Journal of Applied Research in Accounting and Finance

Vol 7 (2) December 2012

Editorial

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Misleading Signals from Operating Cash Flow in the Presence of Non-Controlling Interests By Charles Mulford and Maital Dar

A non-controlling interest, also known as a minority interest, exists when a subsidiary is not wholly owned by the parent company. While a careful designation of income and equity attributable to non-controlling interests is made on the income statement and balance sheet respectively, under GAAP a similar attribution is not made on the statement of cash flows. As such, investors, analysts and other users of financial statements may be unaware that operating cash flow includes amounts attributable to both controlling and non-controlling interests, potentially leading to over-estimates of cash available for dividends to controlling interests.

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Goodwill Impairment Disclosure under AASB136 from 2005-2010 By James Guthrie and Tsz Ting Pang

This study examines goodwill reporting disclosures in Australia under AASB 136 ¿¿¿ Impairment of Assets from the period 2005 to 2010. It explores the extent to which the disclosures complied with the mandatory requirements for impairment testing for goodwill after the implementation of the ¿¿¿impairment regime¿¿¿ in AASB 136. Using a sample of 287 Australian-listed firms, we found improved compliance with almost all disclosure items explored, while non-disclosure was found to be higher for more complicated disclosures. Several firms persistently provided no required disclosures. These findings suggest that some auditors and preparers are failing to comply with mandatory requirements, a potential concern for regulators.

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Rethinking Goodwill: The Murry Legacy By Debra Osborn

In this article, the author advances a rights-based theory of goodwill which contends that for legal purposes, goodwill is a bundle of rights and privileges enjoyed by the owner of an operating business, central to which is the proprietary right to make use of all that constitutes the attractive force of the business to generate earnings or otherwise create value. This 'attractive force' includes everything which adds value to the business and not merely the attributes of the business which can be shown to attract custom. Rather it is all of the assets, advantages and positive attributes of the business working together which bring about the attractive force and result in earnings being generated and value being created.

Moreover, a rights-based legal theory of goodwill is consistent with the reasoning of the majority in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 and importantly, reconciles a number of perceived inconsistencies in the decision concerning the role played by custom. Reconciling these anomalies is critical because their existence has seen two conflicting judicial approaches to goodwill emerge, both of which purport to find their authority in Murry. This has been most observable in the taxation area when courts are regularly called upon to resolve matters involving questions of substantial liability to stamp duty and where the existence and value of goodwill is often a determining factor. This article traces the history of goodwill as a legal concept and identifies the significant findings of the majority in Murry concerning the nature, existence, sources and value of goodwill for legal purposes. It examines the cases which have struggled to apply the decision in the face of residual uncertainty about the inseverable nature of goodwill, the role played by custom, and where the critical distinction between the existence and value of goodwill is not well understood. The article addresses this uncertainty, clarifies the role played by custom, and explains the relationship between the rights-based legal concept of goodwill and the value-based accounting concept. Finally, the author submits that the existence of the bundle of rights and privileges is the reason why an operating business which is generating revenue and is expected to continue to do so, will usually possess excess value in an accounting sense. For this reason, it may be time to distance the modern rights-based doctrine of goodwill from its historical patronage-centred past and rename it 'operating business value'; because on its proper construction, goodwill which is recognised by law exists whenever a business is operating and generating revenue and there is reason to believe that this will continue.

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