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A member of the board of Shoprite Enterprises plc has suggested two accounting policies for consideration by

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A member of the board of Shoprite Enterprises plc has suggested two accounting policies for consideration by the financial director in preparing the latest set of financial statements. These have been summarized as follows:
1. The incorporation of goodwill in the financial statements as a permanent non-current asset in recognition of the favourable trading situations of several of the business's outlets and also to reflect the quality of management experience in the business.
2. No depreciation to be provided in future on the buildings owned by the company, because their market value is constantly appreciating and, in addition, this will result in an increase in the profit of the company.
Required
a. Briefly explain your understanding of each of the following:
i. Goodwill;
ii. Depreciation.
b. Discuss the acceptability of each of the above suggested accounting policies, highlighting any conflict with accounting concepts and standards.
Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of... Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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a i Goodwill The precise nature of goodwill is difficult to define in a theoretically sound manner However it is generally recognized that goodwill ex...View the full answer


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Introduction To Financial Accounting

Introduction To Financial Accounting

ISBN: 978-0077138448

7th edition

Authors: Anne Marie Ward, Andrew Thomas

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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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