Advice for Crafters Ltd on goodwill, dividends and tax Essay

Craig Crafters, Managing Director

Bomber: Advise sing the assorted issues raised

In response to your mail, I hereby want to deviate your sort attending towards the turn toing the issue that you have raised. The following the advice and account of the issue raised:

Issue 1: Recognition and Evaluation of Good will( Board, 2014 )

Good will connote the value originating to an organisation due to its repute, its connexion and other benefits accruing to it in connexion with its employees, client and others which enable the organisation to greater net incomes than the normal rate of return which is expected by others within the industry on its capital employed. In others words we can state that good will is that plus of the company which increases the present value of the house in expectancy of its hereafter surplus earning.

Good will is dependent on the undermentioned factors:

1. It dependents on the net income earning capacity and the net income tendency of the company in past fiscal old ages ;
2. The nature of the concern, degree of competition, demand of its merchandise or services, authorities ordinances, its place in the market and location of industries ;
3. The sum of capital investing required and the life of the concern ;
4. The nature and strength of the hazard involved in the concern ;
5. The accomplishment, cognition and efficiency of the director forces ;
6. The nature and extent of competition and types of client.

There are many other factors on which the good will of an organisation depends. In companies rating of good will arises in the undermentioned fortunes:

1. Amalgamation of two companies ;
2. Sale of the whole company or an unit of a company to another new or an existing company ;
3. Acquisition of commanding involvement in the company ;
4. Evaluation of good will for revenue enhancement intent ;
5. Sometimes rating of good will originate for specific intent.

The good will of an organisation is done by assorted methods depending upon the bing fortunes. Some of the standard methods of rating of good will are:

Arbitrary Valuation Method:In this method the rating of good will of determined by the common understanding between the purchaser and the marketer of the company. This is non the scientific method and therefore it is adopted for the rating of little concern merely. For case A Ltd. wants to buy B Ltd. The value of the assets of the company is $ 50,00,000 but B Ltd. quotes $ 60,00,000, the excess $ 10,00,000 is on history of good will.

Average Net income Method:Under this method,

The value of good will = Average net income ten figure of twelvemonth of purchase

Here, mean net income means the hereafter expected net income after seting unnatural income and losingss.

Number of twelvemonth meant the old ages during which the net income will be maintained.

Ace net income method:under this method,

The value of good will = ace net income x figure of twelvemonth of purchasefor

Where ace net income = mean adjusted net income – normal net income

Annuity Method:under this method the value of good will is determined by happening out the present value hereafter gaining over estimated period discounted at an appropriate rate.

So from the above analysis it has been observed that Carmen thought is right because good will is to be recognized on certain fortunes as mentioned above. No such fortunes exist for the company. Even though company’s portions monetary value has risen significantly as the company has enjoyed profitable fiscal twelvemonth and really positive outlook about the future net incomes, the company can non acknowledge good will in the fiscal statement as at 31^stDecember, 2014.

Issue 2: Rate of Dividend( AustLII, 2001 )

An investor invest in the company as a stockholder to gain either dividend or capital growing i.e. an addition in the portion monetary value. Now the affair here is as to what dividend policy should the company maintained which would run into the internal fund demand of the company and run into the demands and recommendation of the stockholders. The company is basking good net income over clip and is anticipating a net net income border of 40 % – 60 % . Now the company wants to retain some of its net income puting up ain Aboriginal art galleryand for fixs and care. The proviso for all the above disbursals will convey the company’s net net income border down to around 10 % to 30 % which is really comparable to the old twelvemonth. Thus the dividend would stay same. The proviso of the above disbursals is prudent and right. As the company’s net income lifting at a gait, the company should non increase the rate of dividend really high because this would increase the outlook about the dividend for coming old ages besides and it may go on that the company may non go on to gain such high net income. Thus the company is required to keep a stable net income with an appropriate or a fixed per centum rise in dividend.

The company is non advised to stagnant the rate of dividend, alternatively it should increase the rate of dividend at changeless rate, because as the company grows the stockholder invest more in the company anticipating a better return from the same. Therefore if the company on the other manus does non better its dividend the stockholders will lose its outlook and halt taking any involvement in the company. Thus the company is advised to increase every twelvemonth at a peculiar rate, depending in the fiscal growing of the company.

Therefore here the company on one manus is advised to do proviso for art gallery and for fix and care but at the same time it shall besides better the dividend consequently in order to intact the trueness of its stockholders and it is non advisable to keep the same dividend rate.

Issue 3: Deferred Tax Asset and Deferred Tax Liability( AustLII, Income Tax Assessment Act, 1936, 2013 )

The accounting books are prepared harmonizing to the one set of ordinance for case GAAPS, Accounting criterions and other ordinances whereas for calculating revenue enhancement, the revenue enhancement sum is computed on income computed harmonizing to income revenue enhancement regulations. Thus we should unclutter hold clear cognition about the income revenue enhancement act and the ordinance for readying of accounting books.

It has been observed that there are certain points of income and disbursals which are allowed or disallowed under the income revenue enhancement act for calculation of nonexempt income in contrary to accounting attack. For illustration contribution disbursal are allowed as disbursals for accounting intent and is non allowed for revenue enhancement intent, taking to taxation income being higher than the accounting income. Thus the revenue enhancement disbursal is higher as per revenue enhancement than accounting intent. This type of difference is known as lasting difference and will non retrieve in the close hereafter. Whereas timing difference are those differences which is traveling to be reversed in the close hereafter for case difference in rate of depreciation leads to a timing difference.

Now comes the construct of deferred revenue enhancement plus and deferred revenue enhancement liability, DTA or DTL arises merely because of timing difference. For illustration:

Net income before revenue enhancement and depreciation = $ 45,000

Depreciation as per books = @ 20 % $ 2,000

Depreciation as per revenue enhancement intent = @ 30 % $ 3,000

Therefore net income after depreciation as per books = $ 43,000, and

Net income after depreciation as per revenue enhancement intent = $ 42,000

Tax @ 30 % = $ 42,000 x 30 % = $ 12,600

Now revenue enhancement as books would hold been ( 43000 x 30 % ) $ 12,900.

This difference occurs because of difference in depreciation rate.

Therefore it leads to a deferred revenue enhancement liability of $ ( 3000-2000 ) x 30 % = $ 300.

It will be shown in the balance sheet under Long term liabilities.

Therefore due to this timing difference and lasting difference with the application of income revenue enhancement Torahs and accounting Torahs, current revenue enhancement liability in the jutting Statement of Financial Position as at 31 December 2014 is really much less than what we have estimated as income revenue enhancement disbursal for the six month period.

I hope the above the above affair might hold clear all your issue, in instance of any farther aid please allow me cognize.

Thanking You,

Respects,

Bibliography

AustLII. ( 2013 ) . Income Tax Assessment Act, 1936.

AustLII. ( 2001 ) . The Corpoartion Act.

Board, A. A. ( 2014 ) . Australian Accounting Standard.