Corporate Accounting &Reporting Samples †MyAssignmenthelp.com

Question: Discuss about the Corporate Accounting Reporting. Answer: Impairment Loss for Cash Generating Units Overview IAS 36 Impairment is the standard that ensures about the acceptance of entity's assets at the amount which is not more than the recoverable amount of the assets. Under this standard, it is needed that an annual impairment test is conducted through excluding goodwill and convinced intangible assets, when there is a sign of the impairment of an asset as well as the test possibly carried out for the purpose of cash-generating unit' at the time when it is not possible to generate cash inflows from an asset that are basically independent from other assets (Ifrs.org, 2014). Theaccounting standard IAS 36 was reissued with some amendments in the month of March 2004. This standard is mainly concerned to get hold intangible assets in business arrangement from the date of agreement lying after 31 March 2004 and all the other assets whose agreement is probably starting in the first annual period that is after 31 March 2004 (Iasplus, 2017). Objective of IAS The main objective of thisaccounting standard is to make sure that the assets are accepted at the amount which is not more than recoverable amount as well as classify about the identification of recoverable amount (FRAS Canada, 2014). Scope of IAS The applicability of IAS 36 is over all the assets excluding the assets generated under IAS 36.2. The assets that are out of scope of IAS 36 are deferred tax assets, non-current assets held for sale, inventories, agricultural assets carried at fair value, assets arising from employee benefits and construction contracts and many more(Iasplus, 2017). Consequently, applicability of IAS 36 is over the intangible assets, land, investment property carried at cost, buildings, machinery and equipment, assets approved at revalue amounts under IAS 38 and IAS 16, subsidiaries and joint ventures approved at cost (FRAS Canada, 2014). Key definitions [IAS 36.6] Impairment loss: It is the amount through which the cash-generating unit or the carrying amount of an asset surpasses the amount of asset that can be recovered. Recoverable amount:It is the amount that can be defined as the value which is higher to an asset's fair value generated after deducting the costs of disposal and the values of the assets in use(Ernst Young, 2008). Indication of impairments: This states that there are various conditions which represents impairments loss or which shows that there is probability of occurrence of impairments loss. These indications are divided into two parts i.e. external source and internal source. External source covers factors such as decline in the market value, enhancement in market interest rates; negative change or modification in the technology, negative change, or modification in the laws, negative change or modification in the economy, negative change or modification in the market. Various internal sources are obsolescence as well as physical damage of the plant and machinery; economic performance is worse or not good as expected; asset of the company is idle and it is held for disposal purpose, asset is part of restructuring process. Further in order to do the investments in associates, subsidiaries, or joint ventures, there would be chances of impairment of losses if the total carrying amount is greater than the assets' carrying amount generated from the asset of the investee. Further the above stated internal and external factors is not an exhaustive list; apart from this there are other factors also which represents impairments such as value of the machine after applying depreciation(ASSB, 2016). Determination of recoverable amount For finding out the value of the impairment, it is necessary to estimate the recoverable amount of asset. It is calculated by deducting value in use of the asset or cost of disposal from the fair value of asset. This calculation is performed if the amount calculated above is more than the carrying value of the asset. In case if it is not possible to evaluate or calculate the cost of disposal then recoverable amount can be used in its place as a value in use(Ifrs.org, 2014). If there is need for disposing the assets, then in that case recoverable amount is calculated by subtracting cost of disposal from the fair value of the asset. Fair value is the amount which is taken for the calculation of impairment loss is calculated according to the IFRS 13(Bhalla, 2017). This IFRS indicatesvarious methods of fairvalue measurement. Another important component of this is value in use(FRAS Canada, 2014). This value in use shows or represents an estimation that is related with the amount of future cash flows of the organization or entity. It is expected that such cash flows are derived from the asset(Iasplus, 2017). Secondly it states, expectations toward the possible variations or deviations in amount along with the timing of future cash flows of the organization(Ernst Young, 2008).Moreover,the NPR or in other words time value for money is directly represented through the current or existing market's risk-free rate relating to interest. Value in use also depicts the price that has been borne by the organization so that the inherentuncertainty of the asset can be managed. Other factors which represent value in use are illiquidity(Rurallink.gov, 2014). It states that cash flow projections within the entity should be totally based on the reasonable as well as supportable assumptions(Wikinvest.com, 2017). Further cash flow projections should be based on recent budgets as well as forecasts. Thus it indicates the extrapolation in relation to theaccounting periods that are beyond the budgeted projections. It has been stated by the IAS that budgets of the entity along with the forecasts of the company should not go beyond the period of five years(ASSB, 2016). Value in use It is the term represented for the estimated value of the future cash flows that is believed to derived from the amount of the assets of the organization. Possible variations should be recorded according to the time value of the money. For the calculation of value in use for the asset, Discount rate method is generally utilized. It is the rate which does not represent risk as future cash flow has to be calculated through this(Iasplus, 2017). Impairment loss is calculated by subtracting recoverable amount from carrying amount. In other words it can be said that: Carrying amount deducted from recoverable amount It is needed that amount that can be recovered should be more than the following: Value in use Net selling price In the given case value in use for the division is 305000, since the net selling price is not available therefore value in use of the machine is taken as recoverable amount. Carrying Amount Patent 220276 Buildings 53000 Fittings 33000 Inventory 14000 Goodwill 12000 Total carrying amount 332276 It is clearly written that goodwill is not included for the calculation of impairment loss therefore revised carrying amount of the CGU is: Carrying Amount Patent 220276 Buildings 53000 Fittings 33000 Inventory 14000 Goodwill 12000 Total Carrying Amount 332276 Less Goodwill 12000 Net Carrying Value 320276 Carrying value of patent has been taken as fair value generated after deducting cost of disposal instead of the carrying amount which is 229000 because this will provide more accurate and appropriate results as per IFRS and stated IAS. Hence Impairment loss: Net carrying value 320276 less Recoverable amount 305000 Impairment loss 15276 Normally goodwill treatment is shown while calculating the impairment loss but it is specifically mentioned that it has to be excluded from the calculation therefore it has been avoided. Journal entry Impairments loss account (debit) 15276 To profit and loss account (credit) 15276 (Being impairment loss of the unit are transferred to the profit and loss account of the company) References ASSB. (2016). Impairment of Assets.Accounting Standards for Statutory Boards. Bhalla, K. (2017). Impairment of Assets (AS 28). ICAI knowledge Gateway. Ernst Young. (2008). Impairment accounting the basics of IAS 36 Impairment of Assets. Ernst Young. FRAS Canada. (2014). IAS 36: Measuring Recoverable Amount and Allocating. The Financial Reporting Assurance Standards Canada. Iasplus.com. (2017). IAS 36 Impairment of Assets. Retrieved from https://www.iasplus.com/en/standards/ias/ias36 Ifrs.org. (2014). IAS 36 Impairment of Assets. Rurallink.gov. (2014). Impairment of Cash-Generating. Wikinvest.com. (2017). Impairment test and Cash-Generating Units (CGUs). Retrieved from Impairment test and Cash-Generating Units (CGUs): https://www.wikinvest.com/stock/France_Telecom_S.A._(FTE)/Impairment_Test_Cash-generating_Units_Cgus