Audit Quality Accounting And Finance: Importance, Impairment Test, And Asset Classification

Categories of Assets in Corporations

Discuss about the Audit Quality Accounting and Finance.

In the world of competitive business world, the multinational firms that constitutes of both profit as well as non-profit corporations possess assets of different categories. The assets can be further segregated into diverse categories. As correctly mentioned by Liu et al. (2016), corporations utilize or else develop specific assets in a bid to carry out their daily business functions. Specifically, these assets are referred to as the current assets of a corporation. On the contrary, the fixed assets are put to use for attainment of long term objectives of the corporation. While corporations possess mainly two different categories of assets, namely, the fixed assets and the current assets, the firms also engage in holding different intellectual properties such as the trademarks together with copyrights (Bevis 2013). Furthermore, the assets developed owing to merger or else acquisition or else reputation, goodwill or else brand image can be regarded as intellectual property of a business concern.

According to Evangelinos et al. (2015), business concerns cannot utilize intellectual properties directly for the purpose of generation of revenue of the organization. Nevertheless, different kind of assets might perhaps assist in augmenting the level of profit of Longreach Ltd after effectual indirect utilization of the assets. Accordingly, this particular categories of properties are pronounced as intangible assets as these assets are essentially physical and there exists no probability to express the same in pecuniary terms. Therefore, these categories of assets can be registered in the books of accounts of the corporation Longreach Limited based on the total amount expended to acquire the same.

As rightly put forward by Bepari and Mollik (2015), there has been sharp rise in the overall worth of the real assets owing to variations in the present market set-up. Therefore, the Longreach Limited has the need to utilize the particular impairment test in case if the real worth of particular fixed assets are lower in comparison to the book values. Additionally, the impairment tests can also aid the management of the organization Longreach Limited to equate book values of the assets with the future market value by arranging impairment accounts. As such, in this regard, Bond et al. (2016) mentioned that arrangement of impairment accounts permit a specific business concern to lessen the overall book value for comparing with the particular impairment account. Thus, the lessened value of the asset can lead to impairment loss for the corporation Longreach Limited. In the case of the Longreach Limited, the company makes use of different assets for uninterrupted production. However, the production capacity of the business concern might decline in the future due to the utilization of these assets. Camodeca et al. (2013) advocated that the arrival of diverse contemporary equipment as well as technologies lead to lower market value of old fashioned instruments. Consequently, these instruments become archaic in the transnational corporations to cope up with the rising level of competition.

It can be witnessed that the worth of land has been sharply rising in the present business set up. Nevertheless, Glaum et al. (2015) argued that the worth of land has the inclination to decline in different situations owing to the development of different community centre and new towns, communities as well as over population. However, with the constant alterations in the tastes as well as preferences of different consumers as well as the increasing popularity of diverse advanced technologies, the management of the corporation Longreach Limited might probably experience declined values related to the patent rights as well as trademarks. On the other hand, the asset “goodwill” can be regarded as the acquirement value of other business concerns. Nonetheless, if the value of the acquired assets decrease in the market, then the overall value of goodwill cease to decline (Kabir and Rahman 2015).

Impairment Test for Fixed Assets

Besides this, the management of the corporation Longreach Limited have the need to divulge financial declarations in a bid to fulfil the needs of different related stakeholders. However, from the perspective of the AASB as well as the government directives, the management of the corporation Longreach Limited requires to illustrate the fair asset as well as liability values. As such, this kind of disclosure can ensure the interests of the stakeholders of the corporation in the long-term (Liu et al. 2016). It can be supposed that corporation Longreach Limited has purchased overpriced equipment before ten years. Nevertheless, in the current state of affairs, the worth of the machinery has decreased considerably, that is less than half of the buying value. The primary cause behind such decrease is essentially the advent of particular advanced technologies that are available in the market at a lesser price (Glaum et al. 2015). The management of the corporation Longreach Limited can illustrate the buying price of the equipment in the financial declarations of the corporation. However, in case if the company presents overvalued amounts as the worth of the equipment of the corporation, then this will lead to violation of the practices of fair accounting as per the stipulations of AASB. 

Furthermore, breaches in the best business practice of fair value accounting can lead to negative influence on the overall decision making process of the stakeholders. Thus, AASB has introduced the principles of impairment for protecting the rights of the stakeholders. AASB clearly presents instructions to different Australian corporations to cultivate asset impairment test and arrange financial declarations (Glaum et al. 2015).

As rightly put forward by Liu et al. (2016), the application of impairment test is made at the time when the carrying amount of the asset is greater as compared to the recoverable amount. However, the former amount can be placed essentially in the books of asset accounts of the business concern. However, from the standpoint of business, the carrying amount of the asset can be regarded as the buying price as well as the asset worth after depreciation (Bevis 2013).

Particularly, there are two different classification for recoverable amount of a particular asset. However, the different categories of recoverable amount contains the value in use as well as the actual asset worth. The management of the corporation Longreach Limited can enumerate the actual worth of the asset after deduction of the expenditure cost from particularly the recoverable amount of the asset. As rightly put forward by Bond et al. (2016), the estimated flow of cash that is to be recognized in the upcoming period from the asset can be referred to as the value in utilization. As per the standard IAS 36, it is reasonable to adopt the higher amount among the two different amounts in case if both the amounts are available.

As per the conditions stipulated under AASB 136, the amount of loss generated from the impairment can be placed under the debit in comparison to particular asset to lessen the entire book value and maintaining the amount of asset accounting the same. Consequently, the amount of loss realised can be adjusted with the non-operating loss mentioned under the income declaration. Nevertheless, in case if the company Longreach Limited maintains an account for registering the revaluation surplus, then the account for impairment loss can be credited against the account of revaluation surplus (Khokan Bepari et al. 2014). Accordingly, this reduces the entire worth of the equity of the shareholders’ of the business concern.

Khokan Bepari et al. (2014) advocated that goodwill of an organization can be registered under a particular class of assets that assist in increasing the generation cash potential of the business concern. However, the corporation Longreach Limited can adjust the entire account of the impairment loss in a different manner by correcting the account for goodwill. However, the company Longreach Limited could also negotiate the process of cash generation accounts founded on the book value of the specific assets.

References

Bepari, M.K. and Mollik, A.T., 2015. Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing. Journal of Applied Accounting Research, 16(2), pp.196-220.

Bevis, H.W., 2013. Corporate Financial Accounting in a Competitive Economy (RLE Accounting). Routledge.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136.

Camodeca, R., Almici, A. and Bernardi, M., 2013. Goodwill impairment testing under IFRS before and after the financial crisis: evidence from the UK large listed companies. Problems and Perspectives in Management, 11(3), pp.17-23.

Evangelinos, K., Nikolaou, I. and Leal Filho, W., 2015. The effects of climate change policy on the business community: a corporate environmental accounting perspective. Corporate Social Responsibility and Environmental Management, 22(5), pp.257-270.

Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill Impairment: International Evidence. Available at SSRN 2608425.

Kabir, H. and Rahman, A.R., 2015. The Role of Corporate Governance in Accounting Discretion: The Case of Goodwill Impairment in Australia. Available at SSRN 2630581.

Khokan Bepari, M., F. Rahman, S. and Taher Mollik, A., 2014. Firms’ compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics. Journal of Accounting & Organizational Change, 10(1), pp.116-149.

Liu, Y., Li, X., Zeng, H. and An, Y., 2016. Political connections, auditor choice and corporate accounting transparency: evidence from private sector firms in China. Accounting & Finance.