Corporate Accounting And Reporting For Accounts Entities Consisting

Impairment Loss (Its Nature and Disclosure)

Discuss about the Corporate Accounting and Reporting for Accounts Entities Consisting.

Impairment Loss (Its Nature and Disclosure)

The accounting entities consisting of profit and non- profit enterprises have various types of assets in their portfolio. The assets owned by the organizations are allocated into various divisions. According to Novotny-Farkas (2016), the assets, which are used for day-to-day activities for operations of the industry, are known as the current assets. The assets, which can be used for long- term process for the production function of an organization, are known fixed assets. Fixed assets can be used for various financial years in the near future.  The organizations also have plenty of other assets other than the current and fixed assets such as copyrights, trademarks, brand name, goodwill etc known as the intangible assets.  As these assets does not have any physical existence as they  cannot be touched, felt and are not measurable, so these assets cannot be used for creation of any revenue directly but is helps to improve the revenue and profit of the organization indirectly. In the books of account, these assets are treated with respect to the expense made to obtain these assets.

These intangible assets like the other forms of assets have the feature of depreciation of their original value with time. Thus impairment process is undertaken when the original value of the long-term assets fall below their actual book value. According to Stenheim and Madsen (2016) an impairment A/c is generated to compensate with the book value of the asset with the expected future value and the market rate of the asset. The book value of the asset is decreased to its actual value and the amount subtracted is adjusted in the Impairment A/c.  The value that is decreased from the asset is its loss in value and this loss is known as the Impairment Loss.

There are various reasons, which affect the changes in the value of assets. Some of the factors are common in most types of assets and there are others, which leads to a decrease in value of different assets. The reduction in the value of machines, equipments and tools depends on its production capacity and usage in the organization. The future production capacity of these assets decreases according to their use in the production process in the firm. The high market value of these machines also falls with technological advancements because of new machines and equipments, which are implemented in the business. Thus, the old machineries either lose their value or become extinct, as they have no use in the production function (Ramanna and Watts 2012). The only exemption of the asset, which increases its value with time, is land. But, in certain cases, the value of land also reduces due to transformation in the importance of the land due to development of new cities, shifting of renowned centers, rise in population etc. The implementation of new machineries and change in tastes and preferences of the consumers are factors, which lead to the fall in value of the patent rights and the trademark as the value of the machines also decrease with their introduction. The extra value that is added during the addition of a new enterprise is the goodwill. The value of goodwill for acquiring new assets decreases when the financial worth of the acquired asset fall.

Assets in Accounting Entities

In the present market scenario, the industries need to show their financial statements with accordance with the necessities of the stakeholders. The interest of the stakeholders over the firm depends upon person to person. According to their interests, the stakeholders evaluate the financial statements of the firm from various angles. A lot of interest is given to the interests of the stakeholders by the accounting board of standards and the government. The government and the accounting boards thus wants the organizations to listed and non listed with them to provide fair and true financial worth of the assets and liabilities of the firm (Goncharov, Riedl and Sellhorn 2014).

With the introduction of progressive machineries in an organization at a lower rate, the market financial worth of machinery becomes half of its original cost which was purchased five years earlier. If the organization shows the cost price of the machine in the financial statement, then it would over value the cost of its assets and thus will not mirror the fair and true financial worth of the organization. The investors interested in the asset valuation of the firm for investment purpose will consider this as an improved alternative for investment.

Thus, if the organizations do not provide the correct value of their assets, it would lead to wrong decision making on the part of the stakeholders, as they would take decisions based on the financial reports, which have been over-valued by the enterprise. The concept of impairment has been brought in by the accounting boards and the government to protect the stakeholder’s interest. The accounting standard boards and the government has instructed to impair the assets, whenever possible to create a proper financial report according to the guidelines and regulations provided by the accounting standards and the government (Renner 2013).

The impairment process is undertaken when the carrying amount of an asset increases more than its redeemable amount. The value that is recorded in the accounting books of the asset is known as the carrying amount. Carrying amount is also known as the accounting value of the assets too. This amount provides the purchase cost of the assets and the financial worth of the asset after depreciation via true depreciation technique.

In the words of Amiraslani, Iatridis and Pope (2013) there are two types of redeemable amounts, which can be found out for any given asset. The redeemable amount can be taken as the true value of the asset by an enterprise after subtracting the expenditures predicted to take place for the asset. The value in use of the asset is another type of redeemable amount.  Value in use refers to the net cash flow, which is estimated to be created from the asset in the near future. It is preferable to take the higher value of the two according to IAS 36 if both the amounts are available to the organization.

Impairment loss is evaluated by subtracting the recoverable amount of the asset from the asset from the carrying amount of the asset. The impairment loss is thus debited with the specific assets to decrease the book value of the asset and sustain the decreased value as the accounting value of the asset from thereafter. The impairment loss generated is adjusted with the Income Statement or the Profit and Loss A/c at the year-end. This loss is presented in the income statement as a non-operating loss. The impairment loss is credited against the Revaluation Surplus A/c if the organization has a Revaluation Surplus A/c. This process thus directly decreases the total shareholder’s equity amount (Penner, Kreuze and Langsam 2016).

Incase of Cash Generating Units, which includes goodwill coming from new assets acquired, the impairment loss is not adjusted unlike the matter discussed before. In case, the total amount of cash generating units require any impairment, then the impairment loss is computed according to the above method and it is initially adjusted with Goodwill A/c. After the adjustment with the Goodwill A/c, any balance that remains is accommodated with the assets in the cash generating units appropriately on the basis of the book value of the assets.

Journal Entries for Crossbow Ltd

In the Books of Crossbow Ltd. for 30th June 2015
Journal Entry
			Dr.	Cr.
Date	Particulars	Amount	Amount
			($)	($)
30/06/2015	Impairment Loss A/c.	Dr.	260,000
	To,	Goodwill A/c.		40000
	To,	Land A/c.		26829
	To,	Inventory Products A/c.		24146
	To,	Brand “Crossbow Shoes” A/c.		21463
	To,	Shoe Factory A/c.		93902
	To,	Machinery A/c.		53659
	(Being the net identifiable assets & liabilities and goodwill impaired based on the redeemable amount)
	Income Statement A/c.	Dr.	260,000
	To,	Impairment Loss  A/c.		260000
	(Being the value of impairment loss on machinery transferred to Income Statement )

Workings:  Calculation of Impairment Loss
Particulars	Amount
Carrying Amount of Assets (i)	$1,680,000
Recoverable Amount of Assets (ii)	$1,420,000
Fair Value of Assets ( iii)	$171,000
Real Value of Assets                                   (iv = Higher of ii & iii)	$1,420,000
Impairment Loss (i-iv)	$260,000
Less : Goodwill on Acquisition	$40,000
Impairment Loss Less Goodwill	$220,000

Impairment Loss Allocation
Particulars	Amount	Percentage	Impairment
Land	200000	12%	26829
Inventory Products	180000	11%	24146
“Crossbow Shoe” Brand	160000	10%	21463
Shoe Factory	700000	43%	93902
Machinery for production of Shoes	400000	24%	53659
TOTAL	1640000	100%	$220,000

Reference List

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).

Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of Accounting Studies, 19(1), pp.210-241.

Novotny-Farkas, Z., 2016. The interaction of the IFRS 9 expected loss approach with supervisory rules and implications for financial stability. Accounting in Europe, 13(2), pp.197-227.

Penner, J.W., Kreuze, J.G. and Langsam, S.A., 2016. INSTRUCTORS’NOTES: IMPAIRMENT ANALYSIS: COMPARISON OF IMPAIRMENT OF LONG-LIVED ASSETS BETWEEN US GAAP AND IFRS.Academy of Educational Leadership Journal, 22(2), p.90.

Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in required goodwill impairment. Review of Accounting Studies, 17(4), pp.749-780.

Renner, M., 2013. Occupy the System! Societal Constitutionalism and Transnational Corporate Accounting. Indiana Journal of Global Legal Studies,20(2), pp.941-964.

Stenheim, T. and Madsen, D.Ø., 2016. Goodwill Impairment Losses, Economic Impairment, Earnings Management and Corporate Governance. Journal of Accounting and Finance, 16(2), p.11.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014.Corporate finance: theory and practice. John Wiley & Sons.