Evaluate the implications for financial reporting of the change in the Essay - 1

Evaluate the implications for financial reporting of the change in the treatment of goodwill from IAS22 to IFRS3 - Essay Example This has impacted the financial statements of entities. In this essay the implications of these changes of financial accounting and reporting of goodwill are evaluated and discussed in detail. Goodwill computations will be highly affected with effective changes brought in by IFRS 3. Business combinations will now be accounted for only under purchase method, and merger accounting is banned. Intangible assets will be identified in larger way impacting goodwill as the IFRS 3 contains a list of suggestive intangibles. Contingent liabilities will play effective role in goodwill valuation as they will be recognized at fair value. Henceforth goodwill will not be amortized but will face impairment test will all other intangibles. Non- controlling interests will play effective role in determining cost of acquisition and thus in goodwill valuation for acquirer. Cost of restructuring the acquisition will be written off to profit and loss. This will play a part in enhancing goodwill valuation under purchase method. Excess of cost of acquisition over fair value of net assets acquired shall be treated as gain or negative goodwill and will be credited to profit and loss. The major impact is that Goodwill now be considered a permanent asset. IFRS 3 has restricted business combination accounting only under ‘purchase’ method where â€Å"the acquiring company records net assets received at fair value at the date of combination. Any excess of cost over the fair value of net assets is allocated to goodwill.† (Venkatesan Sundarrajan, 1995)1. Fair value of net assets is calculated by deducting the fair market value of liabilities (including contingent liabilities) undertaken from the fair value of identified tangible and intangible assets acquired, and goodwill is the difference between cost of acquisition and the fair value of net assets acquired on acquisition date. Though goodwill was also earlier being recorded as residual value under