Impairment of the Assets-Free-Samples for Students- Myassignment

Question: Discuss about the Impairment of Assets. Answer: Introduction: The main idea behind the principle of IAS 36 is the fact that an asset must never be reported at more than its fair value. In case, the carrying value is more than the recoverable amount, then the asset is stated to have been impaired. In such a case, the asset must be reduced to the carrying value of the asset to its recoverable value and then the loss of impairment must be reported in the statement of profit and loss as an impairment loss. This accounting standard applies to certain group of the assets that do not generate the cash inflows individually such as the cash generating units. This standard applies to all of the assets for which the accounting standard states that the same must be impaired. The main exception to this fact is the inventories, deferred tax assets, the assets that derive from the employee benefits, financial assets that come under the scope of IAS 41. Then there are some of the assets that arise from the insurance contracts and the non-current assets that ar e held for sale. The amount that the company would receive when it sells an asset will have to be stated each eyar in the books of account. The fair value is less than the costs to sell which is the arms length sales price less the costs of disposal between the parties that have knowledge of the same (IFRS, 2017). Evidence of impairment testing: The following are some of the indicators that indicate that the asset has to be impaired: Market rate of interest Significant adverse changes in the technology Changes that takes place in the market, economy and also in the laws pertaining to the company in which the company operates Capitalisation is less than the net assets The internal sources include the internal structuring, evidences of the obsolescence or the physical damage to the assets. The assets that have an indefinite life or the ones that have been out to use are required to be tested each year (EY, 2017). Procedure for impairment: The following is the procedure for determining the impairment loss: The first step is concerned with the comparison of the assets carrying amount with the cash flows that have not been discounted which the same is expected to generate. In case, the cash flows that have not been discounted are more than the carrying value, then there is no requirement to recognise the impairment loss but then step 2 is very much necessary. When the undiscounted flows of the cash is higher than the cash flows that have not been discounted, then the step has to be followed. Step 2 is concerned with the measuring of the difference which exists between the carrying amount and the fair value. The fair value in the terms which is defined as the amount that one would receive when an asset has been sold or that would be paid in case the liability is transferred on the transaction date between the various participants of the market as on the date of the measurement. Only one test of impairment is required as per the provisions of the IFRS. If the carrying amount of that asset is more than its recoverable amount, then the excess amount would represent a loss of an impairment. This is the amount that is more than its fair value less the costs pertaining to the disposal of the asset or the value which is in use. For the long lived assets the test of impairment has to be compared. The step 1 of the GAAP testing means the comparison of the carrying value of the asset to its cash flows that the company would accrue in the future and that have been undiscounted. (AICPA store, 2017). Information required: The following is the information which is required: The likelihood of existence of more than 50% of impairment must be considered so as to check the impairment. This is somewhat based on the assessment of the relevant events and the circumstances. The examples of the same include the increase in the costs, fall in the cash flows etc. The fair value of the asset has to be impaired to its carrying amount. This has to be made sure than the goodwill is included and the presence of any significant unrecognised intangible assets has been taken into account. In case the carrying value is much more than the fair value of the unit of reporting, then the impairment loss has to be calculated. The third step is the calculation of the impairment loss. The implied fair value of the goodwill which is connected or which is linked with the units of reporting is compared with the carrying value of the goodwill. In case, the carrying value is more than the implied fair value, then the impairment loss shall be recognised and this would be up to a maximum of the carrying value of the goodwill (Accounting tools, 2017). Flexibility of the management: The management do not have any sort of flexibility since in case, the conditions exist, then the asset has to be impaired (Power tech exposed, 2017). Conclusion: The main idea behind the principle of IAS 36 is the fact that an asset must never be reported at more than its fair value. In case, the carrying value is more than the recoverable amount, then the asset is stated to have been impaired. In such a case, the asset must be reduced to the carrying value of the asset to its recoverable value and then the loss of impairment must be reported in the statement of profit and loss as an impairment loss. This accounting standard applies to certain group of the assets that do not generate the cash inflows individually such as the cash generating units. There are some of the conditions that exist on the basis of which an impairment is said to have taken place. In case the carrying value of the asset is less than the fair value of an asset, then the management has to impair that assets and reduce its carrying value to its fair value the management as such has no flexibility in this regard, they merely have to comply with the requirements of the accounting standards. The judgement has to resort to when it comes to the exercising of the factors that would lead to the impairment of an asset. Though there are some of the conditions that indicates an impairment but the management is duty bound to use its judgement, past experiences, experiences of the similar companies in the same industry References: Aicpastore.com. (2017).Procedural Differences in Impairment Testing. [online] Available at: https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2009/CPA/Mar/InTesting.jsp [Accessed 27 Aug. 2017]. Bragg, S. and Bragg, S. (2017).Goodwill impairment testing. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/goodwill-impairment-testing.html [Accessed 27 Aug. 2017]. Iasplus.com. (2017).IAS 36 Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 27 Aug. 2017]. Ifrs.org. (2017).IFRS. [online] Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/ [Accessed 27 Aug. 2017]. www.ey.com. (2017).Impairment accounting. [online] 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 27 Aug. 2017]. www.powertechexposed.com. (2017).Impairment testing. [online] Available at: https://www.powertechexposed.com/IAS_36_impairment_testing_GL_IFRS.pdf [Accessed 27 Aug. 2017].