Corporate Accounting Impairment Business Loss

Question: Describe about the Corporate Accounting for Impairment Business Loss. Answer: Part A Impairment Loss and its disclosures The accounting object, that includes both the profitable and non-profitable organizations, has ownerships of different types of assets. Categorization of these assets can be done in different modules. Current assets are those that are created and used by the firm for daily operations. Assets that can be used for several financial years are known as fixed assets (AASB 2012). Several firm own various types of assets that are either acquired or popularly distributed among clients such as brand and goodwill. These assets are mainly intellectual properties such as copyrights, patents and trademarks. But these assets are not used directly for revenue generation but it helps the firm indirectly to earn profits. Intangible assets are those assets of physical nature that cannot be measured in any units. Books of records are kept for the assets in the firm according to sum spent in their acquisition. Since, it is normally observed that the value of assets depreciate with the passage of time. The accounting objects apply impairment when the actual values of durable assets of the objects become less than their book value. Impairment account is created by the accounting entities to adjust with the market rate the assets book value (AASB 2012). Reduction in book value to match the actual value is done and the amount which is reduced is adjusted in the impairment account. The loss incurred during the adjustment is called Impairment Loss. There are various factors which are responsible for the changes in value of assets. Some factors are applicable to all the assets but some factors tend to reduce the value of some particular assets. The worth of equipment, machineries and tools depends on the production capacity and the usage of the machinery. The more machines are used for production, their capacity of production decreases with due course of time. Moreover, due to introduction of new machinery in production the old machines lose their high market value and after some time become obsolete (Hodgson and Russell 2014). But in the case of landed property, its value increases with the passage of time. Some factors may decrease its value such as shifting of public habitats, type of locality, growth of new cities and over population. Intellectual property also loses its value due to the advancement in technology or change in customers choice. By the acquisition of any firm, asset of goodwill is also created. Value of goodwi ll and that of acquired assets go hand in hand. In recent times, stakeholders are very keen and demanding to review the financial statements. Interest over the firm varies according to the nature and type of the stakeholder. Financial statements are analyzed from different point of views. Stakeholders interests are considered as a top priority by the accounting boards and the government. Therefore, it makes it even more important for the financial statements to reflect the true and fair values of liabilities and assets of the enlisted companies (Horngren and Tan 2012). A company may have bought machinery at a higher cost few years back and with time the cost of that machinery has depreciated to half due to the introduction of advanced machines. If the company shows the cost price of previous machines in the financial report, then it would reflect the over-valued rate. Thus fair and correct value of the companys assets and financial statements is not reflected (Deegan 2012). It would rather become a better choice for investment for the stakeholders in the company if the values of firms assets are enhanced. Therefore, the stakeholders will make the wrong choices as the firm shows over-valued assets and over-valued financial statements. To check this kind of wrong decision making, the accounting standard has presented the concept of impairment. Impairing of assets is now required whenever a financial statement is prepared within the framework and guidelines of accounting standards and government policies (Glaum and Vogel 2013). The impairment comes into play when recoverable amount of an asset becomes lower than the carrying amount. The amount which is recorded in the account books for an asset is called carrying amount (Hoskin and Cherry 2014). The amount signifies the sum at which the asset was purchased and the worth of asset after depreciation under specific depreciation methods. Assets have two types of recoverable amounts. For selection of fair value of the assets by way of recoverable amount after deduction of the expenses and costs that are anticipated to be suffered (Ji 2013). Value in use is another type of recoverable amount. The remaining cash flow projected to be produced in the future from the asset is known as value in use. As per the standard of IAS 36 the higher among the two values is selected if both values are available. Calculation of impairment loss is done by deducting the amount to be recoverable from any asset from the carrying amount according to standard of IAS 36. Loss of impairment is debited against the asset to decrease the book value of a specific asset and to continue the depreciated value in the form of accounting amount thereafter (Malone and Wee 2012). Profit and loss account adjusts the impairment loss. It is also settled in the income statement which shows as non-operating loss in the statement of income. Impairment loss account is credited in the Revaluation Surplus account if the latter account is maintained by the firm. This results in the decrease in shareholders equity value. Cash generating units are the group of assets that also include the goodwill, created from acquisition of those specific assets. In these assets adjustment of impairment loss does not happen as it can be observed from the above discussion (Cotter and Wee 2012). If there is a requirement that the entire value of the combined CGU units needs impairment, the loss incurred after the impairment is calculated on the basis of above method. Since, the impairment is adjusted principally with the Goodwill account. When the adjustment with the Goodwill account is done and still the balance remains for settlement then the assets of CGU is used in proportion on the basis of the book value of the assets. The Goodwill account is also a key factor when it comes to impairment account settlement. Part B Source: (Created by Author) Workings: Source: (Created by Author) Reference Bibliography AASB, C.A.S., 2012. Financial Instruments. Cotter, J., Tarca, A. and Wee, M., 2012. 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