International Accounting Standards IFRS 3 and IAS 38 address the accounting for goodwill and intangible assets.
(a) Describe the requirements of IFRS 3 regarding the initial recognition and measurement of goodwill and intangible assets.
(b) Explain the proposed approach set out by IFRS 3 for the treatment of positive goodwill in subsequent years.
(c) Territory plc acquired 80% of the ordinary share capital of Yukon Ltd on 31 May 20X6. The statement of financial position of Yukon Ltd at 31 May 20X6 was:
Additional information relating to the above statement of financial position
(i) The intangible assets of Yukon Ltd were brand names currently utilised by the company. The directors felt that they were worth £7 million but there was no readily ascertainable market value at the statement of financial position date, nor any information to verify the directors’ estimated value.
(ii) The provisional market value of the land and buildings was £20 million at 31 May 20X6. This valuation had again been determined by the directors. A valuers’ report received on 30 November 20X6 stated the market value of land and buildings to be £23 million as at 31 May 20X6. The depreciated replacement cost of the remainder of the tangible fixed assets was £18 million at 31 May 20X6.
(iii) The replacement cost of inventories was estimated at £25 million and its net realisable value was deemed to be £20 million. Trade receivables and trade payables due within one year are stated at the amounts expected to be received and paid.
(iv) The non-current liability was a long-term loan with a bank. The initial loan on 1 June 20X5 was £11 million at a fixed interest rate of 10% per annum. The total amount of the interest is to be paid at the end of the loan period on 31 May 20X9. The current bank lending rate is 7% per annum.
(v) The provision for liabilities and charges relates to costs of reorganisation of Yukon Ltd. This provision had been set up by the directors of Yukon Ltd prior to the offer by Territory plc and the reorganisation would have taken place even if Territory plc had not purchased the shares of Yukon Ltd. Additionally Territory plc wishes to set up a provision for future losses of £10 million which it feels will be incurred by rationalising the group.
(vi) The offer made to all of the shareholders of Yukon Ltd was 2.5 £1 ordinary shares of Territory plc at the market price of £2.25 per share plus £1 cash, per Yukon Ltd ordinary share.
(vii) The directors of Yukon Ltd informed Territory plc that as at 31 May 20X7, the brand names were worthless as the products to which they related had recently been withdrawn from sale because they were deemed to be a health hazard.
(viii) In view of the adverse events since acquisition, the directors of Territory plc have impairmenttested the goodwill relating to Yukon SA, and they estimate its current value is £1 million.
Calculate the charge for impairment of goodwill in the Group Statement of Comprehensive Income of Territory plc for the accounting period ending on 31 May 20X7.