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Reversal of Composition on Audit Quality

Question:

Discuss about the Reversal of Composition on Audit Quality.

Answer:

Introduction

Chang and Yen (2015) has stressed on the fact that one of the essential principles of accounting looks to address the fact that there is no need of assets that have high valuations in the financial reports. In this way reversal of an impairment loss of goodwill is explained to be a scenario, within which the companies would disclose any of their assets to be valuable, which had been recorded as a loss of impairment in some earlier time period.

Sun and Zhang (2017) explained that if the cost of holding the asset is higher than the true market value, then in this scenario, the asset is considered to be impaired. In the scenario, when there is a reversal of the loss of impairment, the asset is looked upon to be valuable. Therefore, the asset is not considered to be a profit burden. During the point of identifying the reversal of impairment, the carrying value that is associated to the asset is increased to the amount that is newly recoverable. Subsequently, the value may not be higher than the actual value or the carrying amount after depreciation because of the fact that then it would mean that previously, there has not been any recognition of impairment. The reversal of the impairment loss is considered as the income that is observed in the income statement of a firm. Schatt et al. (2016) explained that if the carrying amount of the assets are at an amount that is re-valued, and earlier there has not been any loss of impairment revaluation write-off, it is considered to be an impairment loss reversal.

“Paragraph 124 and 125 found in AASB 136” has assessed the impairment loss reversal in accordance to goodwill. “Paragraph 109 of AASB 136” has addressed that all the essentials for impairment loss reversal are created for the purpose of any assets in the previous time frame and for a cash generating unit. The loss of impairment can be reversed back mainly for the assets that includes goodwill, assets that are individual and cash generating units. Aasb.gov.au. (2018), in one of their paragraph has cited that the loss that is created from impairment of the goodwill does not require to be reversed in the coming year. It is mainly because of the fact that goodwill is considered to be an intangible asset in accordance to AASB 136. This standard permits the posting of the goodwill impairment reversals from the previous time period in circumstances when there is a value increase that takes place mainly because of the reversal of any external events that was not forecasted which leads to the realisation of the actual impairment (Aasb.gov.au. 2018). AASB 138 which is related to the intangible assets disallows the recognition of the goodwill that is created internally within the financial reports and this is explained clearly in “AASB 136 in Paragraph 125”. The key reason for the same has been due to the fact that any kind of increase goodwill recoverable value in the coming years after realisation of the goodwill impairment loss that may increase the goodwill created internally in place of realisation of the loss reversal of impairment for the goodwill that is attained (Cpaaustralia.com.au. 2018).

It becomes essential to discover the actual item value within the statement of the balance sheet of an organization. Therefore, it can be stated that all companies needs to undertake assessment of impairment, in case on the date of the reporting of the assessment that the asset recoverable value is lower than the carrying value (Cao, Shaari and Donnelly 2018). On the other hand, it is essential to consider the assessment of the goodwill impairment on a yearly basis. In order to undertake the assessment for goodwill impairment, the goodwill for the business can have an impact on the impairment analysis with regards to the cash generating units, which comprises of several assets that is assists in the cash creation for a company. The goodwill of the company is amalgamated with the cash creating units in order to bring out the profits from the amalgamation of the two operations. In this scenario the yearly assessment of the impairment for the cash creating units with which the goodwill is amalgamated needs to be carried out at the time of constructing the report (Lobo et al. 2017).

Shaari, Cao and Donnelly (2017) addressed that within the approach of examining impairment, the cash-generating unit would be examined with respect to impairment by not adding in the goodwill that is distributed with the operations of the business. An individual assessment can be undertaken in order to discover the actual values of the assets that are related to the business enterprise. By taking assistance of this analysis, an understanding can be created with respect to whether the company has been able to establish value with the assistance of goodwill acquisition during the time of their operations. AASB 136, in scenarios analysis of impairment asks the companies to compare with the inflow cash value of the previous time period with the current cash inflow.

In case goodwill is discovered within the activities of the organization the amount that is recoverable, which is associated to the intangible assets of impairment analysis would rely on the company value or the value of the equity. The construction of the recoverable amount on basis of the company value has to be compared with the capital that has been invested in the company. In case of the value of the equity, the comparison is undertaken on the basis of the shareholder’s equity. The recoverable amount discovered from the company value is found to be lesser than the capital invested in the company, then the analysis of impairment would be undertaken in order to lower the goodwill amount to the amount that is computed. Subsequently, the asset carrying amount is not decreased beneath the highest “fair value subtracted by the Value-in-use”. 

Conclusion

In order to have an understanding of whether reversal of impairment loss is possible, the companies have to look into the sources of information that has been same with respect to the real loss of impairment. The loss reversal of impairment is possible, if the projections are altered in order to determine the asset recoverable value during the time of understanding the previous loss on impairment. In these circumstances, the asset carrying value has to be raised to the amount that is recoverable and this increase can be looked upon to the loss impairment reversal efficiently. There have been observations that the reversal of loss impairment may require certain alterations with respect to the asset amortization for the future and therefore it can be said that goodwill impairment loss cannot be reversed by abiding with the Standards of AASB 136.

Reference List

Aasb.gov.au. (2018). [online] Available at: http://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 22 May 2018].

Cao, T., Shaari, H. and Donnelly, R., 2018. Impairment reversals: unbiased reporting or earnings management. International Journal of Accounting & Information Management, 26(2), pp.245-271.

Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter? Evidence from China. International Research Journal of Applied Finance, 6(4), pp.197-222.

Cpaaustralia.com.au. (2018). [online] Available at: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/reporting-ifrsfactsheet-impairment-of-assets.pdf?la=en [Accessed 22 May 2018].

Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., 2017. The effect of joint auditor pair composition on audit quality: Evidence from impairment tests. Contemporary Accounting Research, 34(1), pp.118-153.

Schatt, A., Doukakis, L., Bessieux-Ollier, C. and Walliser, E., 2016. Do goodwill impairments by European firms provide useful information to investors?. Accounting in Europe, 13(3), pp.307-327.

Shaari, H., Cao, T. and Donnelly, R., 2017. Reversals of impairment charges under IAS 36: evidence from Malaysia. International Journal of Disclosure and Governance, 14(3), pp.224-240.

Sun, L. and Zhang, J.H., 2017. Goodwill impairment loss and bond credit rating. International Journal of Accounting & Information Management, 25(1), pp.2-20.

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