Goodwill is an intangible asset that normally arise at the time of acquisition of one company by another at a price higher than the investee company’s fair value of its net assets. The value of goodwill is usually determined by the intrinsic value of brand name, customer base, patents, proprietary technology and the like.

Once the value of goodwill is determined and accounted for in the company that acquired it, as a rule of thumb it must be assessed annually for any impairment at the balance sheet date to ensure they are carried at fair values as per the provisions of Australian Accounting standards. The value attributed to goodwill may not only affect the financial position but also the performance reported.

Business need to ensure that financial statement assertion of “valuation” is properly evaluated to avoid any material misstatement while carrying value of goodwill in the books. Goodwill once recorded in the financial statements cannot be revalued upwards in majority of the cases.

As owners/directors of the company, we are our best judge when it comes to valuation of “goodwill” as this will involve a fair bit of estimation and judgement which should always be in line with prudent market and economic conditions.

Key aspect of a proper goodwill valuation / impairment testing is getting right the variables used in the value calculation. Basic inputs include:

  • Current year results
  • Capital expenditure budgets for the projected years
  • Company’s cost of capital
  • Growth rate in company’s profits
  • Discount rates

Depending on the size of the organisation cost of equity would include apart from the risk-free rate, a market risk premium/small company premium and market risk. The debt to equity ratio will also have an impact on the final numbers. Growth rates to the company’s profitability need to be realistic and justifiable which should be determined on the trend of past performance of the company and take into consideration the current market and economic conditions surrounding the company’s line of business/field of operations. Given the subjectivity of elements of impairment calculations, all assumptions and key uncertainties are required to be part of the disclosures in the financial statements.

Impairment assessments generally require expert assistance from an accountant and we encourage all directors and management to utilise such expertise when determining the value of goodwill and when undertaking impairment assessments. We are experienced in establishing robust impairment models utilising management knowledge of the market in which it operates and information on goodwill impairment is also available on the ASIC website. Just search for ‘Impairment of non-financial assets: Materials for directors’.

Detailed information on goodwill impairment available at the below website of ASIC:

ASIC guidance on impairment of non-financial assets

         Written by the Audit team at DFK Collins

Key Aspects for Inventory Stocktake

SMEs (small / medium enterprises) might have their compliance requirement to get year-end numbers audited / reviewed by a professional accountant which may either be part of fulfilling bank covenant conditions or for taxation purposes. As owners, we are our best judge when it comes to value of inventories in the financials. Any error or anomaly in the inventory values at year end will have a direct impact on the results and the financial position of the business.

Businesses need to ensure that the assertions listed below are considered and adhered to before dollar values are assigned to the inventories.

  • Existence
  • Completeness
  • Accuracy
  • Valuation
  • Disclosure

An important criteria for a proper stock take is to provide documentary evidence of an adequate set of procedures being followed with supporting work papers. This will provide an audit trail for future reference.

If you hold inventory in your books adherence to the following procedures will result in an efficient and reliable stock take and address the assertions listed below:

  • Issue written stocktake instructions and brief staff involved.
  • Assign a person to be “in-charge” of stocktaking who will be the first point of contact during and after the stock taking.
  • Organise the stocks to facilitate complete and accurate counting.
  • Ensure that no item is left out or counted more than once.
  • Calibrate the instruments to be used for stock take such as weighing machines, counting devices or measuring gauges.
  • Have adequate procedures in place to cover inventories not on the premises – outside warehouse, depots, third parties (consignment stocks)
  • Identify third party stocks within the premises for elimination.
  • Identify slow moving, redundant or damaged item for valuation adjustment.
  • If practical “freeze” movements of all stocks during stocktaking to ensure proper cut-offs.
  • As part of segregation of duties “count stocks in the presence of a person who is independent of the person normally responsible for stock”.
  • Incorporate adequate supervision of the process and arrange test check of the counts by a third person.
  • Investigate differences if any between stock sheets and main inventory records
  • Authorise write off differences after analysing the causes and adjust the books
  • Value the inventories preferably on First in First Out (FIFO) basis and make provision for slow moving, redundant and obsolete stocks

With an efficient inventory check and proper valuation the owners of the business can be confident that the final inventory valuation incorporated into the financial statements is correct and thereby the results for the year and financial position at year end can be relied upon not only by the business owners but by the compliance authorities.

Written by the Audit team at DFK Collins.

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Applicable Tax Rates for Companies

In recent times the Government passed legislation to progressively reduce the company tax rate for companies with a turnover of up to $50 million. The Government has just announced that it will introduce legislation into Parliament to clarify confusion regarding the applicable tax rate for companies. The Government has stated that it will clarify that only active trading companies qualify for the lower tax rate, meaning that companies that are solely engaged in passive investments in shares and property, irrespective of the level of turnover, should calculate their PAYG Instalments on the basis of the 30% rate applying.

If your company is actively trading and its turnover qualifies for the 27.5% tax rate, any PAYG Instalments can be calculated based on the reduced 27.5% tax rate. The progressive rates of corporate tax rate reduction in future years is as follows:

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