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Corporate Accounting & Reporting : High Competition And New Technology

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Question:

Describe about the Corporate Accounting & Reporting for High Competition and New Technology .

 

Answer:

Task A

IAS 36 Impairment of Assets, describes a number of factors, responsible for declining the value of assets such as wear and tear, high competition and new technology. Thus a reduction in a recoverable amount below the carrying value of an asset can be said impairment (Henderson and et.al. 2015). Impairment loss is measured by comparing the value of property with its recoverable amount (the highest amount that can be attained through sale of fixed assets.)

Present essay is based on the practical application of IAS 36 impairment. The relevant accounting standards have been discussed in the report for understanding the provisions which are to be followed while impairment of the asset. Analyses of different cases have been presented in which impairment is needed and where no impairment is required. The objective of the present essay is observing the nature of impairment loss and the discussing the disclosure to be made in books of accounts of an organisation in its reference.

The objective of AASB 136 which is equivalent to IAS 36 is to present the procedures to be applied by the entity for ensuring that the assets are not carried at a value more than its recoverable amount. The prescribed standard applies to the period after beginning on or after 1st January 2005. The standard applies to all the assets except inventories, deferred tax asset, financial assets, a non-current asset held for sale, investment property, insurance contract asset and natural assets which are related to agricultural activity.

IAS 36 “Impairment of Assets.”

The standard deals with the methodology which should be adopted by a company for examination of the requirement of impairment of assets. It also outlines the conditions of reporting and accounts for impairment of significant assets. Due to the recession, a large no. of entities has contemplated to write off, a few of their long-term assets. A sudden decline in fair value of an asset due to obsolescence can be said impairment (Mirza and et.al.., 2010). The signs of impairment are to be required to identify on reasonable intervals, i.e. on a yearly basis. The signs which are to be identified are; reduction in cash is generating a capacity of an asset through the sale or decline in value due to its usage.

IAS 36 mandates the requirement of evaluation that whether the signs of damage are present in any asset or not. Both external and internal resources are to be considered for the evaluation .of impairment. In case, the signs of impairment are not present even than intangible assets and goodwill are to be examined annually, but for fixed asset impairment test are carried out only if impairment exist (Bond and et.al., 2016).

The disclosures that are required to be made in the books of accounts related to impairment are the amount of damage identified and the reason for the same. Along with this, the quantum of goodwill in CGU or CGUs as the case may be is presented. In notes to account, the techniques used in the valuation of asset and approach for ascertaining the assumption is described. Assumptions that have been used in valuing the asset and the growth rate that has been applied are also required to be included in notes to accounts. In the case of probability alteration which leads to damage; a sensitivity study will b required to calculate the damage which leads to impairment of the asset (Manea, 2016.).

All the assets are to be valued at each reporting date to ascertain whether the impairment which was previously measured other than goodwill is in existence or not; the recoverable amount is recalculated in case the indication is present (Pearsons, 2014). A reversal of impairment loss is possible only if the base on which the recoverable amount was calculated has changed. In the case of an individual asset the increased carrying amount due to reversal cannot be more than carrying amount and thus no impairment loss is being recognised (Harris, and et.al. 2014). The reversal is immediately accounted in profit and loss account, and the asset is carried at revalued amount in books of account. The depreciation or amortisation of the asset is adjusted after the reversal so that the remaining value can be allocated on a systematic basis on remaining life of asset and same accounting policies can be applied on the amount.

Practical Implication

In case the recoverable amount is less than the carrying amount of asset, the difference between them is accounted as impairment. The recoverable amount of an asset is higher of “value in use” and “fair value less cost of sale”. Fair value less cost of sale means the amount after deducting the disposal cost of an asset and value in use refers the present value of projected cash flows and amount that is recovered in ultimate sale of asset when its functional life ends. If the asset is carried at historical cost, in that case, impairment loss is considered as an expense and accounted in profit and loss statement (Tsalavoutas et.al. 2014.). If the asset is revalued according to IAS 16 or IAS 38 the impairment loss will be accounted as a decline in revaluation and will be recognised as comprehensive income; will be reduced from revaluation surplus of that asset.

When a series of CGUs or a CGU to which goodwill is allotted, is examined for goodwill in that situation impairment loss is first adjusted against the amount of available goodwill (Georgiades, 2008). If still any loss remains that it is assigned on a pro-rata basis to other assets of CGU. In any case, the carrying amount of an asset will not be reduced below zero or its personal recoverable amount (Tsalavoutas and et.al., 2014.). If impairment loss which is recorded in books of accounts is no more in existence according to internal and external sources, the carrying value of the asset can be enhanced, and the impairment loss apart from goodwill gets annulled.

The practical issues related to the impairment testing includes assessment and reassessment of cash flows, determination of discount rates, reasonableness test of assumption, benchmarking and identification of impairment indicators. If net asset value is greater than market capitalization, than it gives arise to the requirement of impairment of asset. If the value in use (VIU) is greater than market capitalization than the assumption which has been taken for VIU may be challenging; therefore the projected cash flows may not be according to market and reasons should be determined behind it (Weil and et.al.,  2013.). An intangible asset such as goodwill can be tested at an earlier from the end date of financial statement with necessary amendments at the end of the year. It is necessary to disclose discounting rate and long-term growth rate with related assumptions while using cash flow models (Interpreting Financial Statement, 2014). These include all discounting and lending rates and cost of capital which are increasing according to the environment. No exemptions have been provided regarding disclosure requirement.

According to the analysis, it could be concluded that top management must be included in providing analysis as the treatment of impairment is complex in nature. It affects the carrying value of the asset; hence proper reconciliation of value ascertained should be done before finalisation of amounts (Schmidt P. and et.al. 2013).

 

Task B

Journal Entries in the books of Crossbow Ltd:

Date

Entry

Dr. (in $)

Cr. (in $)

30th June 2015

Impairment Loss A/c    Dr.                   

51,000

 
 

             To Crossbow Ltd

 

51,000          

This entry will be done for recognising impairment loss in the books of accounts of the company.

Date

Entry

Dr. (in $)

Cr. (in $)

30th June 2015

Profit & Loss A/c Dr.                   

51,000

 
 

             To Impairment Loss

 

51,000

This entry is for transferring impairment loss to profit and loss account.

In the present situation the carrying amount of assets of the company is higher than the recoverable amount; therefore an impairment loss due to variation has been recorded.

Working Notes

Asset

Amount (in $000)

Land

171

Brand ‘Crossbow Shoes.'

160

Shoe Factory

700

Machinery for manufacturing shoes

400

Goodwill on acquisition of competing companies

    4

Total

1471

Calculation of Impairment Loss:  

Carrying amount of asset as per working note                           $1471000

Recoverable amount according to available data                      $1420000

Impairment Loss (Carrying amount – Recoverable amount)   $51000

It can be concluded from the above calculation that an impairment loss of $51000 which is being debited to profit & loss account as an expense.

Conclusion

The present report depicts the situation which gives arise to impairment. The applicable standards IAS 36 has been included in the report for explaining the relevant disclosures and methods to be applied for ascertaining impairment loss of the asset. The second part of the report reflects the journal entries with proper working notes which make the explanation easier.

 

References

Books & Journal

Bond and et.al.b 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance.

Detzen, D. Stork genannt Wersborg, T. and Zülch, H., 2016. Impairment of Goodwill and Deferred Taxes Under IFRS. Australian Accounting Review. 26(3).Pp.301-311.

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

Harris, P. and et.al. 2014. Converting Financial Statements from US GAAP to IFRS. The CPA Journal. 84(1), P.20.

Henderson, S.and et.al. 2015. Issues in Financial Accounting. Pearson Higher Education AU.

Manea, M.D. 2016. Accounting policies and practices applicable for the impairment of assets that generate income other than cash flows. The Audit Financiar journal. Pp 14(139).

Mirza, A. and et.al. 2010. Wiley IFRS: Practical Implementation Guide and Workbook. John Wiley & Sons.

Persons, O., 2014. A principles-based approach to teaching International Financial Reporting Standards (IFRS). Journal of Instructional Pedagogies. 13, P.1.

Tsalavoutas, I.and et.al. 2014. Worldwide application of IFRS 3, IAS 36 and IAS 38, related disclosures, and determinants of non-compliance.

Weil, R.L. and et.al. 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Online

Interpreting Financial Statement. 2014. [Online]. Available through: < https://books.google.com.au/books?hl=en&lr=&id=7AdhBgAAQBAJ&oi=fnd&pg=PA129&dq=accounting+standard+on+impairment+of+asset >. [Accessed on 20th September 2016].

Schmidt P. and et.al. Compliance with IFRS 3- and IAS36-required disclosures across 17 European countries: company- and country-level determinants. 2013. [Online]. Available through: < https://publications.hse.ru/en/articles/84715458 >. [Accessed on 20th September 2016].

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