Matakuliah
Tahun
: F0142/Akuntansi Internasional
: September 2006
Session 11
International Business
Combinations, Goodwill, and
Intangibles
1
Strategic Decision Point
• How should we consolidate financial
results?
– Use 50% rule or some other method?
– Example – Vodafone owns 47% of Verizon
• Does percentage consolidation show exaggerated
growth?
• FASB and IASB are considering options in
this area currently
2
Consolidated Financial Statements
• Controversy exists on how results for MNEs
should be reported
• Current method – consolidation
– Consolidated reports are useful to external users and
management
– Segment information is also presented
– No treatment is given to differing areas of risk and
return
– Consolidated information varies from country to
country
• U.S. requires consolidated financial statements
• German common practice – parent company
statements and worldwide statements
3
Consolidation Methods
• “Line-by-line” for approach
• Proportionate ownership method
– Considered appropriate for joint ventures
• “One-line basis” - equity method
– Investment amount is adjusted to reflect
MNEs share of equity
• More conservative method involving only
dividends and receivables
– Used in Australia and Sweden
4
Purchase versus Pooling-of-Interests
Accounting
• Purchase method (acquisition method)
– Assets revalued at “fair-value”
– Purchase price above fair value of net assets
is goodwill
– Acquired company contributes to earnings
after consolidation
– Investment recorded at market value
5
Purchase Accounting
• Pooling-of-interests method (merger
method)
– Assets are not revalued
– No goodwill
– Precombination earnings are included
– Investment recorded at nominal value
6
Pooling-of-Interests Accounting
• What method is most appropriate?
– Purchase method for situations where full
ownership is transferred
– Pooling-of-interests method is considered
appropriate when a continuity of ownership
through an exchange of shares exists
• Pooling-of-interests method is used less
often
– Not allowed in the U.S. – FAS 144
– IASB requires purchase method
7
The Treatment of Nonconsolidated
Subsidiaries
• Equity Method
– Reported earnings will be higher because
MNE’s share of earnings is included instead
of dividends
– Used in Japan, U.K., and U.S.
– Japanese keiretsu make comparability difficult
• Cost Method
– MNE’s share of dividends is included in
reported earnings
– Used in Australia, Sweden, and Switzerland
8
Corporate Group Share Ownership
Patterns
9
Fair Value Adjustments
• Fair value of assets acquired is
determined using the current market
value
– U.S. and U.K.
• Book value is retained even if greater than
fair value in Japan and Switzerland
– If there is no restatement and
• FV>BV, earnings overstated and assets
understated
• FV<BV, earnings understated and assets
overstated
10
Accounting for Goodwill
• Most countries treat goodwill as an asset subject
to systematic amortization
– Maximum amortization periods of 5 to 40 years apply
in some countries
• U.S. and IASB treatment is an annual
impairment test of goodwill
• Some countries use immediate write-off method
against reserves
– Not permitted in U.S., Australia, Japan
• Some countries retain goodwill as a permanent
asset
11
International Accounting Standards
• IFRS 3 on Business Combinations superceded
IAS 22 in March 2004
– Pooling-of-interests method disallowed
– Impairment testing for goodwill required
• Some countries still adopt a flexible approach
and permit immediate write-off of goodwill
• Asset-with-amortization and immediate write-off
methods are both supported by evidence
• Enhanced transparency is likely more important
than uniformity
12
Problems and Prospects
• In practice, consolidated financial statements
have not increased with demand – Italy, India
• Consolidated accounts are still not required in
some countries – India, Saudi Arabia
• Problems exist relating to group identification
and the various techniques of consolidation
13
Problems and Prospects
• Different groups want different
consolidation
– Government and trade union – country level
– Investors – worldwide level
• International consolidation may not be
relevant because of inflation, exchange
rates, and political risk
14
Funds and Cash Flow
Statements
• “Funds” does not necessarily mean cash
– Could also mean working capital
• Provides insight into the financial performance,
stability, and liquidity of MNEs
• May be useless without additional disaggregated
information
– Example – location of sources and uses of funds
• Fairly new statement in regards to regulation
15
Funds and Cash Flow Statements
• Countries where statement is required
– Brazil, Canada, Philippines, Australia, NZ
– All countries adopting IFRS
• Countries where statement is not required
– Saudi Arabia, India
• Many companies disclose voluntarily
• IAS 7 permits companies to use the direct
or indirect method (direct recommended)
16
Funds and Cash Flow Statements
• Problems and Prospects
– Regulation is highly flexible in this area
– Some confusion about the purpose,
presentation, and use of the statement
• Confusion as to what “funds” are
• Difficulty in comparing statements
• Cash flow statement could be more useful
than a funds statement internationally
– Used in U.S. and U.K. and endorsed by the
IASB
17
Joint Venture Accounting
• Little is known about the control processes
or performance measurement of joint
ventures
• Differences between current and former
socialist economies and Western
economies lead to potential problems
• IAS 31 attempts to resolve issues from the
venturer’s perspective
18
Joint Venture Accounting
• Three types of joint ventures exist
– Jointly controlled operations
– Jointly controlled assets
– Jointly controlled entities
• IAS 31 requirements for venturers
– Jointly controlled operations and assets – recognition
based on share in operations or assets
– Jointly controlled entities – two alternatives
• Benchmark Treatment
• Allowed Alternative Treatment
19
Goodwill and Intangibles
• Major international importance
• Academic research and cooperation
between standard-setting agencies are
needed in this area
• Intangible Assets and the Balance Sheet
– Balance sheet should show how well a
company can meet its obligations
– Should “relevance” or reliability” govern the
value of intangible assets?
20
Goodwill and Intangibles
• The Stock Market Perspective
– If the market is efficient
• The nature and treatment of intangible assets
should be sufficiently disclosed to help users
assess the treatment used
– If the market is inefficient
• Skepticism exists concerning analysts adjustments
• Markets are affected by international and national
political and economic factors
– More disclosure means fairer stock prices
21
Goodwill
• Only an issue when purchase method is
used
• Controversies
– Should goodwill be included as an asset?
– Should goodwill be amortized?
• Accounting Methods
– Asset without Amortization
– Asset with Annual Impairment Testing
– Asset with Systematic Amortization
– Immediate Write-Off
22
Goodwill
• Comparative National Practices
– Insert Exhibit 8.3
– Conflict existed between U.S. and U.K. over benefits
derived from immediate write-off
• Problem magnified by increased merger activity
• Conclusions
–
–
–
–
Goodwill is not an asset under “separability”
Goodwill meets the “reliability” criterion
Goodwill meets the “relevance” criterion
Accounting for goodwill should be flexible, but fully
disclosed within competitive limits
23
Brands, Trademarks, Patents, and
Related Intangibles
• Should brands be capitalized?
– Brand capitalization would
• Restore equity
• Enhance borrowing capacity
• Facilitate takeovers without consultation with
shareholders (U.K.)
• Avoid undervaluation of firms
24
Brands, Trademarks, Patents, and
Related Intangibles
• Methods of Accounting
– Asset without Amortization
– Asset with Systematic Amortization
– Immediate write-off
• “Current Cost” approach – U.K.
• Capitalization without amortization if no
limit to useful life – France
• Brands are identified as intangible assets
in Australia, France, and the U.K.
25
Brands, Trademarks, Patents, and
Related Intangibles
• U.S. – combination of asset-withoutamortization method and asset-withsystematic-amortization method
depending on estimate of useful life
• IFRS requires recognition of intangible
assets for consolidated statements
• U.S. and Canada must write off internally
developed intangibles immediately
26
Brands, Trademarks, Patents, and
Related Intangibles
• International Accounting Standards
– IAS 38
• Intangible assets only recognized if future benefits
will flow to the enterprise and cost of asset can be
measured reliably
• Systematic amortization required for finite lives
• Impairment testing for assets with infinite lives
27
Brands, Trademarks, Patents, and
Related Intangibles
• Conclusions
– Problems are linked with the goodwill issue
– Brand names qualify as assets under
“separability”
– Measurement of intangibles may not be
“reliable”
– Value-oriented approach to brands and
intangibles should be used
28
Research and Development
• R & D expenditures include all costs related to
the creation and development of new processes,
techniques, applications, and products
• Three categories of expenditure
– Pure research – no specific aim or application
– Applied research – applying research to an area of
business interest
– Development – work toward introduction or
improvement of specific products or processes
29
Research and Development
• Insert Exhibit 8.4
• Tendency towards conservative asset
recognition and assessment of future benefits
• Accounting Methods
– Expense as incurred
• Germany and U.S. (software exception in U.S.)
– Capitalize Development Costs
• Canada, India, U.K.
– Capitalize all R&D Costs
• Greece, Italy, Japan, Sweden
– Multiple methods allowed
• Brazil, Hong Kong, Spain, Thailand
30
Research and Development
• International Accounting Standards
– IAS 38
• Requires immediate write-off method for research
expenditures
• Development costs should be immediately written
off unless project meets specific criteria
– If project meets criteria, capitalize and amortize
– Amortization periods are reviewed and recognition of
impairment losses apply
31
Research and Development
• Conclusions
– R&D expenditure does not qualify under “separability”
unless specific assets are developed
– If assets are developed, expenditure meets the
“relevance” criterion
– If future benefits can be assessed, “reliability” criterion
is met
– R&D expenditures should be capitalized to the extent
of development costs, subject to periodic review and
disclosure within competitive limits
32