Discuss about the Corporate Accounting and Impairment of Assets.
This report is made for Longreach Ltd management to give them an idea about the implementation of impairment test of assets. The company has decided to undergo a practice of impairment testing of their assets as per the Australian Accounting Standard Board standard no 136 on 30the June 2014. As thy are new applicant of this standard, they are keen to understand the process of impairment testing of different assets along with the process of impairment testing to be done to reach the real value of assets with the present context and thus to evaluate the company valuation of tangible and intangible assets including goodwill of the company. As I was approached to guide them regarding this subject, I will highlight different aspects of impairment test of assets including the objective of impairment test of assets, the implication of goodwill in the practice of impairment of assets, and the basic steps to be followed for impairment testing of assets. This report will highlight the above issues to make the management of Longreach Ltd understand the implication of this activity to comply with AASB 136 which is being endorsed by the Corporation Act 2001 of Australia (Aasb, 2009).
Main purpose of this application is endorsed by AASB Standard 136. This is as per guideline fixed by Section 334 of Corporation Act 2001. This standard has been placed for further discussion by the critiques on 15th July 2004. This discussion is meant for highlighting the shortcomings and positivity of the application enforced through this standard. Further this standard is being enforced finally since 1st July 2007 for the corporate entities after the finalization. The enhanced version of impairment testing standard vide Standard 136 had replaced erstwhile AASB standard 116 (Austlii, 2001).
Main objective of AASB 136 is for implementation of standardized platform which is logical for the application of impairment valuation of assets. This standard is being implemented for the impact on financial statements of the corporate to ensure International Accounting Standard 36. To make the convergence effort with IASB, AASB had implemented several accounting standards for the globalization of their accounting standard. As financial statements of the company is projecting the financial performance, it is obligatory of the Board of Directors to implement several standards to make the stakeholders understand the actual financial position of the company. The annual financial reporting of the company is the main resource through which stakeholders can understand the actual financial position of the company. This is instrumental for different stakeholders to make future decision. Impairment testing of assets can find the true value of the assets in real time factor. The main purpose of impairment testing of assets is to reach the present value of asset by considering several factors which are instrumental for this practice. It is mandatory for the Board of Directors to make proper disclosure of impairment testing of assets with certification along with subsequent certification by auditors. This is mandatory for business identities that are practicing the preparation of financial report as per specification made in Part 2M.3 of Corporation Act of 2001 for General Purpose Financial Report or GPFR (Aasb, 2015).
To identify goodwill in the accounting procedure of any entity, it is mainly distinguished as intangible assets. This asset is there to derive the value of the entity not in monetary standard neither it can add value to the cash flow of the entity. The impact of goodwill in respect of impairment of assets is being discussed in AASB Standard 136 through its paragraphs with nos. 80 to 84 (Aasb, 2011).
Paragraph 80 of the standard 136 had emphasized on the basic fact of consideration that goodwill of any business should be treated as per the guideline which directs the allocation of cash generating units of any business entity. It is also defined that valuation of goodwill as allocated to any business organization is determinant for representation of minimum valuation within the business entity as considered by internal assessment by the management of the entity. Proper guideline to this aspect is being directed through AASB 8 which had made restriction of the value of goodwill within the value of operating segment of the entity (Aasb, 2011).
Paragraph 81 of AASB Standard 136 is there to define the process of recognition of goodwill along with clarifying the treatment of goodwill as an asset which is with the nature of non-recognizable with non-identifiable so far its existence for material value is concerned. This paragraph is also emphasizing on the fact that goodwill can not dictate feature of cash flow for any asset of the business entity. On the other hand it has the ability to add value for different units which are instrumental for generation of cash of the specific business entity (Aasb, 2007).
Paragraphs 82 to 84 are providing direction for the business entities to be followed for ensuring proper evaluation of impairment testing of goodwill as per decision made by the management along with specific allocation of the same (Aasb, 2015).
As per Standard 136 of AASB, six probable steps are identified to apply impairment testing of assets. They are:
Conclusion
The concept of impairment testing of assets is being considered to make proper evaluation of assets with derivation of present value in comparison to fair value of assets. This concept had been endorsed by different globally acclaimed accounting standards to provide better level of financial information to the stakeholders enabling them to decide judiciously. Logreach Ltd, being a new entity to start this practice in their financial practices, had asked for the suggestions for proper implementation of this standard and the above discussion will give proper guideline form them so far its application is concerned.
It is found in the case study of Crossbow Ltd that this business entity has opted for practicing of impairment test of their assets to arrive at the present value of their assets. This practice is being prescribed to understand the real value of the company so far its assets are concerned in the changed scenario of business decrement. It is being observed that the company is facing business loss due to change of customer’s fascination towards online platform rather that going to the Crossbow outlets for purchase of goods. It is also observed that the decrement of business is also affected due to stiff global competition. In this scenario the company had opted for impairment testing of assets which had found impairment loss of $ 260,000 as the fair value of assets, booked in the accounts was $1,680,000 had been impaired to $1,420,000 which was resulted as such loss as per the experts deployed by the company and with the proper application of AASB standard 136. This result is not specific asset-wise; instead the same had been arrived at by generalized practice as prescribed in AASB standard 136. The respective journal entry related to booking of this impairment loss is furnished below:
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Journal Entries- Impairment loss of CrossBow Ltd as per as on 30.06.2015 |
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|
Date |
Particulars |
amount |
amount |
|
30.06.2015 |
Impairment loss of assets A/c debit |
$260,000 |
|
|
Accumulated Impairment Loss A/c Credit |
$260,000 |
||
|
Evaluation done as per impairment testing of Crossbow Ltd as on 30.06.2015 |
It is also observed that while the company had sold land, the same had incurred loss of $29,000 which had been arrived at by considering the fair value of land as $ 200,000 though the consolidated financial statement of the company as on 30.06.2015 and the recovered amount from sales proceeds of $ 171,000 of the land which had incurred loss of $ 29,000. This is to be booked in the books of accounts of Crossbow Ltd as below:
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Journal Entries – loss from sale of land – CrossBow Ltd as on 30.06.2015 |
|||
|
30.06.2015 |
Accumulated Impairment Loss A/c Debit |
$29,000 |
|
|
Land A/c Credit |
$29,000 |
||
|
Being the loss on land booked through sale |
With the above journal, the generalized Accumulated Impairment Loss A/c is being reduced by $ 29,000 through the actual sale of land with subsequent loss incurred by the company.
References:
Aasb, 2007. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed 18 January 2017].
Aasb, 2009. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf [Accessed 10 January 2017].
Aasb, 2011. Fair Value Measurement. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf [Accessed 18 January 2017].
Aasb, 2011. Investments in Associates and Joint Ventures. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-11.pdf [Accessed 18 January 2017].
Aasb, 2015. Presentation of Financial Statements. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 18 January 2017].
Aasb, 2015. Presentation of Financial Statements. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 18 January 2017].
Austlii, 2001. CORPORATIONS ACT 2001 – SECT 334. [Online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s334.html [Accessed 18 January 2017].
Ey, 2008. Impairment accounting – the basics of IAS 36 Impairment of Assets. [Online] Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed 18 January 2017].
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