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Corporate Accounting And Reporting

Question:

Discuss about the Corporate Accounting And Reporting.

Answer:

Introduction

IAS 36 Impairment of Assets outlines the conditions to report and account for impairment of majority of the fixed assets. This standard states when a company is required to conduct an impairment examination, how to do it, the acknowledgement of any kind of impairment, and the disclosures involved therein. Having mentioned that, the applicability of IAS 36 is broad and its requisites are subject to interpretation. The economic uncertain times of today have brought impairment into the spotlight. Several organizations are contemplating to re-evaluate their impairment examination procedures, assumptions and models (Dagwell, Wines and Lambert, 2011). The present essay aims to present an overview of the very nature of impairment loss, the main requirements of the standard and the disclosures required.

The credit crunch that hit the world in 2008 has impacted a number of non-financial and financial institutions. Due to the worldwide recession, several organizations contemplated writing-off some of their long term assets. Such write-offs are known as impairments. Impairment of a non-financial asset is a sudden decline of its fair value because of obsolescence, damage etc. A long term fixed asset is said to be impaired when an organization is unable to recover the carrying amount of the asset either by selling it or by using it (Stickney et al., 2009). To identify whether an asset has become impaired, organization review their assets on a yearly basis to identify signs of impairments – i.e. a fall in its cash generating capacity through sale or use. When a fixed asset becomes impaired, then the organization has to reduce its value in the balance sheet and enter a loss in the income statement (Georgiades, 2008).

IAS 36 addresses testing impairment of all intangible and tangible assets, apart from the assets covered by other IFRS. This standard mandates that an asset’s carrying amount should be less than its recoverable amount. In order to satisfy this purpose, IAS 36 necessitates companies to examine all assets which lie within the range of likely impairment when signs of impairment are present or, as a minimum, yearly for intangible assets having imprecise functional lives and for goodwill (Mirza, Orrell and Holt, 2010).

IAS 36 mandates a business to evaluate, at each date of reporting, whether there are any signs that an asset may be damaged. A business needs to take into account information from both internal and external sources. Irrespective of whether signs are present, recoverability of intangible assets and goodwill with imprecise functional lives or those which have still not been used by the company, need to be examined annually (Henderson et al., 2015). For fixed assets, if indicators of impairment exist then impairment test needs to be carried out. Through this examination, the recoverable amount of an asset is compared with its carrying out. If the recoverable amount is less than the carrying amount, the difference amount is impairment loss. However, if the recoverable amount is higher than no impairment needs to be recorded (Ernst & Young LLP, 2015). An asset’s recoverable amount is higher of its “fair value less cost to sell” as well as it “value in use. Fair value less cost to sell implies the amount at which the concerned assets can be sold subsequent to the deduction of disposal costs. Value-in-use refers to the present value of cash flows projected from future usage and ultimate sale of the asset when its functional life comes to an end. If assets are carried at their historical costs, then impairment loss is considered to be an expense and recorded in the income statement (Deloitte, 2016). If the asset which is impaired has been revalued as per IAS 16 or IAS 38, then impairment loss will be recognized as a revaluation decline and entered in other comprehensive income, decreasing the revaluation surplus for such an asset.

When a CGU or a series of CGUs to which allotment of goodwill is made, is examined for impairment, then any impairment loss is first assigned to reduce goodwill’s carrying amount. If any loss is still remaining then it is assigned to other assets of CGU pro-rata based on the each asset’s carrying amount in the CGU. Nonetheless, during this process, an asset’s carrying amount will in no case be decreased below the greater of its personal recoverable amount and zero (Mirza, Orrell and Holt, 2010). 

Internal and external information sources may signify that an impairment loss recorded for a fixed asset, may have reduced or no longer exists. If, due to this, the estimates employed to calculate an asset’s recoverable amount have enhanced since the previously recognized impairment loss, then in such cases, the impairment loss which was earlier recorded for the asset, apart from goodwill, gets annulled.

The standard necessitates broad disclosures in relation to the impairment examinations conducted and the damages identified. These disclosures are especially wide for goodwill as compared to the impairment of other assets (Ernst & Young, 2012). The main disclosure requisites include – a) the amount of damages identified and overturned and the circumstances and events that were the reason for the same; b) the quantum of goodwill per group of CGUs or per CGU; c) the technique of valuation used: VIU or FVLCS and the approached to determine the relevant assumptions; d) the main assumptions used in the valuation of assets, encompassing the discount and growth rate applied; and e) a sensitivity study, when a practically probably alteration in a major postulation is likely to lead to a damage, comprising of the ‘headroom’ while calculating damage and the extent to which the postulation will require changing so that it leads to an impairment (Ernst & Young, 2012).

In conclusion, it can be stated that impairments are an important component of the financial reporting activity, irrespective of whether the company is following IFRS for the first time. The impairment assessment procedure might be time consuming and complex. It is critical that the process authorities, usually the finance department, plan early and gain access to the correct competencies like forecasting and business modeling. Choosing the most suitable approach, assumptions and model may rely on possessing adequate knowledge of company’s financial and operational prospects and the sector in which it operates. Hence, the top management must be included to provide input, support and review the outcomes.

This part of the report attempts to determine whether or not Crossbow Ltd. is incurring any impairment loss. It entails calculating impairment loss if any and passing the relevant journal entries for the same.

Being Impairment Loss Incurred:

Date

Entry

Dr. (in $)

Cr. (in $)

30th June 2015

Impairment Loss A/c                      

51,000

 

 

              To Crossbow Ltd

 

51,000

Since, the carrying amount of the company’s assets is higher than the recoverable amount, hence, an impairment expense amounting to the variation is recorded in the period.

Working Note –

Calculation of Impairment Loss Amount –

Carrying Amount of all Assets of the Company - 

Asset

Amount (in $)

Land

171,000

Brand ‘Crossbow Shoes’

160,000

Shoe Factory

700,000

Machinery for manufacturing shoes

400,000

Goodwill on acquisition of competing companies

  40,000

Total

1,471,000

 Recoverable amount - $1,420,000 (Given)

Impairment Loss = Carrying amount – Recoverable amount

                            = 1,471,000 – 1,420,000

                            = $51,000

Being Impairment Loss Recognized in the Profit & Loss Account:

Date

Entry

Dr. (in $)

Cr. (in $)

30th June 2015

Profit & Loss A/c                     

51,000

 

 

              To Impairment Loss A/c

 

51,000

Thus, from the calculation, it can be concluded that Crossbow Ltd. has had an impairment loss of $80,000 which is debited to the P&L account as an expense.

References

Dagwell, R., Wines, G. and Lambert, C., 2011. Corporate Accounting in Australia. Pearson Higher Education AU.

Deloitte. 2016. IAS 36 – Impairment of Assets. [Online]. Available through: . [Accessed on 12th September 2016].

Ernst & Young LLP. 2015. International GAAP 2016: Generally Accepted Accounting Principles under International Financial Reporting Standards. John Wiley & Sons.

Ernst & Young. 2012. Impairment accounting – the basics of IAS 36 Impairment of Assets. [Online]. Available through: . [Accessed on 12th September 2016].

Georgiades, G., 2008. GAAP Financial Statement Disclosures Manual 2008-2009. CCH.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in Financial Accounting. Pearson Higher Education AU.

Mirza, A. A., Orrell, M. and Holt, G., 2010. Wiley IFRS: Practical Implementation Guide and Workbook. John Wiley & Sons.

Stickney, P. C., Weil, L. R., Schipper, K. and Francis, J., 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.

 

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