On the application of IFRS 3, the companies are feeling the impact of non- amortization on their financial statements. Income for shareholders was increasing because of fewer expenses charged to revenue. Certain companies even started reclassifying existing goodwill like intangibles as goodwill in order to take benefit of the impairment process. Like UBS in its magazine ‘ Quarterly Themes’ (Feb. 8, 2005) has stated that “ Following the new standard, we have also reclassified the net book value of former PaineWebber trained workforce intangible assets to goodwill” With the abolishment of amortization of goodwill, the cost of goodwill purchased becomes a sunk cost and non- amortization will hike the shareholders’ value through inflated income, as impairment losses on goodwill do not occur in successful ventures.
Eventually, there will be artificially inflated EPS creating a positive but unreal impact on the market value of shares. The recognition of contingent liabilities will enhance the value of goodwill, and the same role will be played by intangibles. The standard provides a list of intangibles some of those earlier were never identified in acquisition transactions.
The immediate impact of such a treatment would be an enhancement of the value of total assets of the acquirer as now contingent liabilities and intangibles which were not earlier used to be identified would play a role in goodwill calculations. Increased value of total assets would bring down ROA (return on assets) ratio as nonamortization effect on profitability may be neutralized by the impairment effects on profit and loss. Financial statements will now be constituted in different manners. Assets appearing at fair value and visibility of intangibles are likely to show more volatility in earnings of the acquirer.
Goodwill will be treated as an asset, and rightly so as it has all the capabilities of bringing future economic benefits to the entity. The goodwill that has been acquired will raise both the capital base and asset base of the acquirer’ s financial statement. With the result ratios like ROA, ROE, and ROCE will go down.
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