Acc240 The Basic Principles Of Assessment Answers

Answer:

According to the basic principles of impairment, assets should not be recorded in the books above its recoverable amount. However, the recoverable amount is the higher of value in use and the fair value less costs amount (Wink, 2011). There is a comparison made between this carrying amount and the recoverable amount. When on comparison it is observed that the carrying amount is more than the recoverable amount, then the asset is said to be impaired. The impairment loss that is calculated is then written off in the profit and loss account (Girard, 2014).

Usually, the impairment tests for asset are done when there is an impairment indicator but in certain cases there is no requirement of an indicator. Like, there is no requirement of impairment indicator in case of goodwill and intangible asset with indefinite life. Recoverable amount is determined for all the assets individually (Gow, 2016).

Although each assets generate cash inflows independent of each other but the impairment test is carried out for the entire cash generating unit in which a group of cash generating assets are pooled together. The cash flows from such assets are independent of the cash flows derived from any other asset. In case of business combination, goodwill is allocated to the cash generating unit of the acquirer who will be deriving benefits from such acquisition.

The treatment of impairment loss of a normal asset and that of a cash generating unit is very similar. There is a procedure that has to be followed by the company to determine the recoverable amount. After the determination of recoverable amount and comparison is done the difference between these two figures has to be treated in the books. The amount of goodwill that is present is written off completely because recoverable amount cannot be determined. However, the remaining impairment loss has to be distributed among all the remaining assets in the cash generating unit in the ratio of their carrying amounts. The value of the assets and the cash generating units decline after making the adjustments for the impairment losses (Holtzman, 2013).

The entities first determine if there are any impairment indicators available. If there is an impairment indicator available, then it has to find the recoverable amount of such asset that is shows such indication. However, it is not easy to determine the recoverable amount of all the assets (McLaney & Adril, 2016). If the recoverable amount is measurable and identifiable then there is a comparison made between the carrying amount and the recoverable amount. The carrying amount is then reduced to recoverable amount and the difference between them is considered to be as impairment loss which is to be written off in the profit and loss account (Warren, 2017).

However, there may also arise a situation when the recoverable amount of an asset cannot be determined then the company must try to identify the cash generating unit to which this specific asset belongs. If the goodwill cannot be allocated to a single CGU then it might be distributed among various CGU’s. If it is found out that the carrying amount of the cash generating unit exceeds the recoverable amount, then the carrying amount should be reduce carrying amount by the amount of goodwill (Rayman, 2009).

There are some external and internal sources of the indicators of the impairment test. The external indicators are the market interest rates, any type of adverse changes in the technology, legal or economic environment in which the company is operating and also the market capitalisation being lower than net assets of the company (Schroeder, 2014). The internal indicators of impairment include physical damage of the assets or internal restructurings of the company. However, goodwill and intangible assets with an indefinite life have to be tested annually whether indicators exist or not.

There may also be an indication made that the impairment loss that has been recognised for an asset may be decreased or may no longer exists. The indication provided by the external sources for the reversal of impairment loss may be an increase in the value of asset or a favourable change in the market condition. A favourable change in the performance and use of the asset are the internal indicators that might lead to reversal (Scott, 2014).

There are certain disclosure requirements that have to be fulfilled by the company. They are-

• The amount of impairment loss charges and reversed at the end of the reporting period along with any events that were the cause has to be disclosed.
• The goodwill amount of a particular CGU or the group of CGU’s.
• The assumptions, approaches and the valuation method that has been used by the company.
• The growth rate and the discount rate are based on certain assumptions. These assumptions should be stated in the financial reports in order to check its validity.
• The company has to mention if it transfers any particular asset from one cash generating unit to another (Siciliano, 2015).

Impairment is considered to be one of the very important elements f the financial reporting process for all the companies. It is very difficult and time consuming to assess impairment and its impacts. It is very important for the financial department to have professional knowledge and right skills to carry put business forecasting and business modelling (Taillard, 2013).

The selection of valuation methods, approaches and assumptions that are taken by the company may impact the company in the long run and therefore, the company must have a finance team which has a sufficient knowledge about the financial as well as operational prospects in which the company has been operating.

Part B:

The total impairment loss of the cash generating unit is 96000 (908700-812700). This is because the carrying amount of the cash generating unit is 908700 and the recoverable amount of it is 812700. Goodwill is written off wholly which amounts to 32000 and Factory is written off to the extent of 23301 (587399-610700) as mentioned in the question. The remaining impairment loss of 40699 (96000-32000-23301) is distributed among the remaining three assets. The allocation of loss is shown below:

The journal entries for impairment loss are as follows:

Bibliography

Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.

Gow, I. D. (2016). Causal Inference in Accounting Research. Journal of Accounting Reseach , 54 (2), 477-523.

Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Rayman, A. (2009). Accounting Standards: True or False? . New York (Estados Unidos): Routledge.

Schroeder, R. G. (2014). Financial Accounting Theory and Analysis: Text and Cases. Hoboken: John Wiley & Sons.

Scott, W. R. (2014). Financial Accounting Theory. Toronto: Pearson.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.

Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.

Warren, C. S. (2017). Accounting . [S.I.]: South-Western College Pub.

Wink, G. B. (2011). Intermediate accounting demystified. New York, NY: McGraw-Hill.