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You are required to prepare a report about your findings from the literature research, and discuss how it is useful for financial reporting in Australian companies.

Accounting for Asset Impairment: A Test for IFRS Compliance Across Europe

The report herein has studied the revaluation and impairment testing of non-current assets.  The report has found the information about the topic by reviewing two articles that have information about the topic. The articles that have been used for the study are one, “International accounting regulation and IFRS implementation in Europe and beyond–experiences with first-time adoption in Europe” written by Hoogendoorn, M. in 2006 and published by Taylor & Francis publishers. The second article used in the study is “The use of fair value in IFRS” by Cairns D. in 2012 and published by Routledge.


According to the first article written by Hoogendoorn (2006, p. 23), the impairment is a principle in the field of accounting that give details on the permanent reduction of value of assets in a given company and the process normally affect the fixed or the non-current assets (Barth, & Clinch, 2018, p. 200). The second article define revaluation as the process where the carrying value of the fixed assets are decreased or increased when some major changes occur in the fair market value of those non-current assets (Barker, 2010, p. 158).
The first article by Hoogendoorn has given the highlights about impairment testing and its importance to the accounting field (Cotter & Richardson, 2013, p. 436). The article suggests that when conducting impairment testing the cash flow, the total profit or other value that specific asset is expected to generate is compared periodically by the book value of the same asset. According to Høegh-Krohn, & Knivsflå (2010, p. 245) who also quoted the article says that impairment testing is measuring whether the items in the balance sheet are worth the amount quoted in the balance sheet document. The article also continues to state that impairment testing can be used in tax and audit or commercial account (Lhaopadchan, 2010, p. 120). The importance of impairment testing is that it helps the investors know the current performance and the value of assets in the company they want to put their investments.


The second article studied revaluation of fixed assets. Revaluation of non-current assets is the process of decreasing or increasing the carrying value of fixed assets when the major changes have occurred in the fair market value of the fixed assets in question (Christensen & Nikolaev, 2013, p. 740). Amiraslani, Iatridis & Pope (2013, p. 23) argue in the article that the main purpose of revaluation of fixed assets is to indicate clearly the fair market value of the non-current assets in question. The investors and creditors can then use the information to determine the value of the assets of the business they are interested to invest in. Another importance of revaluation of fixed assets is that the finding may help the management decide to invest in other businesses or not (Seetharaman et al, 2014, p. 340). The two articles were chosen because of the following main reasons; one, they answer the topic the group was given to discus. The topic for the discussion is “revaluation and impairment testing of non-current assets”. The first article has talked about both the revaluation and impairment, however, it has majorly discussed the impairment testing of fixed assets. The second article has mainly discussed the revaluation of fixed assets and its importance in business world.  Impairment testing of non-current assets has also been mentioned in the article. The second reason why the group decided to use the two articles for the discussion is that the articles have vividly explained the concepts revaluation of non-current assets and Impairment testing of fixed assets.

Reporting Financial Performance


The group wanted detailed information about the topic of discussion so that they could come out with very detailed findings about the topic and these articles just gave that to the group. The third reason why the two articles were chosen for the discussion is that they were written in not more than fifteen years. Business journals are important for research if they are current because they tackle current issues. The world of business has changed hence the 1990s materials have little use in current business studies. The last reason why the articles were considered for the study is that they comply with all the instructions given by the lecturer on how to choose the articles. The main purpose of the two studies was to explain the concept of “revaluation and impairment testing of non-current assets and the relationship between revaluation of fixed assets and impairment testing of non-current assets.” Therefore, the research questions the two scholars used to reach their findings, explore and investigate further the topic include;


1. What is impairment testing?

2. What are non-current assets?

3. What are the importance of impairment testing of non-current assets?

4. What is the relationship between revaluation of fixed assets and impairment testing of non-current assets? Both articles have found out that revaluation of fixed assets is important when the investors what to invest in any company. The articles have agreed that, before the investors venture into any business, they must first look and the fair market value of the fixed assets of that specific business. The articles are also similar in the findings that the business management of a certain business find the information from revaluation of the fixed assets valuable because they use the data to decide on whether to join another business or not (Nichols & Buerger, 2012, p. 160). Even though the two studies look alike, they differ in one thing. The first article argues that revaluation and impairment testing are different processes in business while the other argues that revaluation and impairment testing are the same but with a very small difference. Hoogendoorn in his article states that revaluation and impairment are different processes and should be treated as such.  Cairns D on the other hand argues that the slight difference between revaluation and impairment testing is that revaluation can be made either to decrease the market value or increase the market value of the asset while impairment testing fall in between the two processes of revaluation (Emmanuel-Iatridis & Kilirgiotis, 2012, p. 5). The findings of the second article are very important and have many implications on different stakeholders. The report herein has looked at the implication of the findings to the following stakeholders; first accountants in Australian companies- by reading the importance of impairment testing the accountants can communicate the fate of the Australian companies to its managements. The second implication is that the accountants can know how to analyse financial status of the Australian companies through impairment testing. The accounting regulators can come up with new impairment laws through studying the findings of the first article. They can also know which company is no complying by studying impairment testing results. The external stakeholders, in this case, the investors- the impairment results can warn them if the company they want to invest in is falling. The findings can also help the investors to know how to assess the company management and make decision. The second article also has different implications on stakeholders who include; one, the accountants in Australia. The findings will help the accountants understand how to calculate the value of assets in fair market value. The findings will also help the accountants to come up with a well-balanced balance sheet document which show the value of fixed assets. Second accounting regulators- the findings will help the regulators to come up with new laws of revaluations because the study of the article is recent and about current affairs in business.  The findings can also help the regulators to come up with right decisions when playing intermediary roles when the two businesses are merging. Third, investors-the findings of the study can help the investor predict if the value of the fixed assets of the company he/she wants to invest in will depreciate or appreciate. Another implication is that the investors can know the fate of the company they want to invest in by looking at the balance sheet document of the firm. 

Conclusion

The two articles that were chosen by the group have helped the group members to understand the topic. The articles have also helped the group to understand the relationship between revaluation of fixed assets and the impairing of the non-current assets. Through the articles the group members have learnt that that impairment testing is measuring whether the items in the balance sheet is worth the amount quoted in the balance sheet document. Revaluation on the other hand is the process of decreasing or increasing the carrying value of fixed assets when the major changes have occurred in the fair market value of the fixed assets in question.

References

Amiraslani, H., Iatridis, G.E. and Pope, P.F., (2013). Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR). Pp. 23

Barker, R., (2010). Reporting financial performance. Accounting horizons, 18(2), pp.157-172.

Barth, M.E. and Clinch, G., (2018). Revalued financial, tangible, and intangible assets: Associations with share prices and non-market-based value estimates. Journal of Accounting Research, 36, pp.199-233

Cairns, D., (2012). The use of fair value in IFRS. In The Routledge Companion to Fair Value and Financial Reporting (pp. 25-39). Routledge.

Christensen, H.B. and Nikolaev, V.V., (2013). Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.

Cotter, J. and Richardson, S., (2013). Reliability of asset revaluations: The impact of appraiser independence. Review of Accounting Studies, 7(4), pp.435-457.

Emmanuel Iatridis, G. and Kilirgiotis, G., 2012. Incentives for fixed asset revaluations: the UK evidence. Journal of applied accounting research, 13(1), pp.5-20.

Høegh-Krohn, N.E.J. and Knivsflå, K.H., (2010). Accounting for Intangible Assets in Scandinavia, the UK, the US, and by the IASC: Challenges and a Solution. The International Journal of Accounting, 35(2), pp.243-265

Hoogendoorn, M., 2006. International accounting regulation and IFRS implementation in Europe and beyond–experiences with first-time adoption in Europe. Accounting in Europe, 3(1), pp.23-26.

Lhaopadchan, S., (2010). Fair value accounting and intangible assets: Goodwill impairment and managerial choice. Journal of Financial Regulation and Compliance, 18(2), pp.120-130.

Nichols, L.M. and Buerger, K.H., 2012. An investigation of the effect of valuation alternatives for fixed assets on the decisions of statement users in the United States and Germany. Journal of International Accounting, Auditing and Taxation, 11(2), pp.155-163.

Seetharaman, A., Sreenivasan, J., Sudha, R. and Ya Yee, T., (2014). Managing impairment of goodwill. Journal of Intellectual Capital, 7(3), pp.338-353.

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[Accessed 13 July 2024].

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