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

Super Fund CGT Relief

The Government has introduced new legislation for SMSFs in late 2016, notably a pension cap balance of $1.6M and removing the tax-exempt status of Transition to Retirement Pensions (TRAPs) accounts. With many SMSF’s currently holding more than $1.6M tax free in pension accounts, these are significant changes for superannuation that will dramatically affect many individual’s current retirement plans.

Once sold, these gains would have originally been tax exempt if the asset was held in a pension or TRAP account. The Capital Gains Tax (“CGT”) relief offers SMSF’s a final chance to realise their accumulated gains and to claim the current tax concessions available to them before the new legislation comes into effect. The relief will ensure that any CGT will be payable only on capital gains accrued from 1 July 2017 onwards.

The relief is performed by notionally selling the asset on 30 June 2017 at its current market value, then immediately buying it back for the same price. This process realises the accrued gains on the asset and resets the cost base back to the market value at the time of “sale” for the start of the next financial year. Eligibility is not guaranteed and an SMSF must satisfy ALL the following criteria to qualify for the relief.

  • The SMSF is complying.
  • At least one member of the SMSF commenced a Pension (i.e. SABP / TRAP) before 1 July 2017.
  • At least one member of the SMSF is affected by the new law (i.e. their pension is a TRAP and / or their pension is an SABP and currently over $1.6M
  • The assets were acquired by the Fund prior to 9 November 2016 and are continued to be held by the Fund until 30 June 2017.
  • The Trustees make a valid election in the approved form before the ATO’s lodgement due date of the 2016/2017 Income Tax Return.

Superannuation Clearing House

The ATO reminded businesses on 15 August 2017 that its Superannuation Clearing House is now more widely available. The Clearing House can now be utilised by businesses with 19 or less staff or less than $10 million in turnover (previously a $2 million threshold).
Now more employers can save time by paying all employee super contributions to the Clearing House instead of to each employees individual fund.
More information is available on the ATO website, just search for super clearing house eligibility.

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:

Turnover Threshold Company Tax Rate if below Threshold Company Tax Rate if above Threshold
2015-2016 $2 Million 28.50% 30%
2016-2017 $10 Million 27.50% 30%
2017-2018 $25 Million 27.50% 30%
2018-2019 to2023-2024 $50 Million 27.50% 30%
2024-2025 $50 Million 27% 30%
2025-2026 $50 Million 26% 30%
2026-2027 $50 Million 25% 30%