ACC204 Introduction To Financial Accounting

The report has been prepared to identify and evaluate the various concept of impairment accounting such as recoverable amount, value in use, fair value less cost of disposal, etc. this report mainly focuses on their treatment and the process to reach over the conclusion.

Impairment accounting is a process in which an assets book value exceeds than the recoverable cost of the business. Impairment of asset shows about the diminishing quality of assets, the total strength amount of the asset and the value of an asset. The impairment process is done by the companies on their assets on periodic basis to measure the worth of the assets and record them in the books of the company (Brandt and Kavajecz, 2004). It is an accounting principle which describes about the permanent reduction in the assets value of a company which generally is a fixed asset. Normally, the long term assets, goodwill and accounts receivables value are written down because the carrying value of these assets have a longer period of time for the purpose of investment.

AASB 136 explains that process of impairment accounting in an organization. It explains it is crucial for each business to evaluate total worth of the assets so that a better treatment could be done and fair value about the business could be presented among the shareholders and other stakeholders of the business (AASB, 2018).

AASB 136 and impairment principles explain that an asset must not be carried by the business more than the recoverable amount of the assets. In order to meet these objectives and goal of impairment principles, the organization is required to test all the assets which fall under the scope of impairment (Kieso, Weygandt & Warfield, 2010). The impairment test must be done by the business on the long term assets, goodwill and accounts receivables value  when the impairment exist indicates about it or at least periodically on the assets which has indefinite useful lives such as goodwill or intangible assets.

AASB 136 standards explains the recoverable amount as the asset’s higher amount or the cash generating units (CGU) fair value out of which the cost to sell and the value in use of the assets is deducted. The standard further explains that it is not necessary to get the value of cost of sale and the value in use of an assets and thus if any of those asset exceed from the carrying amount of the asset, the asset is not considered as impairment asset. However, an asset’s cost of sales deducted from their fair value could be identified it the assets are not traded in the active market (Hu, Percy and Yao, 2015). However, it becomes tough for the entity to recognize the fair value of such assets and the amount which other parties willing to pay for that asset is recognized as the recoverable amount of that asset.

The recoverable amount is calculated for an individual asset. In case, the asset does not generate any cash inflows which is hugely depend on the other assets. In such cases, the recoverable amount of the asset is determined on the basis of CGU that the asset belongs to:

• The cost of sell deducted from the fair value of the assets is higher than the carrying amount of the asset
• Or the asset’s value in use could be measured near to the cost of sell deducted from the fair value (AASB, 2018).  

Value in use describes the worth of an asset which is expected from an entity through deriving the asset in the market. The expectation in the possible fluctuations in the worth of the asset and future cash flows from that asset also brief the value in use of the asset. While evaluating the value in use of an asset, it is important for the entity to consider the time value of money which is represented in the risk free rate of return of that particular market. The price level in order to bear the uncertainty and fluctuations in the asset price of an organization is also measured while evaluating the value in use of the business (AASB, 2015). Other factors, such as liquidity, market participants would replicated the pricing of the future cash flows which could be used by the entity to reach over a conclusion about the value of assets of the business.

Further, in order to estimate the value of future cash flows (inflows and outflows) to be derived from continuing use of the assets and from the eventual disposal and it also applies the appropriate discount rate to those future cash flows of the business (Dagwell, Wines and Lambert, 2011).

In case, a business does not have a binding agreement in the market, but the asset of the company is traded in an active market than the cost of sell deducted from the fair value is the market price less the cost of disposal of the asset.  The fair value less cost of disposal is a term which is used in the impairment accounting to recognize the impaired cost of an asset. If an asset is not qualified enough and it is not traded in the active market than it becomes tough for the business to recognize the actual worth of the business and at that time, the disposal worth of the asset is calculated and deducted from the fair value of the asset to measure the impairment worth of the assets (Brigham and Ehrhardt, 2013). This makes it easier for the business to recognize the impairment price of an asset.

On the basis of the above study on various concept of impairment accounting such as recoverable amount, value in use, fair value less cost of disposal, etc. it has been found that these concepts are crucial for an entity to get the fair value of an asset. It offers the transparent and fair information to the shareholders of the company.

AASB 136. 2018. Impairment of Assets. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed on: 18 September 2018].

AASB, C. A. S. 2015. Investment Property. International Journal of Accounting, 25(4), 140.

Brandt, M.W. and Kavajecz, K.A., 2004. Price discovery in the US Treasury market: The impact of orderflow and liquidity on the yield curve. The Journal of Finance, Vol. 59, no. 6, pp.2623-2654.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory and practice. 4^th ed, USA: Engage Learning.

Dagwell, R., Wines, G., and Lambert, C. 2011. Corporate accounting in Australia. 2^nd, Australia: Pearson Higher Education AU.

Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

Kieso, D. E., Weygandt, J. J., and Warfield, T. D. 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley and Sons.