Trade marks and patents may be capitalized and then written off over their useful lives with any renewal fees being charged to revenue. If a trade mark or patent is abandoned then the net book amount should be written off immediately. Normally the company should keep a register of all material items which should be checked against the agreements, the accounting records, and third party confirmation from the patent agent of the existence and company’s title to the assets. Auditors will need to consider the valuation of the assets. This will include a review of the future income arising from the trade mark and patent to see whether it justifies the value placed on it. In assessing the future income it will be necessary to consider the possibility that income will not arise due for example to expiry or changes in the client’s business.

You should also recall from your accounting knowledge that the goodwill impairment could be determined using ‘top-down’ or ‘bottom-up’ tests.

The ‘bottom-up’ test involves identifying the goodwill in the balance sheet that can be allocated on a reasonable basis to the cash generating unit.

The ‘top-down’ test involves identifying the smallest cash generating unit which the goodwill belongs and then apportioning any unallocated goodwill on a reasonable basis to the cash generating unit.

In each case above, impairment has occurred where the recoverable amount of the cash generating unit is less than the carrying amount of the assets plus the allocated goodwill.

You should recall from your earlier studies that the ‘top-down’ test is required where there is no reasonable basis for carrying out a ‘bottom up’ test.

Management’s justification of the process of carrying out the impairment review must be carefully examined. The auditor should consider the sufficiency and reliability of the evidence available. When examining ‘economic value’ or ‘value-in-use’ evidence will be required to support (for example) future cash flow projections, interest rates growth rates, product life cycles, future production costs etc. These are subjective areas whereas determining the ‘net selling proceeds’ is more easily verifiable by reference to evidence from current market activity.

It is particularly important that the auditor reviews the notes to the financial statements to ensure that the disclosures in respect of the accounting policy and treatment is sufficient and appropriate.

Goodwill and fair value

The main points the auditor needs to verify for any goodwill arising in the accounting period are as follows:

  1. Examine the methods used to determine the fair value of the consideration given to purchase the shares of the subsidiary and the fair value of the net assets in the subsidiary at the date of acquisition. The usual verification procedures should be used, although the auditor should consider the need for an expert valuation.
  2. The accounting treatment of the goodwill once it has been quantified needs to be checked to ensure it is being accounted for incompliance with IFRS 3
  3. A check is required that the detailed disclosure requirements of IFRS 3 are complied with.