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Goodwill & Impairment 1

Goodwill & Impairment


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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
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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:
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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.
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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).
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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
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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
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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.
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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
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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
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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.
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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.
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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
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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.
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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.
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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

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