[Name of Student] [Name of Instructor] [Course Title] [Date] Goodwill & Impairment 2 Contents Introduction......................................................................................................................................4 Background..................................................................................................................................4 Research Aim...............................................................................................................................5 Company Background: homas Cook !"C.................................................................................5 Research #$%ecti&es.....................................................................................................................' Research (uestions......................................................................................................................) *tructure o+ the Report.................................................................................................................) "iterature Re&iew............................................................................................................................, Goodwill......................................................................................................................................., -easurement o+ Goodwill........................................................................................................../ -easurement a+ter recognition..................................................................................................... 0ow Goodwill is calculated1....................................................................................................... 0istory& 2ew -odi+ications......................................................................................................4 reatment +or goodwill measurement.........................................................................................4 he relationship o+ Goodwill and Impairment............................................................................5 Goodwill as per Accounting *tandards:......................................................................................' Calculation o+ impairment..........................................................................................................' *ummary.....................................................................................................................................) Research -ethodology...................................................................................................................3 Research Approach.....................................................................................................................3 *ources o+ 4ata...........................................................................................................................3 Goodwill & Impairment 3 5&aluation and 4ata Analysis.....................................................................................................3 5thical Considerations................................................................................................................3 Case *tudy Analysis 6 homas Cook............................................................................................7/ homas Cook8s Accounting !olicies +or Goodwill and Impairment.........................................7/ Changes and Impairment in Goodwill.......................................................................................79 Intangi$le Assets o+ homas Cook............................................................................................74 Impairment est !er+ormance....................................................................................................74 Impact o+ Impairment in Goodwill on the *hareholders8 :ealth -a;imi<ation.......................7' *ummary....................................................................................................................................7' Conclusion.....................................................................................................................................73 "ist o+ Re+erences..........................................................................................................................7, Appendi;====================================.=.9/ Goodwill & Impairment 4 Introduction Background Before understanding the treatment of goodwill in accounting, it is imperative to conduct an analysis regarding its origin and application. Upon examination of financial statements of companies, it can be noted that there are two types of long-term assets that are recognized. These assets are further classified as tangible and intangible assets. Tangible assets are those that have a physical existence and can be inspected physically. Needles et al (2010, p.497) describes an intangible asset as an asset that is $oth long term and nonphysical. Its &alue comes +rom the long> term rights or ad&antages it a++ords its owner. hus? Goodwill is an intangible asset. The value of goodwill is realized when the purchase price is more than the fair value of its physical net assets. By contrast, if the purchase price is less than the value of identifiable physical net asset, then negative goodwill is realized. It is not easy to value goodwill; nonetheless, it makes the company valuable. Long existing companies are likely to accumulate goodwill unlike newly formed companies. It is an evident fact that the factors causing a company to gain goodwill will always remain subjective. Herein, it can be said that there are chances that overvaluing of goodwill during acquisition. This can work against the reputation acquirer. Goodwill has become a very integral part of accounting after a series of amendments in its standards many companies that have participated in acquisitions are recording it as an asset. Needles et al (2010, p, 501) Noted that 3) percent o+ '// large companies separately report goodwill as an asset. Because much o+ the growth o+ these companies has come through purchasing other companies? goodwill as a percentage o+ total assets has also grown. As the ta$le $elow shows? the amount o+ goodwill can $e material. Goodwill & Impairment 5 Goodwill @in $illionsA !ercentage o+ otal Asset General -ills B'?395 93C 0ein< B7?395 73C Cisco *ystems B,?7,3 7.C Research Aim, This research aims to evaluate a broad and in-depth study of past literature, which has been published regarding goodwill in accounting. Differing viewpoints and schools of thought have also been considered for this study since the debate on goodwill resulted in the reversal of accounting standards. Furthermore, this report has dedicated a section to note the method which is used to calculate goodwill. In addition, to understand the practical implication, a case study has been selected of Thomas Cook, which brings the flow of the report towards a brief conclusion. Company Background: Thomas Cook PLC The company was formed in February 2007 when news spread that a merger was on the way between Thomas Cook AG and MyTravel Group plc. Merger terms saw Thomas Cook plc own 52% while MyTravel group plc took 48%. After the merger in June 2007, NewCo bought the combination of these companies. The company was listed under the name of Thomas Cook Group plc in the London Stock Exchange. The companys major shareholders include Invesco, Kames Capital and Marathon Asset ManagementInvalid source specified.. In early 2008 the company acquired Hotels4U.com and even bought the operation license that allowed the company to resume its operations in Middle East and the rest of Asia. It was reported Goodwill & Impairment 6 that the company obtained the license for 249 million Euros. The company continued its acquisition of businesses throughout 2008 buying Elegant Resorts for an undisclosed amount and Gold Medal International for an estimated amount of 87 million poundsInvalid source specified.. In 2010 the company provided a statement that in order to create the largest travel network in the United Kingdom the company was going to merge the companys branch network and the branch network of The Co-operative Travel. The partnership would be dominated 70% by Thomas Cook whereas 30% of the partnership was to be owned by Co-operative Travel. In the same year the companys main shareholders Arcandor filed for bankruptcy and its shares were sold off to the bank. The bankruptcy did not affect the company. In 2011, after announcing the company made it known that it wanted a huge loan, its shares tumbled just for a day. Research Objectives Keeping in view the aim of the research, the researcher has set following objectives for the study: 1. To understand the meaning and application of framework provided by International Accounting Standards for recognition and impairment of goodwill; and 2. To determine how Thomas Cook recognizes and impairs its goodwill associated with its assets in accordance with the International Accounting Standards. Research Questions Based on the research aim presented above, the research intents to answer the following questions: Goodwill & Impairment 7 1. What guidelines are provided in relation to the meaning and application of International Accounting Standards for recognition and impairment of goodwill? 2. How Thomas Cook does recognize and impairs its goodwill associated with its assets in accordance with the International Accounting Standards? Structure of the Report This report contains five main sections as follows: Introduction In this section of the report, the researcher has presented a brief background to the context, which leads to the aim of this study. In addition, research objectives and questions have also been identified in this section of the report. Literature Review The researcher has used this section to review literature pertaining to the subject matter under consideration. In addition, the concepts of goodwill and impairment have also been discussed in light of the guidance provided in the relevant International Accounting Standards. This discussion is aimed at addressing the first research question of the study. Research Methodology In this section, the researcher has discussed the research methodology, which has been adopted to conduct this study. The section focuses on research design, data collection sources and data analysis. Goodwill & Impairment 8 Case Study Analysis This section of the report provides a case analysis of Thomas Cook PLC and an analysis of the treatment and recognition of goodwill and impairment has been carried out. Conclusion Being the last section of the report, the researcher concludes the study in this section by stating findings from literature review and analysis of Thomas Cook PLCs treatment and recognition of goodwill and impairment. Summary In this section of the report, various factors regarding goodwill and goodwill impairment have been discussed. Factors such as measurement of goodwill have always had been greatly focused. Literature Review :ood et al @7//5? p? 594A? Goodwill is an intangi$le asset. It can only e;ist i+ the $usiness was purchased and the amount paid was greater than the &alue o+ the net assets. In many cases? goodwill represents the &alue o+ the reputation o+ the $usiness at the time it was purchased.
Goodwill as cited in IFRS is An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. (Epstein & Jermakowicz, 2008, p.294). Goodwill & Impairment 9 International Financial Reporting Standards (IFRS 3) stipulates that goodwill should not be amortized. However, it is the duty of the management to value goodwill on yearly basis to ascertain the necessity of impairment. Goodwill can be perceived differently in various companies. In some sectors, goodwill is mostly understood in terms of the brand and how well the firm is well reputed, while some other companies may take goodwill as value which entitles customer relationships. Due to these reasons it is difficult to measure goodwill like other assets of the companies because of its intangible nature (Kieso et al., 2010). According to Smith and Smith (2002), goodwill should feature two main characteristics to be an asset. First, how goodwill can provide future benefits and secondly goodwill should give measurable results. There can be some difficulties understanding what intangible assets like goodwill are, as indicated by Cathro (1996) because in most of the cases they cannot give measurable results. Nethercott and Hanlon (2002) state that most of the benefits are stemmed from how effectively the organizations are working which show identifiable intangible assets like goodwill. Gary (2006) has this view that intangible assets can be identified and transferable as well, which show an enduring nature, which can be protected and enforced. These characteristics features are essential in goodwill and failure to meet this requirement will not define it as an asset. (Nethercott & Hanlon, 2002) Measurement of Goodwill Goodwill & Impairment 10 IFRS stipulates that goodwill is recognized with acquisition-date fair value. The acquisition method recognizes goodwill in a four- step method; firstly, identification of an acquirer, secondly, finds out when the acquirer has acquired the assets in his hand, the date precisely. (IFRS38). Third step is measuring the identifiable assets which are acquired, the liabilities assumed which will help in recognizing assets and liabilities that were not recognized in the acquirees financial statement in the first place and also any non-controlling interest. And lastly, recognition of goodwill. Goodwill can be identified by subtracting the net of the identifiable assets including values of intangible assets and liabilities from what is paid. After good will is recognized it needs to be tested for impairment annually (IAS 36.96) (Epstein & Jermakowicz, 2008). Measurement after recognition After goodwill is recognized, an entity can either use the cost model or revaluation of assets at market value as its accounting policy. The cost model relates to the measurement of intangible assets, whereas revaluation model is used to measure tangible assets only. Keeping in view the purpose of this research, only cost model is considered, which is defined as follows: An intangible asset is to be carried with a cost which is less any accumulated amortization and accumulated impairment losses (Epstein & Jermakowicz, 2008). How to calculate partial and full goodwill. IDR* 9 gi&es a choice on the issue o+ when to recogni<e partial or +ull goodwill. According to @Bunea>Bontas et al 7//,? p? 9A an acEuirer may either recogni<e non>controlling interest in the acEuiree? which leads to +ull goodwill or the acEuirer can recogni<e non> controlling interest measured at the non>controlling interest in net assets e;cluding goodwillF this is recognition o+ partial goodwill. Illustration .: Initial measurement of goodwill based on IFRS 3 (2004 edition) Goodwill & Impairment 11 At acEuisition date "ima "4 holds: angi$le assets @+air &alueA B9./?/// mil Intangi$le assets @+air &alueA B'/?/// mil "ia$ilities @+air &alueA B.3/?/// mil ABC "4 acEuires )/C o+ the shares o+ the su$sidiary +or B7//?/// mil. Recognizing goodwill based on partial goodwill method he +air &alue o+ the assets 9)/?///- Less: he +air &alue o+ the lia$ilities @.3/?///A- Identi+ia$le net assets @+air &alueA .,/?///- Less: -inority interest @9/C G .,/?///A @5)?///A- 2et Assets acEuired .99?///- Goodwill on acEuisition H 7//./// > .99?/// H B') /// mil Under the revised IFRS 3, @Bunea>Bontas et al 7//,? p? 4A Goodwill can also $e measured on a I+ull goodwillJ $asis? which means that goodwill is recogni<ed +or the non>controlling interest in a su$sidiary as well as the controlling interest? Illustration 7: -easurement o+ goodwill $ased on IDR* 9 @Re&isedA Considering illustration .? the minority interest was +air &alued at B'5?/// mil. Recognizing goodwill based on full goodwill method: ! "il #he fair $alue of the assets 3%0&000 Less: #he fair $alue of the liabilities ('(0&000 )et assets (fair $alue) '*0&000 Less: )on+controlling interest (fair $alue) (,-&000) )et .ssets ac/uired '2-&000 0oodwill on ac/uisition 1 2002000 + '2-&000 1 !%-&000 mil Measurement of goodwill (Abeysekera, 2012) of non-controlling interest is concerned, the guidance provided in the IFRS 3 provides option with regard to the accounting policy, i.e. to Goodwill & Impairment 12 either measure it on the basis of the fair value, which is also called the full goodwill method, or on the basis of non-controlling interests share in the net assets acquired. This measurement is however based on a transaction by transaction and these options in relation to accounting policy application are applicable only with respect to the existing ownership which in turn entitles the holder to a particular share in the assets, if there is liquidation of the same. In addition to these requirements, the International Financial Reporting Standards require other components of non- controlling interests to be recognized on the basis of fair value existing on the date of acquisition, or if some other IFRS is applicable, then to be recognized and measured in line with the requirements of that IFRS. Despite its limitations, fair market value is the ideal method to measure goodwill. As for instance, this method is not able to determine the NPV of the assets of the business acquired. Secondly, there is also an issue with the assumption regarding equal earning potential of every asset, which in turn requires the application of the same rate to be discounted for all assets. Such an application and ignorance of different earning potentials can lead to problems in the identification of assets. Moreover, another problem is the perception that the NPV of the business is represented by the market value.
History and New Modifications The only discrepancy, according to (Carrara et al., 2005) was the lack of consensus, initially European companies used to work in accordance with the local accounting standards which had different approaches and alternatives. Goodwill & Impairment 13 Hence, (Carrara et al., 2005), before 1997, the companies either capitalized good will or they wrote it off equity. The reporting of good will had to be changed even if companies were following IFRS. IAS 22 Accounting for Business Combinations is considered the first standard, according to which goodwill was termed as an asset that had to be amortized, as well as tested for impairment. This accounting standard was established in 1983 but was revised in 1993 and then 1998 to make it consistent with other IFRS standard. IFRS 3 replaced 1AS 22 and this application was used in 15 European countries in the year 2005.
Treatment for goodwill measurement For effective accounting of goodwill, accounting practices have generated four divergent solutions which are; firstly, maintenance of goodwill as an asset without having any elements of amortization. Secondly, deducting the goodwill from owners equity, this solution entitles a company to make extra payment for acquiring assets when they estimate that this will help them to generate future benefits. Extra revenues will compensate additional payment. Thirdly, if the acquired assets have depreciated then goodwill can be capitalized and then fulfilling provisions and requirements for it. In this way, the most important benefit attained by an entity is that its balance sheet is strengthened and thereby improves outlook of the business. Fourthly, capitalization of goodwill during the time, the acquired assets show useful results. As some characteristics of good will cannot be identified or have a definite economic life so with amortization good will does not show the real image of companys finances (Carrara et al., 2005). The relationship of Goodwill and Impairment Goodwill & Impairment 14 In asset @*tickney et al? 7/./? p.49)A& Impairment +or Goodwill +irms do not amorti<e goodwill under IDR*. Both standard>setting $odies reEuire +irms to test annually +or impairment losses on goodwill? as well as whene&er there is an indication o+ impairment due? +or e;ample? to changes in the legal or economic climate? ad&erse regulatory conditions? unanticipated competition? and loss o+ key personnel. hese units are identi+ia$le groups o+ assets that generate identi+ia$le cash +lows? which +irms use to measure +air &alue @K.*. GAA!A or reco&era$le amount @IDR*A. Goodwill, an intangible asset consisting of indefinite lives, requires testing for impairment once a year but those which have finite lives requires more reviews with tests that shows comparisons of the actual value of the asset in accordance to its recoverable amount. This recoverable amount represents the values, which is in use, based on discounted cash flows in futuristic state and thereby represents the market value for goodwill. Hence, with respect to goodwill, every company at the end of their reporting period requires seeing if any impairment is needed in the recorded amounts. In case there is an indication of impairment needed to be introduced in the book value, the next step is to determine the recoverable amount and restate the book value with that amount (Carrara et al., 2005). Goodwill as per Accounting Standards Accounting standards, IAS 36 (2008) prescribes procedures through which entities can have this conformity that its assets are carried at no more than its recoverable amount when it is sold off because if they are carried more than recoverable amount it can be difficult to recover the amount through sale. In this case, as asset like goodwill is termed as impaired by the Standards and entity has to recognize it as an impairment loss. However, entity may reverse the impairment loss and the Standard specifies and prescribes its disclosures as well. Calculation of impairment Goodwill & Impairment 15 IFRS 3 (2008) implies that goodwill acquired which is due with a business combination is not liable to be amortized, but should be tested for impairment based on IAS 36 Impairment of Assets The impairment test consists of two tests: Step 1: The cash generating unit with its carrying amount and goodwill is compared with its recoverable amount. The measurements should give consistent results as required in IAS 36. If the amount, which is recovered, is less than its carrying amounts it indicates that the goodwill needs to be impaired. Step 2: It requires comparison of the carrying amount with the implied goodwill, which is amount in excess recovered of the unit where the goodwill has been allocated over the fair value of identifiable assets. An Entity is liable to recognize it if it has been acquired when the impairment test was conducted. If the carrying amount of goodwill exceeds its implied value, it is recognized and termed as impairment loss. Pros and Cons of Goodwill The recording of goodwill in the balance sheet involves both, pros and cons for a business entity. For instance, recording goodwill improves the overall financial picture of the company as the balance sheet is strengthened further. Moreover, the business entity which records a goodwill amount is able to present itself as a more lucrative investment option as the goodwill amount portrays positive market standing of the business. Implementation of IAS 36-38 and IFRS 3 helps to decrease the costs by reducing the amount of time required to prepare intangible assets such as goodwill and this in turn increases confidence to investors. Goodwill & Impairment 16 Furthermore, goodwill provides a wide range of choice to the investors which eases the movement of capital and increases competitiveness. On the other hand, recording of goodwill may not necessarily reflect the true picture of a business state of operations and worth. Since it is a matter of judgment, therefore there is always a possibility that the amount recorded for goodwill may be overstated and can be misinterpreted (Nethercott & Hanlon, 2002). chapter has discussed the literature that has been available. Goodwill usually is a term that arises when one company is in the process of acquiring another and has been known as an intangible asset. The International Accounting Standards require business entities to reassess the carrying values of intangible assets on annual basis and shall expense out any impairment in the fair value of the assets in comparison with the carrying value. Goodwill & Impairment 17 Research Methodology Research Approach The researcher has adopted a mixed approach in which qualitative and quantitative assessment of the research problem has been carried out. This implies that an interpretive research philosophy has been adopted in this study. In addition, a case study analysis, which is of Thomas Cook PLC, also offers the coverage of longitudinal and cross-sectional analysis of the subject matter at hand. Sources of Data The researcher has only made use of secondary information sources to collect information necessary for reviewing the literature and conducting analysis of the company, Thomas Cook PLC. The sources of information include books, journal articles and online sources, whereas annual reports and financial statements have been taken into consideration to evaluate and investigate the treatment of goodwill and impairment by Thomas Cook PLC. In this regard, reports and financial statements considered pertain to the last three financial years. Evaluation and Data Analysis The literature reviewed and International Accounting Standards 36 and 38 and IFRS 3 serve as the benchmarks for evaluating the treatment and recognition of goodwill and impairment by Thomas Cook PLC. In addition to this, the researcher has also conducted analysis for calculating the impairment and goodwill of the company to understand how the company has recognized them. Ethical Considerations Goodwill & Impairment 18 The researcher has taken into consideration the ethical aspects of conducting a research work while carrying out this study. In this regard, the researcher has placed particular emphasis on ensuring that secondary information used in this study is properly cited and the source or author of the information has been provided. In addition to this, the researcher has ensured that the discussion presented and conclusion derived in this study does not in any way affects the business of the company or misrepresented or misreported in a way not desirable for the company. Goodwill & Impairment 19 Case Study Analysis Thomas Cook This section presents the analysis of Thomas Cook, a travel agency based in London. It presents goodwill and impairment analysis of Thomas Cook for the past two years. The analysis includes a comprehensive review of the policies and treatment of goodwill and impairment adopted by Thomas Cook in line with IAS 36 and IFRS3. The researcher will compare the annual financial reports of the years 2012 and 2013. Thomas Cooks Accounting Policies for Goodwill and Impairment On recording and impairment of goodwill, Thomas Cook uses IAS 36 and 38 (IAS 36 - Impairment of Assets and IAS 38 - Intangible Assets). The following is an overview followed by Thomas Cook in recognition and impairment of goodwill: 1. The company recognizes goodwill as an asset and reviews it for impairment on annual basis; 2. If there is any impairment in goodwill identified, it is reflected in the financial statement of the Group, which is not reversed afterwards; 3. For making assessments regarding the impairment, the assets of the company are categorized in a manner that cash flows related to each category can be identified, which are termed as the cash generating units; 4. Goodwill is allocated to those cash generating units of the company, which are benefited by any business combination, which result in the increase in goodwill. Goodwill & Impairment 20 5. Moreover, goodwill is allocated to assets on the basis of segments to which it belong. This is the allocation of the purchase price to assets together with the accompanying goodwill. 6. Lastly, when there is a disposal of a subsidiary, joint venture or associate of the company, the goodwill associated with it is considered while determining the gain or loss on disposal. Goodwill is treated as an asset on the face of the companys balance sheet. Impairment is done once a year. This implies that in case of major change in the business acquired which has a direct affect on its value can be subject to revalue and therefore impairment early than the completion of one year if the company deems to do so. The impairment of goodwill is charged to the companys income statement in the year of recognition. There is no option considered for reversal of the impairment. It is also noted that the company assesses the value of goodwill and discount rate to calculate the carrying value goodwill. This implies that the companys assessment of the future cash flows from the identifiable assets is based on the judgment of management. This could therefore, have implications on the size of the companys balance sheet if any mistakes or errors or wrong judgment have been made by the company for determining future cash flows. The discount rate, which is also used for discounting future cash flows is derived on the basis of the companys WACC which is also expected to vary throughout the course of the business. The company has disclosed the discount rate in its annual report, which has been used for calculating the present value of future cash flows from the assets acquired. This discount rate is between 13.4% and 14.1%. This rate varies according to risks associated with each Goodwill & Impairment 21 cash-generating unit (CGU). However, there is no disclosure in the annual report of the company related to the assessment of risks pertaining to each business segment of the company. The audit report of the company does mention that the basis for the companys recording of goodwill and subsequent impairment of goodwill has been checked and assessed whether it is reasonable. The audit has approved the methods and basis used by the company for determining the carrying value of goodwill. In order for assets to be subjected to impairment, the company ensures that there are identifiable and separable assets. These assets are considered as cash generating units and they are allocated to business units, which are going to benefit from the use of these assets. Furthermore, the company allocates goodwill to its business segments, which are making use of assets acquired. The company provides details of segments assets in the notes to financial statements under note 3 Segmental Information. This indicates that the companys record goodwill as net of the impaired amount in its balance sheet. This treatment is different from other intangible assets recognized and recorded in the companys balance. For these intangible assets, the company has estimated useful lives and they are amortized rather than impaired like goodwill. Furthermore, from the companys annual report it can be indicated that the impairment of goodwill recorded in the companys income statement is related its UK segment. From the annual report of the company it can be noted that the company has recognized major value of goodwill in its UK business and its business segments in Europe. For other segments of the company including Egypt and Lebanon assets held by them are recorded at their recoverable amount. This decision was made as the company made a disposal of its businesses in these two regions because of their poor performance and losses that the company incurred resulting from Goodwill & Impairment 22 instable political conditions and decline in tourism in these markets. They are treated differently and recorded as assets held for sale. The company also mentions events, which are responsible for changes in the carrying value of goodwill in its annual report. The company however does not provide information on how much value of goodwill is impaired because of these events as the ones, which are mentioned here related to Egypt and Lebanon. Changes and Impairment in Goodwill In 2012, Thomas Cook sold its business operations in three regions, which also involved the reassessment of the carrying amounts of goodwill associated with the operations carried out in those three regions. The businesses sold included operations in India, France and Canada. After classifying the business segment in India on sale, the company determined an impairment charge for the same amounting to 96 million. This amount was calculated in line with the guidance provided in the IAS 36. On the other hand, for Canada and France, the company made use of the present value for those segments and determined an impairment of 299.6 million as the impairment of goodwill and amortization of the intangible assets as business combinations. See appendix; Table A: Those were the only impairments determined by the end of the financial year 2012. In 2013, the impairment of goodwill and review of assets valuation resulted in a net charge of 18 million, which is considerably lower than that of the amount charged in 2012. This amount included a pre-disposal review of goodwill for the companys operations in Egypt and Lebanon, review of non-current assets value, review of goodwill and assets of Neilson and subsidiaries before its disposal, revaluation of particular investments in the UK pension fund and some other intangible asset items. Goodwill & Impairment 23 Intangible Assets of Thomas Cook The intangible assets of the company comprise of goodwill raised from business combinations and other assets. See Appendix, Table B It can be noted that there has been a decrease in the carrying values of intangible assets of Thomas Cook. The company values its business combination intangibles on the basis of forecasted cash flows from them, which are discounted at a suitable discount rate, which are presented later in this report. Impairment Test Performance IAS 36 stipulates that the company performs impairment tests by conducting a comparison of the carrying amounts of every cash-generating unit it has with the amounts, which can be recovered. Recoverable amount, as stated in the notes to the financial statements of the company, is determined on the basis of the present value of cash generating units. This value is determined by calculating the net present value of the cash flows expected to inflow in future while taking into consideration pre-tax discount rates. The pre-tax discount rates used for the determination of net present value of future cash flows are attributed to the cash generating units on the basis of specific risks associated with them. The cash generating units of Thomas Cook PLC are determined on the basis of regional markets in which they operate, which include markets in the UK, Europe, America, Egypt and Germany (Thomas Cook PLC, 2013). As far as the determination of the future cash flows associated with the cash generating units of the company are concerned, they are determined on the basis of their respective value in use, Goodwill & Impairment 24 which are extracted from the budgeted values and a three year planning schedule maintained by the company for each of its cash generating units (Thomas Cook PLC, 2013). Apart from this, the cash flow forecasts for the company for more than three years are based on the long term nominal growth rate, which is an average estimate. See Appendix; Table C (Thomas Cook PLC, 2013) Impact of Impairment in Goodwill on the Shareholders Wealth Maximization The business has suffered losses in the past few years, (Thomas Cook PLC, 2013; Thomas Cook PLC, 2012). The losses could have been mitigated significantly had there been no impairment and amortization charge subtracted from the net operating profits of the company, and therefore, the earnings or loss (as the case might have been) per share for shareholders would have been reduced significantly. See Appendix; Table D In the table above, it can be noted that after adding back the impairment and amortization expense to the net loss incurred by the company, the loss per share for the shareholders has declined significantly. Therefore, it can be stated that the impairment and amortization expenses have a significant on the wealth maximization of shareholders. Summary In this section of the report, the researcher has presented an analysis of the goodwill and impairment recognition and treatment by Thomas Cook in relation to its intangible assets and business combination. The section provides detailed analysis of the policies and assumptions used by the company in light of the relevant International Accounting Standards. Goodwill & Impairment 25 Conclusion The review of accounting standards related to the measurement and recognition of goodwill and impairment requires that business entities shall assess the carrying amounts of goodwill and other intangible assets and if the carrying amount is over and above the fair value of the assets, such an amount shall be expensed out as impairment. The impairment charges are then required to be deducted from the operating income of the company in the income statement. As far as the second research question is concerned, it has been found that the company, Thomas Cook PLC, records and reports goodwill in accordance to the International Financial Reporting Standards, and in particular it follows IAS 36 Impairment of Assets and IAS 38 Intangible Assets for measuring and impairing goodwill. The company recognizes goodwill upon acquisition when the amount paid by the company is greater than the fair value of assets and liabilities of the target business. Goodwill is treated as an asset on the face of the companys balance sheet. Apart from this, it has been noted that Thomas Cook PLC has provided disclosures regarding its acquisitions and disposals during the last two years. In this regard, the company has reassessed the carrying value of its goodwill and business combination intangibles after making adjustment for acquisitions or disposals, as the case may be. Goodwill & Impairment 26 List of References A$eysekera? I.? 7/.7. Measuring and recognizing the value of purchased goodwill: A note on market value measurement method, :ollongong: Kni&ersity o+ :ollongong. Bunea-Bontas, A, & Petre, C, 2009, Issues on recognition?measurement andimpairment o+ goodwill pp 9>4 Task. Australian Accounting Review, 11(2), pp.12-21. Carrara, M., Baboukardos, D., Cunningham, G.M. & Hassel, L., 2005. The impact of IFRS on reporting for business communications: An in-depth analysis using the telecommunications industry. Oradea: University of Oradea. Cathro, G., 1996. Goodwill: Now You See It, Now You Dont. Australian Tax Review, 25(4), pp.169-185. Epstein, B.J. & Jermakowicz, E.K., 2008. Standards, Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting. New York: John Wiley & Sons. Gary, P., 2006. Research in Accounting Regulation, Volume 18. San Diego: Elsevier. Johnson, L.T. & Petrone, 1998. Is Goodwill an Asset? Accounting Horizons, 12(1), pp.293 303. Kieso, D.E., Weygandt, J.J. & Warfield, T.D., 2010. Intermediate Accounting: IFRS Edition, Volume 1. New York: John Wiley & Sons. Nethercott, L. & Hanlon, D., 2002. When is Goodwill not Goodwill?The Accounting and Taxation Implications. Australian Accounting Review, 12(1), pp.55-63. 2eedles? !owers? -? Crosson? L? Principles of Accounting?#hio? Cengage "earning. Goodwill & Impairment 27 Smith, G. & Smith, J., 2002. An Epigrammatic Examination of the Nature Measurement and Valuation of Goodwill Between 1810-2002. New York: Faculty of Commerce. *tickney? !? :eil? "? *chipper? M? 7/./?Financial Accounting: An Introduction to concepts, methods and uses, Ohio? 5ngage "earning. Thomas Cook PLC, 2012. Annual eport. "ondon: homas Cook !"C. homas Cook !"C? 7/.9. Annual eport. "ondon: homas Cook !"C. :ood? D? *angster? A? Business Accounting .? !earson 5ducation "imited? "ondon Goodwill & Impairment 28 .ppendi3 #.456 . I"7.IR"6)# 8F 0889:I55 .)9 ."8R#IS.#I8) 8F 4;SI)6SS .SS6#S2 2012 million Pre-tax discount rate France 94.4 9.23 % Canada 109.2 9.24 % India 96 N/A 299.6 #.456 4 I)#.)0I456 .SS6#S 8F #<8".S =88> 2013 million 2012 million Goodwill 2,690.9 2,660.2 Business combination intangible assets 325.9 369.2 Others 137.7 129.5 3,154.5 3,158.9 #.456 = THE RATES USED FOR DISCOUNTING THE NET PRESENT VALUE FOR FUTURE CASH FLOWS Rate Discount Rate for determining net present value of cash flows 13.3 % - 14.1 % Goodwill & Impairment 29 from Cash Generating Units Long term nominal growth rate for estimating cash flows beyond three years 2 % for all CGUs #.456 9 GOODWILL IMPAIRMENT AND AMORTIZATION EXPENSE FOR 2012 & 2013 2013 2012 Impairment of goodwill and amortization of business combination intangibles 31.0 m 218.6 m Profit / (loss) from operations (after accounting for impairment and amortization expense) 13.0 m - 170.1 m Net loss (after adding back impairment and amortization expense) 44 m 48.5 m Loss per share - 16.7 m - 67.2 m Loss per share (after adding back impairment and amortization expense) - 14.20 m - 42.31 m (Thomas Cook PLC, 2013 Goodwill & Impairment 30