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Hi Mike,
I’m having troubles with this question: PICANT Co, Kaplan revision kit question 211. I have watched your lecture on this question but still could not understand how writing-off-intangible-asset is accounted for. (Partially because I’ve gotten so used to using the ‘net asset’ method to calculate reserves).
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Also at the date of the acquisition, Sander had an intangible asset of $500,000 for software to have no recoverable value at the date of acquisition and Sander wrote it off shortly after its acquisition.In the “net assets” working,
(this is the full working of ‘net assets’, but the other figures other than ‘software written off’ are completely unrelated to the intangible asset write off calculation)
At acquisition reserves:
Share capital $8,000
Retained earnings $16,500
Fair value adjustment $2,000
Software written off $(500)
= $26,000At reporting date reserves:
Share capital $8,000
Retained earnings $17,500
Fair value adjustment $2,000
Fair value depreciation $(100)
= $27,400At post acquisition reserves:
Retained earnings $1,000
Fair value depreciation $(100)
Software written off $500
= $1,400Explanation:
The effect of the software having no recoverable amount is that it’s write-off in the post acquisition period should be treated as a fair value adjustment at the date of acquisition for consolidation purposes. The consequent effect is that this will increase the post acquisition profit for consolidation purposes by $500,000.If the software had no recoverable value, shouldn’t we still recognize it as a separable intangible asset at $500,000 in our calculation of ‘at acquisition reserves’ and thus goodwill? Since Sander wrote it off after its acquisition, the ‘at acquisition reserves’ and therefore the consolidated goodwill wouldn’t have been affected?
My workings were:
Net assets:
At acquisition reserves:
Share capital $8,000
Retained earnings $16,500
Fair value adjustment $2,000
Software $500,000
= $27,000At reporting date reserves:
Share capital $8,000
Retained earnings $17,500
Fair value adjustment $2,000
Fair value depreciation $(100)
= $27,400At post acquisition reserves:
Retained earnings $1,000
Fair value depreciation $(100)
Software written off $(500)
= $400Hope the above has been clear to you. Thank you
“If the software had no recoverable value, shouldn’t we still recognize it as a separable intangible asset at $500,000 in our calculation of ‘at acquisition reserves’ and thus goodwill? Since Sander wrote it off after its acquisition, the ‘at acquisition reserves’ and therefore the consolidated goodwill wouldn’t have been affected?”
No, you’re mistaken
Consider the software issue as an issue of fair value adjustments
As at date of acquisition that software was worthless so in the working W2 for goodwill, that software needed a fair value adjustment to bring its value down to zero as at acquisition date
If that had been done correctly, that $500,000 would not have been around to be written off in the post-acquisition period
Is that better?
So, since $500,000 isn’t around to be written off in the post acquisition period, we have to add it back in order to ensure that the “at acquisition reserves” and “post acquisition reserves” add up exactly to the “at reporting date reserves”, is that correct?
At acquisition the software was still there
At reporting date the software had been written off
But it should have been written off as at acquisition date
So we need to write it off acquisition date profits and add it back to reporting date profits
OK?
I understand why we need to write the intangible asset off as at acquisition date, but since the intangible asset has no recoverable value, I still don’t get how writing off it ncreases post acquisition profits?
Would the answer have been different, had Sander wrote it off as at acquisition date instead?
We need to increase the post-acquisition figure because the write off has happened in the post-acquisition period … and it shouldn’t have!
If we’re told the pre-acquisition situation and then told that something that should have been expensed in that period (but wasn’t expensed until the post-acquisition period) then we need to ‘move’ that write-off expense
So reduce the pre-acquisition and increase the post-acquisition
Is that better?
Try this:
Pre acq 84,000
Post acq 95,000
Total 179,000
and we’re told that 3,000 written off post acq should have been written off pre acq
So reduce pre acq by 3,000 bringing it down to 81,000 and increase post acq by 3,000 increasing it to 98,000
Total? Still 179,000
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