Discuss about the Corporate Finance and Reporting Reflection.
The importance of an impairment test is to measure if the amount that is stated on the balance sheet is a true reflection of the balance sheet items. When the impairment test is done and subsequently indicates a lower value then there should be a reduction of the balance sheet value. Impairment testing is applied for both tax accounts and audit accounts.
Impairment test is conducted at annual intervals. This can be done at any time of the year as long as the next test will be done at the same time in the next financial year. There is no need of testing at the same time if the company is comprised of different reporting units. It may necessitate to conduct an impairment test. If the fair value reduces more than carrying amount, this may necessitate an impairment test to be done. Other circumstance that may compel the management to carry out this test includes an event where a lawsuit looms, the loss of key staff, regulatory changes and in the event that the reporting unit will be sold.
An asset is accounted for when its amounts in the books is greater than the assets recoverable amount. This means that the asset will not generate the profits in a sufficient way. Very few take into account the importance of conducting an impairment test at the close of financial statements of assets such as fixed assets, inventories, accounts receivables that must be checked to check whether there is evidence of deterioration. Therefore, it is important for the management to know the importance of an impairment test.
Anil Kumar, Vrajesh Kumar and B Mariyappa, Corporate Accounting (Himalaya Pub. House, 2010)
The management of long reach ltd for purposes of decision making needs to see how much is going to be recovered and how much of the inventories noted in the balance sheet will be realized 2. It is common that in many accounts inventories are not reviewed in relation to obsolescence, expiration and deterioration. There are many stakeholders who are interested in this type of reviews, some of the stakeholders are banks, suppliers etc. who are interested in this review for the assets that are offered as collateral .
Long term depreciated assets may also be tested for impairment when there is an external or internal indication that these assets might be worth less that the carrying amount. AASB 136 defines carrying amount as the amount recognized in an asset after deducting any amortization or accumulated depreciation and accumulated impairment loss.
how the existence of goodwill will affect the impairment testPositive and negative goodwill.once the assets and liabilities that meet the recognition conditions have been identified and the fair value (or any one of the special valuation rules) established, the difference between the Cost of the combination with the net value of the assets and liabilities acquired.
If the difference is positive, it is recorded as “goodwill” on the assets side of the balance sheet. If it is negative, it is immediately recognized as income within the operating result.
Although this latter assumption is considered “exceptional”, the standard does not incorporate the obligation established in paragraph 56 of IFRS 3, which requires a prior review of the identification and valuation of the assets, liabilities and contingent liabilities of the business acquired, and Of the cost of the combination.
Positive Goodwill bookings underwent very significant and well-publicized changes as a result of the substitution of the systematic amortization of this asset by the annual impairment test. As a result, and regardless of the retroactive adjustments that could result from the correction of an accounting error after the conclusion of the provisional accounting period, the value of goodwill in balances after the combination date is obtained as follows:
Once the initial goodwill value is determined (without prejudice to any adjustments that may be made during the interim accounting period), the entity must determine which cash-generating units benefit from the synergies of the combination, and distribute among them the fund of paid trade. The 6th standard is again based on international standard 21 and requires that such units be submitted at least annually to the impairment test described in standard 2.2, comparing the carrying amount of such unit with its recoverable value, Which is the largest of:
Its value in use, which is defined in the Framework as “the present value of the expected future cash flows,
Sometimes the assets of a company are impossible to touch or see. A company with a higher goodwill will for instance be bought at a higher price as compared to a company .
whose goodwill is not so much. This also applies to companies that intend to acquire others. For example, a company that is recognized widely is expected to have a bigger goodwill than the company that is moderately known , hence will be required to fork out more if the two businesses intend to buy a company. Therefore, goodwill affects acquisition cost and hence impairment test is critical5.
basic steps to be followed in applying the impairment testThe process of impairment testing involves a multi step process.
The first step is Assessing Qualitative factors; it is important to review the situation to note if it is necessary to do further impairment testing. Based on assessing relevant circumstances and events, this will be a starting point to determine whether the impairment test is necessary or not. For example, it is likely that impairment is present when macro economic conditions are not favorable, when there is increased costs, when there is declining cashflows, a sustained shareprice decrease or a change in management. Hence, if there is possibility of impairement you can continue with impairment testing 4.Step 2; this steps involve identifying impairment potential
In this step compare the fair value of the reporting unit to the carrying amount of the asset. It is advisable to include the goodwill on the reporting units carrying amount.
Edward Fields, The Essentials Of Finance And Accounting For Nonfinancial Managers (AMACOM, 2002).
Also, consider the presence of any unrecognizable intangible assets. If the carrying amount is less than the fair value of the reporting unit then there is no goodwill
impairment hence no need to go on to the next step. However, proceed to the next step when the carrying amount is greater than the fair value.
This involves comparing the implied fair value and the goodwill of the reporting units carrying amount. The difference in figures of the two figures i.e. the carrying amount and the fair value is regarded as the impairment loss. When calculating the fair value of the implied goodwill, the IASB 136 requires that you assign the fair value of the unit that is being reported on with the associated liabilities and assets of that reporting unit. This includes research and development assets.
If there is excess amount of the fair value of the reporting unit over the amounts assigned to its liabilities and assets, this is the fair value implied of the associated goodwill 5. The company will receive the price that is equivalent to the fair value of the reporting unit as long as it does not sell the unit in a rushed transaction. There are other alternatives that are used to quote the market price such as the revenue that is based on revenue or earnings.
A cash-generating unit is a set of assets that a company destines to a particular purpose and that can operate independently of the rest of the company, so that the pool of assets that make up this unit can deteriorate globally instead of deteriorating assets by active. For example a branch or a delegation of a company.
For a pool of assets to be considered as a cash-generating unit, cash inflows must be independent of other cash flows generated by other assets or groups of assets 7.The treatment of impairment losses of a cash unit is set out in the resolution of September 18, 2013, of the Institute of Accounting and Auditing, which establishes rules of registration and valuation and information to be included in the report Of the annual accounts on the impairment of assets, published in the BOE of September 25, 2013.
|
Carrying amount of assets |
$ 1500,000 |
|
Recoverable amount |
$1420,000 |
|
Impairement loss |
$ 80,000 |
Allocation against good will
Impairment loss is first used to write of the goodwill of $40,000
Girish Kumar Rana, Corporate Accounting (ABD Publishers, 2010).
Andrea Zanoni, Accounting For Goodwill (Routledge, 2009).
The loss of $ 40,000 is used to allocated against other assets of the company, only that cash is an exception because it is already at realizable value. And also inventory because it is recorded at net realizable value and lower of cost.
|
Carrying amount |
proportion |
Allocation of loss |
Net carrying amount |
|
|
Brand |
160000 |
160/1260 |
5079 |
154921 |
|
Factory |
700000 |
700/1260 |
22222 |
677778 |
|
machine |
400000 |
400/1260 |
12699 |
387301 |
|
1260000 |
40000 |
|
Dr |
cr |
|
|
Impairement loss |
80000 |
|
|
Goodwill |
40000 |
|
|
Brand( ac amortization and impairment loss |
5079 |
|
|
Factory( accumulated depr and impairment loss |
22222 |
|
|
Machinery(accumulated depr and impaired loss |
12699 |
Anil Kumar, S, Vrajesh Kumar and B Mariyappa, Corporate Accounting (Himalaya Pub. House, 2010)
Bloom, Martin, Double Accounting For Goodwill (Routledge, 2008)
Fields, Edward, The Essentials Of Finance And Accounting For Nonfinancial Managers (AMACOM, 2002)
Joseph, T, Corporate Accounting (Tata McGraw-Hill, 2009)
Peterson, Raymond H, Accounting For Fixed Assets (J. Wiley, 2002)
Rajasekaran, V and R Lalitha, Corporate Accounting (Pearson, 2011)
Rana, Girish Kumar, Corporate Accounting (ABD Publishers, 2010)
Zanoni, Andrea, Accounting For Goodwill (Routledge, 2009)
Discuss about the Corporate Finance and Reporting Reflection.
The importance of an impairment test is to measure if the amount that is stated on the balance sheet is a true reflection of the balance sheet items. When the impairment test is done and subsequently indicates a lower value then there should be a reduction of the balance sheet value. Impairment testing is applied for both tax accounts and audit accounts.
Impairment test is conducted at annual intervals. This can be done at any time of the year as long as the next test will be done at the same time in the next financial year. There is no need of testing at the same time if the company is comprised of different reporting units. It may necessitate to conduct an impairment test. If the fair value reduces more than carrying amount, this may necessitate an impairment test to be done. Other circumstance that may compel the management to carry out this test includes an event where a lawsuit looms, the loss of key staff, regulatory changes and in the event that the reporting unit will be sold.
An asset is accounted for when its amounts in the books is greater than the assets recoverable amount. This means that the asset will not generate the profits in a sufficient way. Very few take into account the importance of conducting an impairment test at the close of financial statements of assets such as fixed assets, inventories, accounts receivables that must be checked to check whether there is evidence of deterioration. Therefore, it is important for the management to know the importance of an impairment test.
Anil Kumar, Vrajesh Kumar and B Mariyappa, Corporate Accounting (Himalaya Pub. House, 2010)
The management of long reach ltd for purposes of decision making needs to see how much is going to be recovered and how much of the inventories noted in the balance sheet will be realized 2. It is common that in many accounts inventories are not reviewed in relation to obsolescence, expiration and deterioration. There are many stakeholders who are interested in this type of reviews, some of the stakeholders are banks, suppliers etc. who are interested in this review for the assets that are offered as collateral .
Long term depreciated assets may also be tested for impairment when there is an external or internal indication that these assets might be worth less that the carrying amount. AASB 136 defines carrying amount as the amount recognized in an asset after deducting any amortization or accumulated depreciation and accumulated impairment loss.
how the existence of goodwill will affect the impairment testPositive and negative goodwill.once the assets and liabilities that meet the recognition conditions have been identified and the fair value (or any one of the special valuation rules) established, the difference between the Cost of the combination with the net value of the assets and liabilities acquired.
If the difference is positive, it is recorded as “goodwill” on the assets side of the balance sheet. If it is negative, it is immediately recognized as income within the operating result.
Although this latter assumption is considered “exceptional”, the standard does not incorporate the obligation established in paragraph 56 of IFRS 3, which requires a prior review of the identification and valuation of the assets, liabilities and contingent liabilities of the business acquired, and Of the cost of the combination.
Positive Goodwill bookings underwent very significant and well-publicized changes as a result of the substitution of the systematic amortization of this asset by the annual impairment test. As a result, and regardless of the retroactive adjustments that could result from the correction of an accounting error after the conclusion of the provisional accounting period, the value of goodwill in balances after the combination date is obtained as follows:
Once the initial goodwill value is determined (without prejudice to any adjustments that may be made during the interim accounting period), the entity must determine which cash-generating units benefit from the synergies of the combination, and distribute among them the fund of paid trade. The 6th standard is again based on international standard 21 and requires that such units be submitted at least annually to the impairment test described in standard 2.2, comparing the carrying amount of such unit with its recoverable value, Which is the largest of:
Its value in use, which is defined in the Framework as “the present value of the expected future cash flows,
Sometimes the assets of a company are impossible to touch or see. A company with a higher goodwill will for instance be bought at a higher price as compared to a company .
whose goodwill is not so much. This also applies to companies that intend to acquire others. For example, a company that is recognized widely is expected to have a bigger goodwill than the company that is moderately known , hence will be required to fork out more if the two businesses intend to buy a company. Therefore, goodwill affects acquisition cost and hence impairment test is critical5.
basic steps to be followed in applying the impairment testThe process of impairment testing involves a multi step process.
The first step is Assessing Qualitative factors; it is important to review the situation to note if it is necessary to do further impairment testing. Based on assessing relevant circumstances and events, this will be a starting point to determine whether the impairment test is necessary or not. For example, it is likely that impairment is present when macro economic conditions are not favorable, when there is increased costs, when there is declining cashflows, a sustained shareprice decrease or a change in management. Hence, if there is possibility of impairement you can continue with impairment testing 4.Step 2; this steps involve identifying impairment potential
In this step compare the fair value of the reporting unit to the carrying amount of the asset. It is advisable to include the goodwill on the reporting units carrying amount.
Edward Fields, The Essentials Of Finance And Accounting For Nonfinancial Managers (AMACOM, 2002).
Also, consider the presence of any unrecognizable intangible assets. If the carrying amount is less than the fair value of the reporting unit then there is no goodwill
impairment hence no need to go on to the next step. However, proceed to the next step when the carrying amount is greater than the fair value.
This involves comparing the implied fair value and the goodwill of the reporting units carrying amount. The difference in figures of the two figures i.e. the carrying amount and the fair value is regarded as the impairment loss. When calculating the fair value of the implied goodwill, the IASB 136 requires that you assign the fair value of the unit that is being reported on with the associated liabilities and assets of that reporting unit. This includes research and development assets.
If there is excess amount of the fair value of the reporting unit over the amounts assigned to its liabilities and assets, this is the fair value implied of the associated goodwill 5. The company will receive the price that is equivalent to the fair value of the reporting unit as long as it does not sell the unit in a rushed transaction. There are other alternatives that are used to quote the market price such as the revenue that is based on revenue or earnings.
A cash-generating unit is a set of assets that a company destines to a particular purpose and that can operate independently of the rest of the company, so that the pool of assets that make up this unit can deteriorate globally instead of deteriorating assets by active. For example a branch or a delegation of a company.
For a pool of assets to be considered as a cash-generating unit, cash inflows must be independent of other cash flows generated by other assets or groups of assets 7.The treatment of impairment losses of a cash unit is set out in the resolution of September 18, 2013, of the Institute of Accounting and Auditing, which establishes rules of registration and valuation and information to be included in the report Of the annual accounts on the impairment of assets, published in the BOE of September 25, 2013.
|
Carrying amount of assets |
$ 1500,000 |
|
Recoverable amount |
$1420,000 |
|
Impairement loss |
$ 80,000 |
Allocation against good will
Impairment loss is first used to write of the goodwill of $40,000
Girish Kumar Rana, Corporate Accounting (ABD Publishers, 2010).
Andrea Zanoni, Accounting For Goodwill (Routledge, 2009).
The loss of $ 40,000 is used to allocated against other assets of the company, only that cash is an exception because it is already at realizable value. And also inventory because it is recorded at net realizable value and lower of cost.
|
Carrying amount |
proportion |
Allocation of loss |
Net carrying amount |
|
|
Brand |
160000 |
160/1260 |
5079 |
154921 |
|
Factory |
700000 |
700/1260 |
22222 |
677778 |
|
machine |
400000 |
400/1260 |
12699 |
387301 |
|
1260000 |
40000 |
|
Dr |
cr |
|
|
Impairement loss |
80000 |
|
|
Goodwill |
40000 |
|
|
Brand( ac amortization and impairment loss |
5079 |
|
|
Factory( accumulated depr and impairment loss |
22222 |
|
|
Machinery(accumulated depr and impaired loss |
12699 |
Anil Kumar, S, Vrajesh Kumar and B Mariyappa, Corporate Accounting (Himalaya Pub. House, 2010)
Bloom, Martin, Double Accounting For Goodwill (Routledge, 2008)
Fields, Edward, The Essentials Of Finance And Accounting For Nonfinancial Managers (AMACOM, 2002)
Joseph, T, Corporate Accounting (Tata McGraw-Hill, 2009)
Peterson, Raymond H, Accounting For Fixed Assets (J. Wiley, 2002)
Rajasekaran, V and R Lalitha, Corporate Accounting (Pearson, 2011)
Rana, Girish Kumar, Corporate Accounting (ABD Publishers, 2010)
Zanoni, Andrea, Accounting For Goodwill (Routledge, 2009)
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