Acc204 Introduction To Financial Accounting-Financial Assessment Answer

Answer:

Impairment refers to the situation where the value of asset appearing in the books exceeds the recoverable amount of such asset. In simple terms, if the book value of the asset is more than its recoverable value then it is known as Impairment  (Antle, Garstka and Sevigny, n.d.).

It is compulsory for all the entities to carry out an impairment test. Usually impairment is done for all assets excluding the following:

• Inventories
• Investments which are already valued at fair value.
• Financial assets
• Biological assets
• Deferred tax asset
• Assets involved in construction contract
• Insurance contract
• Non- current asset which have been classified as held for sale.
• Employee benefit asset

All the entities must know about the impairment of assets. If the recoverable amount falls below the carrying amount of the asset then it is said to be impaired (Bebbington, Gray and Laughlin, 2011). An entity comes to know when it has to do impairment based on certain conditions and situations. It also may happen that an entity takes up an impairment test without existence of such situation.

At the end of every financial year, all entities are required to access if there are any indications to undertake an impairment test. If such indications are identified by the company then the company must make an estimate of the recoverable amount and treat it in the books accordingly (Berry, n.d.).

It is first important to understand the situations and conditions of the impairment test. There are some circumstances when all entities has to compulsorily undertake the impairment test and calculate the impaired amount. There are various internal and external factors that may be regarded as indicators (CAANZ. and Kemp, 2017).

 The external factors that indicate that the impairment test should be carried out by an entity are-

1. The situation when there is a huge decline in the value of the assets irrespective of the period of use of life. This indication shows that asset does not have worth as before.
2. If there is any kind of vital changes in the industry or the economy in relation to the technology or any other market related aspects. Such changes may harm the entity in an adverse manner in the future and maybe also in the current scenario.
3. The gradual increase in the interest rate or the rate of return on investment in a very short period is also considered to be one of the indicators (Chaudhry, n.d.). This is the situation when it is observed that the discounting rate that is derived for the economic benefit of the asset also shows an increment. The value of the asset and the rate moves in opposite direction. The increase in the rate decreases the value of the asset and vice versa. This leads to the result of impairment test.
4. One of the many external factors is when the market capitalisation of an entity falls below the book value. Then the company must understand that it is time to do the impairment test.

There are not only external factors that indicate an entity about the impairment test but there are also some internal factors. The internal factors are some indications that given to the entity within the entity itself. Some of the internal factors are explained below-

1. Any kind of reduction in the value of asset due to obscelence or wear and tear as a result of excessive use is also one of the internal factors. There must be an existence of proper evidence to reveal such reduction in value as per the physical condition of the asset (Greuning, Scott and Terblanche, 2011).
2. Sometimes there is a need of making changes in the management or the business of an entity. If any such change directly or indirectly affects the assets of the company in any manner like use of asset in particular way, using the asset for another purpose or stop using the asset. This may also happen when the company has taken a decision to discontinue because the use of the asset will also be abandoned. There may also be a situation that the company has made modifications in the business in such a manner that the asset has no significance and is considered wasteful.
3. If after the use of the asset the entity there is certain indications of adverse impacts, then this may also be considered one of the factor (Spiceland, Thomas and Herrmann, n.d.).

The indications from the internal and external sources which enables the company to know when to do the impairment test has been explained above in details. Sometimes there are no indications that can be seen by the entity but still it has to do impairment test. Such situations are as follows-

1. The recoverable amount for any intangible asset whose life is unascertainable or the intangible asset which are not to be used for impairment should be calculated at any day but before the end of reporting period. The company has to maintain consistency with the date in which the calculation was made. For example, if a company makes the required calculation on a particular day this year then it has to make the calculation on the same day next year. This is in case of existing intangible asset. The rule for the newly acquired intangible asset is a little different. In that case, the entity can make calculation on any day before the end of the reporting date.
2. If the goodwill has been acquired in the course of business connection then the impairment should also be done for such goodwill annually before the end of reporting date (Harrison, Horngren and Thomas, n.d.).

This list of external and internal factors which indicate the impairment test is very long and never ending one. There may be many other indications which have not been mentioned above in which the company may be required to carry out this test. For example – Increase in the estimated losses, the net cash generated from the asset etc. The management should be efficient enough to understand the various other indicators and do the impairment test for the assets accordingly.

We are given the following information:

 The total recoverable amount of all the assets together amounts to $ 737000 and the land alone is $ 531637.

The total impairment loss amounts to $(821000-737000) =$84000 which includes impairment of land amounting to $(552000-531637) =$ 20363.

The goodwill of $28000 will be wholly impaired. This leaves the impairment loss to be $(84000-20363-28000) = $35637

This amount shall be allocated in the ratio of the carrying amount of the asset shown here under:

References

Antle, R., Garstka, S. and Sevigny, K. (n.d.). Questions, exercises, problems, and cases to accompany financial accounting. 1st ed. Mason, Ohio: South-Western.

Bebbington, J., Gray, R. and Laughlin, R. (2011). Financial accounting. 1st ed. Australia: Cengage Learning EMEA.

Berry, A. (n.d.). Financial accounting. 1st ed. London: International Thomson Business.

CAANZ. and Kemp, S. (2017). Auditing, assurance and ethics handbook 2017 Australia. 1st ed. Milton, Qld: Wiley.

Chaudhry, A. (n.d.). Wiley 2016 interpretation and application of International Financial Reporting Standards. 1st ed.

Greuning, H., Scott, D. and Terblanche, S. (2011). International financial reporting standards. 1st ed. Washington, D.C.: World Bank.

Harrison, W., Horngren, C. and Thomas, C. (n.d.). Financial accounting. 1st ed.

Spiceland, J., Thomas, W. and Herrmann, D. (n.d.). Financial accounting. 1st ed.