CHAPTER 5 Balance sheet 211Required
Discuss which figure is more useful for decision making. Analyse how revaluation increases and
decreases, related to the land, are accounted for. Explain if this is consistent with accounting for
movements in the net market value of biological assets (refer to question 5.42).5.44 Measuring goodwill LO3, 4, 10
Bigger n’ Better Pty Ltd has just acquired the Tiny Tots business. The fair value of Tiny Tots’
net assets as at the date of acquisition is $1 855 000. Bigger n’ Better Pty Ltd has agreed to pay
the owners of Tiny Tots $1 000 000 in cash and give them 100 000 shares in Bigger n’ Better Pty
Ltd, valued at $10 per share. Calculate the goodwill that would be recognised in Bigger n’ Better
Pty Ltd’s balance sheet immediately after the acquisition. How will this goodwill be treated sub-
sequent to its recognition?5.45 Business acquisition LO3, 4, 5, 10
Microsoft is going to struggle to raise the US$8.5 billion it agreed to pay for Skype, the internet
communications company, this week — but the deal is likely to be important in its pursuit of key
rivals and could have nasty consequences for the telecommunications sector. Skype is the most
expensive acquisition in Microsoft’s history... About 170 million people use Skype’s services every
month but the vast majority are making free video calls from one computer to another... Skype
has yet to record a profit in its seven-year history, reporting a loss of US$7 million on revenue of
US$860 million in 2010.
Source: Corrigan B 2011, ‘$8.5 bn... Will Microsoft’s heart Skype a beat’, Australian Financial Review, 14–15 May, p. 29.
Required
Generate a list of the factors that Microsoft would have considered in determining the price to pay for
Skype. Compose a memorandum detailing how Microsoft would account for the acquisition of Skype:
a. at acquisition date
b. one year post acquisition.5.46 Impaired assets LO4, 10
EY’s analysis of the accounts of 16 European utilities reveals that almost €17.7 billion (US$23.4
billion) was written off balance sheets between 2010 and 2011. A large proportion (58 per cent) of
this lost value is concentrated among just three utilities, while only four companies posted impair-
ments of €150 million (US$198 million) or less.
Mergers and acquisitions activity may have left some companies lamenting costly acquisitions,
notably those in Southern Europe. Deals concluded at high prices have failed to deliver promised
value in the current economic climate, leading to impairments to goodwill. Assets, meanwhile,
account for the largest share of lost value, with almost €13.6 billion (US$18 billion) written off
between 2010 and 2011.
Source: EY Global 2012, ‘Europe’s utilities take multi-billion euro asset impairment hit’, Utilities Unbundled, iss. 12,
http://www.ey.com.
Required
a. Discuss when entities can recognise goodwill on the balance sheet.
b. Once recognised, explain the annual reporting requirements for goodwill.
c. Explain the factors that would have contributed to European utilities’ impairment of goodwill.5.47 Research and development expenditure LO3, 4, 10
The following is an extract from the website of Samsung.
R&D at Samsung
Innovation is crucial to Samsung’s business. As new technologies are being constantly introduced
to the market, speed is essential for remaining competitive in today’s digital era, and new markets
have to be pioneered continuously. Through the interplay of creative, imaginative people; a global
R&D network; an organisation that encourages collaboration and cooperation among business
partners all along the supply chain; and a strong commitment to ongoing investment, Samsung has
put R&D at the heart of everything we do.