004).PriortotheIAS,EuropeancountrieswereeitherusingUSGAAPortheirownnationalstandards.TheEuropeanCommissionhassaid“IASwilloffer[thosenowusingUSGAAP]thesamehighqualityleveloffinancialinformationasUSGAAP,withtheadditionaladvantagethatIAShavebeenconceivedinatrulyinternationalperspectiveandarenotmodeledbyaparticularnationalenvironment.TheCommissionhopesandexpectsthattheUSSecuritiesandExchangeCommission(SEC)willacceptinthenearfuturefinancialstatementspreparedbyEUissuerswithoutrequiringareconciliationtoUSGAAP.”

Asthisthesiscomparesthepre-IFRSUKGAAPtoIFRS,IwouldliketowritealittleabouttheIFRSsituationintheUK.TheAccountingStandardsCommittee(ASC)andtheAccountingStandardsBoard(ASB)werepreviouslyproducingUKSSAPsandFRSs.SincetheimplementationoftheInternationalFinancialReportingStandards,anumberofchangeshavetakenplaceintheaccountingandpresentationoffinancial

statements.SomeoftheareasinwhichtheIFRSdiffersfromthepre-IFRSUKGAAP

are-

• TangibleFixedAssets

• Intangibleassets

• ImpairmentofAssets

• StockandLongTermContracts

• Deferredtaxes

• Leases

• RetirementBenefits.

IFRSANDUSGAAP

DIFFERENCES

AccountantswillencounterUSGAAPeitherwithAmericangroupsorwithforeigngroupsthathavealistingonUSstockmarkets.USGAAParestandardsdevelopedforthe12,000orsolistedcompaniesintheUSA,andrequiredbytheSecuritiesandExchangeCommission(SEC).ForeigncompaniesthathavesharesorbondslistedintheUSAneednotpublishUSGAAPaccountsassuch,butmustineffectpreparetheminordertoprovideareconciliationstatement.ThisdetailsfortheirUSinvestorsthedifferencesbetweennetprofitandnetassetsasreportedandhowtheywouldhavebeenstatedunderUSGAAP.ThoughthereisnogeneralfilingrequirementforaccountsofunlistedcompaniesintheUSAitisthoughtthatabout15,000other

companiesprepareGAAP-compliantaccountsasarequirementofbankborrowingsoron

avoluntarybasis.GAAP,principallydevelopedbytheFinancialAccountingStandardsBoard(FASB),aremoreextensivethanIFRS-comprisinghundredsofstandards,interpretations,opinionsandotherauthoritativerules.(Martin,2004).

SomeoftheaccountingareasinwhichtheUSGAAPdiffersfromtheIFRSare-

• Tangibleassets

• Availableforsalemarketablesecurities

• Intangibleassets

• Researchanddevelopmentexpenditures

• Leases

• Inventory

IASB-FASBCONVERGENCEPROJECTS

InSeptember2002,theFASBandtheIASBreachedanagreementtoconductashort-termprojecttoworktowardseliminatingthedifferencesbetweentheIFRSandUSGAAP.TheSECalsomadeanannouncementinthesamemonthinwhichitsaidthatstartingin2007,itmightallowforeigncompanieswhicharetryingtoraisecapitalintheUStousetheIFRSratherthanreconcilingtoUSGAAPastheydorightnow.

Convergenceissupposedtoeasethetaskofraisingcapital.Oncetheprocessiscomplete,investorswillneedlesshelpcomparingresultsofcompetingfirmsbasedindifferentcountries.U.S.companiesthatconformtoGAAP willbeabletoraisecapitalabroadwithoutreconcilingtheirresultstoIFRS.(Reason,2005,2).TheFASBandIASBare

alsoworkingtogetheronanumberoflong-termprojectsthatdealwithconceptslikebusinesscombinations,employeebenefitsandcomprehensiveincome.

LITERATUREREVIEW

IhaveanalyzedandcomparethereconciliatoryBalanceSheetsof10

Europeancountries.IchosethesecompaniesfromdifferentsectorsoftheEuropeaneconomyandhavewrittenabouttheirperformance.Forthetheoreticalframework,Iusethestakeholdertheory.

ThestakeholderresearchtraditionbegantounfoldinthewakeofR.EdwardFreeman’sseminalbookStrategicManagement.AStakeholdersApproach,whichwaspublishedinthemid-1980s.Thebookinitiatedastillongoingacademicdiscussion.Itdemonstratedinacomprehensivefashionthatstrategicmanagementofprivatesectorfirmscouldbecomemuchmoreeffectiveandefficient,ifmanagerialeffortsregardvariousstakeholdersconcerns.Or,inotherwords,shareholdersbenefitlong-termifotherlegitimateinterestsinthefirmdonotfallbythewayside(Scholl,2).Thus,besidesshareholderstheinterestsofotherstakeholdersinandoutsidetheorganizationhadtobetakenintoconsiderationwhilemakingmanagerialdecisionsandimplementingpolicies.

Stakeholdertheorysuggeststhatanorganizationhasrelationshipswithmanyconstituentgroups,or"stakeholders,"(Covell,2004)thataffectandareaffectedbyitsdecisions(Freeman,1984).Amajorpurposeofstakeholdertheoryistohelpcorporatemanagersunderstandtheirstakeholderenvironmentsandmanagemoreeffectivelywithinthenexusofrelationshipsthatexistsfortheircompanies.However,alargerpurposeofstakeholdertheoryistohelpcorporatemanagersimprovethevalueoftheoutcomesof

theiractions,andminimizetheharmstostakeholders.Thewholepointofstakeholdertheory,infact,liesinwhathappenswhencorporationsandstakeholdersactoutoftheirrelationships.(LogsdonandWood,3).

Thestakeholdertheoryinvolvesansweringthreeimportantquestions-

Whoaretheorganization’sstakeholdersforaccountingstandards?

Thisstepinvolvesidentificationoftheorganization’sstakeholders.Stakeholdersaredefinedasthoseindividualsthathavea"stake"intheperformanceofanorganization,thattheinterestsofalllegitimatestakeholdershaveintrinsicvalue,andthatnosetofinterestsisassumedtodominatetheothers.IntheIveyBusinessJournal,RobertPhilipswritesthatstakeholdersarethosegroupsfromwhomtheorganizationhasvoluntarilyacceptedbenefits,andtowhomtheorganizationhas

thereforeincurredobligationsoffairness.Typically,thisincludesgroupssuchasfinanciers,employees,customers,suppliersandlocalcommunities.(Philips,2004,2).Stakeholdertheoryholdsthatbesidestheselegitimatestakeholders,derivativestakeholderslikecompetitorsoractivistgroupsareimportantastheiractionscaninfluencethecorporation.

Whyarethestakeholdersimportantforaccountingstandards?

BrennerandCochrancommentthat"thestakeholdertheoryofthefirmpositsthatthenatureofanorganization'sstakeholders,theirvalues,theirrelativeinfluenceondecisionsandthenatureofthesituationareallrelevantinformationforpredictingorganizationalbehavior"(1991,p.462).MiltonFriedmanusesthepropertyrightsargumentstatingthatshareholdersownanorganizationastheyowntheequitysharesandiftheydesireto

maximizethevalueoftheirinvestment,itisthemanager’sdutytoworkinaccordance.Managerswhofailtodosoviolatethemoralpropertyright.(Mitchelletal.1997)notethatstakeholdertheoryhasmanagerialimportancebecauseitcandeterminetowhatandtowhommanagersneedtolistenandgiveattention.

WhatdoStakeholderswant?

Differentpeoplewantdifferentthingsfromtheirrelationshipswithorganizations.Stakeholderdiscussionsoftenfocusonallocatingsomemeasureoforganizationalvalueoroutcome(e.g.,whogetshowmuchmoneyfromthefirm).Thequestionofhowtheorganizationcreatesthisvalueusuallygetslessattention,butitiscertainlynotlessimportant.Notallstakeholderswantavoiceinorganizationaldecision-making,butthosewhododesireavoiceshouldhaveit.(Philips,2004,2)

Myliteraturesourceshadtobeorganizedintothreedatasets-IFRSstandards,USGAAPandpre–IFRSUKGAAP.MydocumentsforanalyzingtheIFRSwerethewebsummariesputupontheInternationalAccountingStandardsBoardsite.Forpre-IFRSUKGAAP,IreferredprimarilytotheDeloitteandTouchépublication‘GAAP

2004’.FortheUSGAAP,IreferredtothetextbookbeingusedrightnowinUMassBostonforAF310andAF311‘IntermediateAccounting’byKieso,WeygandtandWarfield.TheIFRSaccountingforintangibleassetswasthexvariableIusedtoprovemyyvariables,whichare,increasedtransparencyandbetterstakeholdermanagement.ImustmentionthatthisresearchgreatlybenefitedfromthearticlespostedbyIntangiblesBusinessLtd.TheresearchresourcesIhaveusedarearchives,realdata,literature,interviews,reviewsandtheresearchfacilitiesavailableatUMASSintheHealeylibrary

database.ThedatabasesIhaveusedareBusinessSourcePremier,LexisNexisAcademic,

EbraryandtheWallStreetJournalforarticles.Besidesthese,IhavealsousedotherUMBresourcesliketheCMfaculty,theCMBusinessCenterandtheadviceandguidanceoftheAccountingandManagementDepartmentfaculty.

METHODOLOGY

Ihaveusedananalyticalaswellasatheoreticalframeworktoprovemyresearchobjective.Myresearchcanbedividedintothreestages.

StageoneinvolvesanalysisinvolveslookingatthestandardsforintangibleassetsandgoodwillunderIFRS,UKGAAPandUSGAAPandmakingcomparisons.

ThisisfollowedbyStagetwo-theanalysisofthereconciliationsofBalanceSheetsofasampleof10companiesandinterpretsthedatatoprovetheincreasedtransparencyunderIFRS.

InStagethree,ThestakeholdertheorywhichIvidesmanagerswithanumberofalternativestoservestakeholdersinabettermannerwhichwouldultimatelyprovebeneficialtobusiness.IntheendIusethestakeholdertheoryagaintoprovethegeneraleffectivenessoftheIFRSusingtheinformationinsurveysconducted.

Empirically,myresearchcouldbesummarizedinthefollowingsteps-collectionofdata,questioningoftheinformationcollected,formingconclusionsandfinallyputtingtogetherallofmyresearchonpaper.Thediagramonthenextpagesummarizesthestructureandorganizationofmythesis.

Accountingforintangibleassets

IFRS3

USGAAPSFAS141

SFAS142

Comparisonsanddifferences

UKGAAPFRS10

Sampleanalysis

Analysisofreconciliatorystatementsofsampleof10

Europeancompaniesthathave

transitionedtotheIFRS

Interpretationofdataonintangibleassetsandgoodwill

INCREASEDTRANSPARENCY

Usingthestakeholdertheory

Investors

Creditors

Society

IFRS

IFRS3

Government

Customers

Suppliers

ANALYSIS

STAGE1

ACCOUNTINGFORINTANGIBLEASSETS

ThisstageinvolvesacomparisonofaccountingforintangiblesunderIFRS,USGAAPandUKGAAP.

IFRS3

USGAAPSFAS141

SFAS142

Comparisonsanddifferences

UKGAAPFRS10

Introducingconcepts:Intangibleassets,Goodwill

Intangibleassets

TheUniformCommercialCode(Section9-102(a)(42))defines"general

intangibles"as"anypersonalpropertyotherthanaccounts,chattelpaper,commercialtort

claims,depositaccounts,documents,goods,instruments,investmentproperty,letterof

creditrights,lettersofcredit,money,andoil,gas,orothermineralsbeforeextraction.

Thetermincludespaymentintangiblesandsoftware."Intoday’sglobaleconomy

dominatedbyinformationandserviceproviders,intangibleassetsconstituteamajor

proportionoftotalassets.Intangibleassetscommandanincreasinglylargeproportionof

acompany’svalueandthisvaluehaslargelynotbeenrecognized.Inheavilybranded

consumerbusinessessuchasCocaColaorNike,brandsaccounttoupto80%ofthe

company’svalue.Inotherindustries,suchaspharmaceutical,patentsandcopyrightsare

moreprominent(Thaynes,1).Thus,Microsoft’ssoftware,Coke’ssecretformulaand

AmericaOnline’ssubscriptionbasearethemostimportantassetsontheirbalancesheets.

Infact,thevalueoftangibleassetsasapercentageofallassetshasbeensteadily

decreasingasshowninthegraphbelowwhichisprovidedbytheFederalReserveBoard

butwhichisrecreatedbymeforthisthesis’spurpose.Theoriginalgraphisattached.

80%

70%

60%

50%55 Years ‘00

Whileintangiblesarepotentialsourcesofincome,theirvaluescanerodejustasquickly.

JustbeforeWinstarCommunicationsfiledforbankruptcyin2001,theirassetswerelisted

at5billiondollars.However,onliquidationtheassetsfetchedjust42milliondollarsdue

todeclineinthevalueofintangibles.Traditionalassessmentofnationaleconomic

performancehasrelieduponunderstandingtheGDPintermsoftraditionalfactorsof

production–land,laborandcapital.Knowledgeassetsmaybedistinguishedfromthe

traditionalfactorsofproduction–inthattheyaregovernedbywhathasbeendescribed

asthe‘lawofincreasingreturns’.Incontrasttothetraditionalfactorsofproductionthat

weregovernedbydiminishingreturns,everyadditionalunitofknowledgeused

effectivelyresultsinamarginalincreaseinperformance.Successofcompaniessuchas

Microsoftisoftenattributedtothefactthateveryadditionalunitofinformation-based

productorservicewouldresultinanincreaseinthemarginalreturns.Giventhe

changingdynamicsunderlyingnationalperformance,itisnotsurprisingthatsomeless

developedeconomieswithsignificantassetsinICTknowledgeandInternet-related

expertisearehopingtoleapfrogmoredevelopedeconomies.(Malhotra,2000).Intangible

assetshavetwomaincharacteristics-theylackphysicalexistenceandtheyarenot

financialinstruments.Intangibleassetsderivetheirvaluefromtherightsandprivileges

grantedtothecompanyusingthem.(Kieso,WeygandtandWarfield,570).Intangible

assetsarefurtherclassifiedaslimitedlifeintangiblesorindefinitelifeintangibles.

Limitedlifeintangibleshaveaknownusefullifeandindefinitelifeintangiblesare

intangibleswhoseusefullifecannotbedetermined.Accountingtreatmentforthe

intangiblesvaryaccordingtotheirtypewhichweshalllookmoreindetailinthenext

section.Whenintangiblesarepurchasedfromotherpartiestheyaremostrecordedatthe

costofpurchaseorfairmarketvalueundermostaccountingsystems.Thiscostincludes

alltheexpensesincurredtomaketheassetreadyforuse.Theseincludeitspurchase

price,legalfeesandincidentalexpenses.Internallygeneratedintangiblesaregenerally

expensedasincurred.Alltheresearchanddevelopmentcoststhatcompanieshaveto

incurtocomeupwiththeassetareexpensedintheincomestatement.

Thesixmajorcategoriesofintangibleassetsaremarketing–relatedintangibleassets,customer-relatedintangibleassets,artistic-relatedintangibleassets,contract-relatedintangibleassets,technology-relatedintangibleassetsandgoodwill.Marketing-relatedintangiblesassetsarethoseassetsusedinthemarketingorpromotionofproducts.Theseincludetrademark,tradenamesandinternetdomainnames.Customer-relatedintangibleassetsincludeassetssuchascustomercontracts,customerrelationships,subscriberlists,customerordersandbacklogsandcoredeposits.Artistic–relatedintangibleassetsincludeownershiprightstoplays,literaryworks,musicalworksetc.Contract–relatedintangibleassetsincludelicenses,non-competitionagreementsandvariousotheragreementsandcontractrights.Goodwillisanimportantcomponentofintangibleassetsandcomesintoplayduringbusinessacquisitionsandmergers.Goodwillcanbeinternallycreatedorpurchasedgoodwill.Accountingtreatmentforgoodwill

differsaccordingtoitstypeandtheaccountingstandardsfollowed.

Goodwill

Goodwillistheexcessofthepurchasepriceoverthefairmarketvalueofanassetduringabusinesscombination.Someofthereasonswhyabusinesswouldbeworthmorethanthesumofthefairvaluesoftheaccountableandidentifiablenetassetsofthatbusinessare-

Theexpertiseoftheworkforce—currentaccountingpracticesdonotnormallyrecognizethevalueofhumanresourcesasanassetonthebalancesheet.

Thereputationoftheproduct(s)ofthebusiness—iftheproducthasawellknownnameattachedtoitthensalesandprofitswillbeboostedonthebasisofreputationalone.

Thegeneraleconomicenvironment—levelsofinterestratesandexchangeratesandlevelsofinvestorconfidencegenerallywillclearlyhaveamajorinfluenceonthevalueofbusinessesandhenceontheamountofgoodwillattachingtoabusiness.(Robins,2000)

Goodwillisoftenreferredtoasthemostintangibleofallintangibleassets.Theproblemofdeterminingthepropercosttoallocatetointangibleassetsinabusinesscombinationiscomplexbecauseofthemanydifferenttypesofintangiblesthatmightbeconsidered.Itisextremelydifficultnotonlytoidentifycertaintypesofintangiblesbutalsotoassignavaluetotheminabusinesscombination.Asaresult,theapproachfollowedistorecordidentifiableintangibleassetsthatcanbereliablymeasured.Otherintangibleassetsthat

aredifficulttoidentifyormeasurearerecordedasgoodwill.(Kieso,Weygandtand

Warfield,578)

IFRSaccountingforbusinesscombinations

ThethreeIFRSstandardsimpactingaccountingforintangibleassetsareIFRS3,BusinessCombinations,IAS36,ImpairmentofAssetsandIAS38,IntangibleAssets.Thesethreestandardsareapplicabletointangibleassetsandgoodwillacquiredonorafter31March

2004.IAS38prescribesaccountingtreatmentfortherecognitionofinternallygeneratedandacquiredintangibleassets.IAS38prescribestherulesforimpairmenttestingofassetsandgoodwill.IFRS3prescribestheoveralltreatmentforaccountingforacquiredassetsandgoodwillinabusinesscombination.Thethreestandardscanbesummarizedasfollows-

Acquiredintangibleassets

Businesscombinationsareaccountedforusingthepurchasemethodi.e.accountingfromtheperspectiveoftheacquirer.Intangibleassetsareinitiallyrecognizedatcostbasedonthefollowingcriteria-

1)Theyareidentifiable

2)Theprobablefutureeconomicbenefitscreatedbythemwillbenefittheorganization.

3)Themeasurementoftheircostisreliable.

Aftertheirinitialrecognition,intangibleassetsmaybecarriedattheircostorrevaluedamountlessanyaccumulatedamortizationorimpairmentlosses.Theirrevaluationamountistheirfairvalueatthedateofrevaluation.Ifthereisanincreaseintheamountofcarryingvalueafterrevaluationiscreditedtoarevaluationsurplusaccount.

InternallyGeneratedIntangibleassets

Internallygeneratedgoodwill,brands,mastheads,publishingtitles,customerlistsarenotrecognizedasintangibleassets.Researchanddevelopmentcostsaregenerallyexpensed.Theycanhoweverbetreatedasanintangibleassetiftheymeetthefollowingcriteria-

• Theyareidentifiable

• Theprobablefutureeconomicbenefitscreatedbythemwillbenefittheorganization.

• Themeasurementoftheircostisreliable.

Goodwill

Internallygeneratedgoodwillisnotrecognized.Theonlygoodwillrecognizedisasaresultofbusinesscombinations.Goodwillrepresentsthedifferencebetweenthetotalpurchaseconsiderationandthetotalofthefairvalueofallacquiredassetsandliabilitiesassumed.Ifthefairvalueoftheassetsexceedthepurchaseconsideration,thentheacquirermustreassessandidentifyalltheassetsandimmediatelyafterreassessmentmustrecognizethenegativegoodwillasaprofitintheincomestatement.

Impairmenttesting

Theusefullifeoftheassetisdetermined.Iftheassethasafiniteusefullife,itshouldbeamortizedoveritslife.Forassetswithindefiniteusefullife,annualimpairmenttestingisrequired.Thetestinvolvesacomparisonofthecarryingvalueoftheassetwithits

estimatedrecoverableamount.Therecoverableisdefinedasthehigherofthevaluelesscoststosellandthevalueinuse.Theinuseisgenerallybasedonthediscountedfuturecashflowsfromtheasset.Whentherecoverableamountisfoundtobelowerthanthecarryingvalue,thecarryingvalueisreducedtotherecoverableamountwithachargetoprofits.(Caldwell,4)

USGAAPaccountingforBusinessCombinations

ThestandardsthatprescribetreatmentforaccountingforBusinessCombinationsareSFAS141BusinessCombinationsandSFAS142Goodwillandotherintangibleassets.Thetreatmentcanbesummarizedasfollows-

Acquired