Impairment of Assets for Corporate Accounting- myassignmenthelp.com

Question: Discuss about theImpairment of Assets for Corporate Accounting. Answer: IAS 36, defines the standard with regards impairment of assets of various firms. The main purpose for conducting an impairment test of any asset is to ensure that the asset is not being carried at a value which is higher than its net realisable value. However, it is not compulsory that all assets will undergo impairment at end of each accounting year. There has to be certain indication which would entail the requirement of conducting impairment for that particular reporting year (Thornton, 2014). But there are some assets for which it is mandatory to undertake impairment each year. They are the intangible assets with an indefinite useful life, intangible assets which is still not with the firm for use and goodwill that is obtained during a business amalgamation (aasb.gov.au., 2007). IAS 36 states that all the tangible and intangible assets should be tested for impairment but for those assets which are covered by other standards. First and foremost, the assets should give such indications that it may be subject to impairment, post which the impairment test is undertaken. The various indications can be external as well as internal to the organization. An entity should be desirous of looking towards both the factors before impairing an asset. The external factors comprises of any significant diminution in the market value of a particular asset or a cash generating unit (CGU) sue to normal wear and tear or time gap, the market capitalisation value is less than the amount at which the asset is presently being recorded in the balance sheet of the company, the discounting rate at which the value-in-use of the asset to be premeditated has gone up due to an upward trend in the market interest rate due to which the amount which would have been recovered by selling the ass et has diminished and the asset has become outdated due to various technological alterations (Bond et.al. 2013). Whereas the internal factors comprises of any kind of damage being caused to the asset while usage due to accidents or such other mishaps, the organizations performance has been deteriorating, due to any kind of significant amalgamation being undertaken by the company and the carrying amount of the asset is more than the carrying amount of the investees assets also is a reason for impairment (Kpmg.com, 2010). However, as has been mentioned, irrespective of any such indications as is mentioned above, certain assets have to undergo the impairment test every year. In case there seems that the performance of the company will decline in the future years, then also one should undertake an impairment test so as to be on the safe side and the assets are not over-stated in the balance sheet and hence does not portray a rosy picture (Dagwell et.al. 2012). Therefore it can be construed that if any eye catching changes is being noticed in the business performance or the environment in which it operates such as a fall in the market for the goods or the value of the goods and services, over supply in the market, issues in acquiring the raw materials, an increment in the production costs or distribution services, exchange rate fluctuation which is not in favour of the organization, rise of competition, technological advancement and lack of the company to cope up with the advancement, alterations in law or the rules which is negative for the organization, economic conditions have become unfavourable, any intention of the company to sell the assets earlier, any plans to shut down the operations of a segment of the organization or such other major alterations in the overall conduct of the business also instil an organization to undertake impairment (Ey.com., 2008). Apart from the generalised reasons, an organization may undertake an impairment test while considering certain specific procedures. Such as the culture is one of it wherein the organization ends up asking questions such as if it has an inbuilt culture which favours high end financial reporting structure thus believes in portraying a realistic picture irrespective of the indications and thus conducts impairment test each year without paying heed to the fact whether there is an indication for impairment. Secondly, the source which shows them the various indications as to when to undertake impairment testing is reliable or not. The internal control procedures should be stringent enough to be able to extract sufficient data about impairment (asic.gov.au., 2016). Lastly, the proofs from internal reporting that shows for an asset that may be impaired comprises of such cash flows which are used for acquisition of an asset and the same is prominently more than the originally budgeted amount or concrete net cash flows or such operating profits or losses which is gained from an asset is drastically low than that expected or a major decrease in the budgeted cash flow or a major increase in the expected loss from a particular asset. Apart from all this, materiality attached with a particular asset also has a major role to play in determining whether an asset should be subject to an impairment testing or not (accaglobal.com, 2014). Therefore, on a concluding note it can be said that impairment of all assets is not compulsory for an organization to conduct, until and unless there are indications for the same and also some class of assets for which impairment test has to be conducted whether or not there are indications which desire the need for the said test. Hence, analysing these indications in detail is of utmost importance else the company would end up wasting its time when it does not require any such impairment test to be conducted. However, a company which believes in portraying a true picture and publish a very high quality report to the stakeholders about the companys asset position per year, specifically undertakes an impairment test irrespective of any indications. Thus if the situation points towards an impairment, then the test should be undertaken, else it is at the discretion of the company. References: aasb.gov.au., (2007), AASB 136- Impairment of Assets, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf (Accessed 23rd May 2017) accaglobal.com, (2014), IAS 36 Impairment of Assets, Available at https://www.accaglobal.com/in/en/discover/cpd-articles/corporate-reporting/ias36-impairment.html (Accessed 23rd May 2017) asic.gov.au., (2016), Impairment of non-financial assets : Materials for directors, Available at https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/directors-and-financial-reporting/impairment-of-non-financial-assets-materials-for-directors/#need-for-testing (Accessed 23rd May 2017) Bond, D., Govendir, B., Wells, P., (2013), An evaluation of asset impairment decisions by Australian Firms and whether this was impacted by AASB 136, Available at https://www.uts.edu.au/sites/default/files/ACCDG_Aut15Sem_D.Bond_.pdf (Accessed 23rd May 2017) Dagwell, R., Wines, G., Lambert, C., (2012), Corporate Accounting in Australia, Pearson: Australia Ey.com., (2008), Impairment Accounting- the basics of IAS 36 Impairment of Assets, Available at https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf (Accessed 23rd May 2017) Kpmg.com, (2010), Impairment Testing, Available at https://www.kpmg.com/AL/en/IssuesAndInsights/ArticlesPublications/Factsheet/Advisory/Documents/Impairment%20testing.pdf (Accessed 23rd May 2017) Thornton, G., (2014), Impairment of Assets- A Guide to applying IAS 36 in practice, Available at file:///C:/Users/E-ZONE/Downloads/IAS%2036%20Impairment%20of%20Assets%20-%20A%20guide%20to%20applying%20IAS%2036%20in%20practice.pdf (Accessed 23rd May 2017)