Financial Analysis And Reporting Research: Case Study On Customer List Revaluation And Asset Impairment

Revaluation of Customer List

Discuss about the Financial Analysis and Reporting Research.

The issue presented in the first part of the case study is that the company Marvin had purchased a customer list for $4 million which had a useful life of two years. Meanwhile the managing director of Marvin conducted an independent valuation of the customer list which resulted in valuation of the customer list at $5 million with a total useful life of five years. Now the issue lies in the fact that the customer list has been recorded as an intangible asset with a carrying value of $4 million. However Marcus now wants the list to be revalued to the higher amount (Chalmers et al., 2012).  

	$ (in millions)
Previous value of the customer list	4,000,000 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Useful life (years)	2
Amortization Expense under Straight line method	2000000
Amortization Expense from July to December ($)	1000000

Formula for calculating Amortization Expense under Straight Line Method = Cost of intangible asset / Useful Life        

According to the above table the carrying amount of the customer list that should be recorded in the books of accounts is ($4,000,000 – $1,000,000) = $3,000,000. But currently the intangible asset has been recorded at $4,000,000. Therefore in order to record the customer list at a rectified figure the intangible assets in the balance sheet should be reduced by $1,000,000 (-$4,000,000 + $3,000,000).

Now in order to record the customer list at a revalued figure, the $3,000,000 that is the rectified amortized figure of the customer list has to subtracted from the intangible asset and the new carrying amount of the customer list according to the below table should be added.

	$ (in millions)
Revalued figure of the customer list	5,000,000
Revalued useful life (years)	5
Amortization Expense under Straight line method	1000000
Amortization Expense from July to December ($)	500000

According to the above table the revalued carrying amount of the customer list should be ($5,000,000 – $500,000) = $4,500,000

Therefore the intangible asset in the balance sheet should be ($15,000,000 – $1,000,000 – $3,000,000 + $ 4,500,000) = $15,500,000

As the total intangible asset account increases by $500,000 therefore the total revenue automatically increases by $500,000 which should be adjusted in the consolidated income statement under the head, Revaluation. Therefore the total comprehensive income for the year increases by $500,000 (Ifrs.org, 2017).

The second part of the case study involves impairment of asset. In order to find the amount of impairment it should be determined that whether the value in use of the machine is higher or the fair value of the machine given in the case study is higher. In order to calculate the value in use of the machine, the table below has been made (Amiraslani, Iatridis and Pope 2013).

PV	Annual net income to be generated	Expected present value
0.909	$3,800,000	$3,454,200
0.826		$3,138,800
0.751		$2,853,800
0.683		$2,595,400
0.621		$2,359,800
		$14,402,000
	Add: disposable value of the machine	$4,200,000
	TOTAL	$18,602,000

Impairment of Asset

Here in the above table the annual net income to be generated has been provided in the case study that is $3,800,000.

The expected present value or the value in use has been calculated by multiplying the rate of present value given in the case study with the annual net income to be generated by the machine. Therefore the total value in use of the machine as generated by the table is $18,602,000.

Now as given in the case study the fair value of the machine is calculated at $16,000,000. The recoverable amount will be the fair value or the value in use whichever is higher. Therefore the recoverable amount in this case will be the value in use that is $18,602,000.

Now the recoverable amount should be compared to the carrying value of the machine. The carrying value of the machine as stated in the case study of the machine is $22,000,000. Therefore the value of asset impairment that has to be recorded is ($22,000,000 – $18,602,000) = $3,398,000.

As $3,398,000 is a loss incurred by the company and it will appear as an expense in the income statement of the company and the net profit will reduce by this amount. More specifically the profit before taxation will be reduced by the impairment loss amount and will come under the head Non-operating Expenses. Therefore the total comprehensive income will reduce by $3,398,000.

The same amount has to be adjusted in the balance sheet of the company in order to make them even. Therefore the carrying value of the asset should be decreased by the impairment value of $3,398,000 by adding it to the accumulated depreciation account. Therefore the carrying value of the machine will become $18,602,000 (Ifrs.org, 2017).

The global accounting standards that have been created in order to simplify the task of preparation of the financial statements also come with certain limitations. Though the major intention behind the creators of the financial statements have been to make the work of the accountants more organized and systematic in nature but there have been certain limitations that restrict the extent to which the users of the financial statements can rely on them in order to make economic decisions.

The major issue with the global accounting standards is concerned with the translation of the standards in different languages around the world. Translators often struggle to interpret or translate the exact meaning that the standard setter is trying to convey. The translators mostly face this issue because of the use of lengthy sentences; haphazard and random use of accounting terms; and usage of those terms in further describing topics. Another issue related to translating the global accounting standards is that the translation of the accounting standards is often done with the support of donor funding. Donor funding generally is a time oriented or specific task oriented event. This means that the translation is done once as the organizations are unable to manage resources for executing the task of translating the accounting standards again, thus the revisions that are done in the accounting standards from time to time are not updated. The translated standards soon become outdated and the accounting statements that are prepared in accordance with these standards can no more claim compliance with the global accounting standards, forcing an individual to question or doubt his economic decision taken on the basis of these financial statements (Trombetta, Wagenhofer and Wysocki 2012).

Limitations of Global Accounting Standards

For an instance a particular concern that was raised when the IFRS was endorsed by the EU and the European Commission was that the translation of all the accounting standards under the IFRS required certain time and could not be done within a specified time frame. This would surely disrupt the process of proper implementation of the accounting standards. The Commission made an official declaration that it would take approximately nine months (after the publication of the standards by the IFRS) for the regulations to appear in the Official Journal of the Commission.

The International Accounting Standards Committee in order to mitigate this issue developed a formal plan regarding the process of translation of the accounting standards and involved professional accountants in the team concerned with the process of translation.

Users of the global accounting standards are of the opinion that the global standards with each passing day are becoming more complex, rules or regulation dependent and complicated in nature. This is clearly becoming a major issue in the implementation of the accounting standards. Though the in depth discussion that the standards hold is highly acclaimed and appreciated by accountants worldwide but the need for a guidance manual in regards to the implementation of the standards have been the demand of the users for a long time. International accounting standards are generally created by the standard setters by observing the common problems that occur while preparing the financial statements. Now the difficulty lies in the fact that these accounting statements that are prepared for the purpose of global implementation may not apply to all situations. This means that each company face different experience but in order to comply with the stated accounting standards, the accountant may have to apply a standard that is not fit for the situation. This issue occurs due to the inflexibility of the accounting standards. Some users also are of the opinion that the standard setters should establish or modify the accounting standards keeping in mind that certain countries do need to incorporate the standards as their national law. The approach in which these standards are written cannot be directly integrated into national law and therefore they have to be transformed by the national standard setters. The International Accounting Standards Board decision to move towards a fair value model has made the situation more critical. The users opposed such a model because they were of the opinion that a fair value model is subjective and out of the scope of measurement. This means that different interpretations will lead to different conclusions and hence cannot be accurately measured (Bradbury and Schröder 2012).

A particular recommendation for this issue is that the global standard setters should make the accounting standards more principle oriented. This will not only make the text of the established standards simple and understandable but also elevate the structure of the accounting standards in such a way that they can be incorporated into the national law with ease.

Another major issue that is faced by the users of the global accounting standards are that the frequent, in volume and complex changes in the standards that are very difficult by the users to follow. For instance the IASB amended 13 major standards which in turn resulted in amendment of many other accounting standards. There also has been implementation of new accounting controls in relation to quality control of the accounting firm and the audit engagement levels. The global auditing standard related to the responsibility of the auditor in identifying fraud in the financial statements has been revised and another previously revised standard regarding the audit of the financial statements became effective.

Such huge number of amendments and modifications do not allow or give time to the users or adopters of the global standards to fully incorporate the accounting standards and implement them in relevant cases.

A particular recommendation for such a situation has been that the countries that engage in incorporating accounting standards in the national body of law should not include those standards that are already being revised or may be revised till the time these standards are finalized (Watty et al., 2014).

Thus the presence of such limitations restrict or make an user doubt the economic decisions taken on the basis of the financial statements prepared in compliance with the global accounting standards.

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).

Bradbury, M.E. and Schröder, L.B., 2012. The content of accounting standards: Principles versus rules. The British Accounting Review, 44(1), pp.1-10.

Chalmers, K., Clinch, G., Godfrey, J.M. and Wei, Z., 2012. Intangible assets, IFRS and analysts’ earnings forecasts. Accounting & Finance, 52(3), pp.691-721.

Ifrs.org. (2017). IFRS. [online] Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/ [Accessed 31 Oct. 2017].

Ifrs.org. (2017). IFRS. [online] Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/ [Accessed 31 Oct. 2017].

Trombetta, M., Wagenhofer, A. and Wysocki, P., 2012. The usefulness of academic research in understanding the effects of accounting standards. Accounting in Europe, 9(2), pp.127-146.

Watty, K., Freeman, M., Howieson, B., Hancock, P., O’Connell, B., De Lange, P. and Abraham, A., 2014. Social moderation, assessment and assuring standards for accounting graduates. Assessment & Evaluation in Higher Education, 39(4), pp.461-478.