Accounting and Reporting Impairment Test - Free Sample

Question: Discuss about the Corporate Accounting and Reportingfor Impairment Test. Answer: Introduction This study aims to provide an advice to Longreach Ltd regarding the assets impairment tests as per AASB 136. During this study, the focus is made on identifying the reasons of conducting the impairment test. At the same time, the study also provides the guidance regarding the effects of goodwill in the impairment test. Along with these, the basic steps, which are required to be followed during the impairment test, are also identified. The Purpose of Impairment Test: Avallone and Quagli (2015) stated that an impairment test helps the companies identifying whether the items shown in the balance sheet of the company actually worth the money value stated in the balance sheet. In the business organization like, Longreach Ltd, different types of assets are used for generating the revenue or operating the business activities. These assets can be divided into two categories fixed assets and current assets (Rocha do Nascimento et al. 2015). However, in the business organization, there is another type of assets, which is known as intangible assets. The intangible assets are the goodwill, patent, trademark and copyright (Penner, Kreuze and Langsam 2016). However, the companies conduct the impairment test at the time, when the book value of asset is higher than the actual value of the asset. Hence, in order to adjust the book value of the assets with its actual value, the companies conduct the impairment test (Gros and Koch 2015). In the other words, it can be said that the impairment test is conducted in order to adjust the book value of the assets with its expected future or market value. This means, the impairment test is done in order to identify the actual financial position of the company in a particular financial year. As per the AASB 136, the impairment test must be done in order to ensure that the assets of the company are carried at their recoverable amount (Zhuang 2016). Effects of Goodwill on the Impairment Test Goodwill is considered as the assets of the company. Therefore, it is obvious that the value of goodwill also changes over the time. The existence of goodwill can affect the impairment test in a company (Bond, Govendir and Wells 2016). If the goodwill of the company is purchased and the market value of the company declines, then due to the decreased market value, the value of the goodwill will also decline (Jordan and Clark 2015). Hence, the company will require conducting the impairment of goodwill. This means, if there is purchased goodwill, and then the impairment loss will take place due to the decrease in market value. On the other side, if the goodwill in the business is acquired and the market interest rates increases, then also the goodwill of the company will be negatively affected and there will be impairment loss (Banker, Basu and Byzalov 2015). Increase in the market interest rates actually decreases the investment opportunity in the business. Therefore, the value of acqu ired value of business goodwill will also be affected negatively. Hence, the company will require conducting the impairment tests, which generates the impairment loss to the company (Rocha do Nascimento et al. 2015). On the other side, if the company performs badly in the market, then the value of the goodwill of the company decreases. Due to this, the company again requires conducting the impairment test of the goodwill and the impairment loss is generated (Koroec, Jerman and Tominc 2016). Therefore, from this discussion, it can be said that if there is goodwill included in the balance sheet of the company, whether that is purchased or generated through the business activities, the companies required conducting the impairment test (Detzen, Wersborg and Zlch 2015). However, the impairment test is conducted only when the value of the goodwill changes due to some internal or external factors. Basic Steps in Impairment Test In order to conduct the impairment test, Longreach Ltd requires following some basic steps. These steps are as follows: Step 1 The first step of conducting the impairment test is calculating the recoverable value or amount of the asset (Jordan and Clark 2015). The recoverable value of the asset is that value, which the company generates deducting the cost of sell from the fair market value of the asset (Gros and Koch 2015). This is actually the estimated future cash flow that the company will derive from the asset. Step 2 The second step comparing the recoverable value of the asset with its carrying value. At this step, the company identifies whether the carrying value of the asset is higher or lower than its actual value or recoverable value (Bond, Govendir and Wells 2016). Step 3 The third step of asset impairment test is allocating the recoverable amount or value to the asset of the company (Banker, Basu and Byzalov 2015). At the time of comparing the recoverable amount to the carrying value, if it is identified that the recoverable value is less than the carrying value, then the value is considered as the impairment loss and if it is high, then it is considered as impairment profit (Penner, Kreuze and Langsam 2016). However, in most of the time, the impairment loss is obtained through the impairment test. Therefore, in the above discussion, it can be identified that there are mainly three basic steps, which are needed to be followed by Longreach Ltd, while conducting the impairment test. Conclusion In this study, it has been identified that the asset impairment test is important for the company in order to identify the actual value of the asset. In AASB 136, it has been mentioned that the impairment test is needed to be done for ensuring that the assets of the company have been carried at their recoverable amount. The study has also identified that existence of goodwill has effects on the impairment test of the company. The study has indicated that the company requires following three basic steps while conducting the impairment tests for its assets. In the Books of Crossbow Ltd Calculation of Impairment loss Particulars Amount Carrying value of assets 1680000 Recoverable value of assets 1420000 Fair value of assets 171000 Real value of assets 1420000 Impairment loss 260000 Less: Goodwill on acquisition 40000 Impairment loss after deducting goodwill 220000 Ascertaining the impairment loss allocation Particulars Amount Percentage Impairment Land 200000 12% 26829.26829 Inventory Products 180000 11% 24146.34146 Brand value 160000 10% 21463.41463 Shoe Factory 700000 43% 93902.43902 Machinery for Manufacturing Shoes 400000 24% 53658.53659 TOTAL 1640000 100% 220000 Sources: (Created by Author) Journal entries Date Particulars Amount ($) (Debit) Amount ($) (Credit) 30/06/2015 Impairment Loss A/c. Dr. 260,000 To, Goodwill A/c. 40000 To, Land A/c. 26829 To, Inventory Products A/c. 24146 To, Brand "Crossbow Shoes" A/c. 21463 To, Shoe Factory A/c. 93902 To, Machinery A/c. 53659 (Being The net assets and liabilities as well as goodwill impaired as per the recoverable value) Income Statement A/c. Dr. 260,000 To, Impairment Loss A/c. 260000 (Being the value of impairment loss transferred to income statement ) Sources: (Created by Author) Reference List: Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill impairment test under IAS 36.Advances in Accounting,31(1), pp.107-114. Banker, R.D., Basu, S. and Byzalov, D., 2015. Implications of impairment decisions and assets cash-flow horizons for conservatism research.Fox School of Business Research Paper, (14-031). Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance. Detzen, D., Wersborg, T.S.G. and Zlch, H., 2015. Bleak Weather for Sun-Shine AG: A Case Study of Impairment of Assets.Issues in Accounting Education,30(2), pp.18-39. Gros, M. and Koch, S., 2015. Goodwill Impairment Test Disclosures Under IAS 36: Disclosure Quality and its Determinants in Europe.Available at SSRN 2636792. Jordan, C.E. and Clark, S.J., 2015. Do Canadian Companies Employ Big Bath Accounting When Recording Goodwill Impairment?.International Journal of Economics and Finance,7(9), p.159. Koroec, B., Jerman, M. and Tominc, P., 2016. The impairment test of goodwill: an empirical analysis of incentives for earnings management in Italian publicly traded companies.Economic Research-Ekonomska IstraÃ… ¾ivanja,29(1), pp.162-176. Penner, J.W., Kreuze, J.G. and Langsam, S.A., 2016. INSTRUCTORS'NOTES: IMPAIRMENT ANALYSIS: COMPARISON OF IMPAIRMENT OF LONG-LIVED ASSETS BETWEEN US GAAP AND IFRS.Academy of Educational Leadership Journal,22(2), p.90. Rocha do Nascimento, D.V., da Silva, J.P., Sa, T.S. and Gonzaga Borges, T.J., 2015. Impacts Of The Impairment Test In The Accounting Variables And Performance Indicators Of The 50 Largest Companies Listed On BmFbovespa.Revista Contabilidade E Controladoria-RC C,7(2), pp.92-108. Zhuang, Z., 2016. Discussion of An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance,56(1), pp.289-294.