Corporate Accounting and Reporting and Regulations

Question: Discuss about the Corporate Accounting and Reporting and Regulations. Answer: Introduction The following part of the study aims to present the concept on impairment test based on the regulations of international accounting standards. The discussion incorporates the purpose of impairment test according to the principles and requirements of Australian Accounting Standards Board (AASB) 136 on impairment of assets. Besides, the discussion includes the impact of goodwill on impairment test along with the relevant steps required to be followed in applying impairment test. Purpose of impairment test In order to conduct business operations, organizations need to own several assets that are classified as per various sections for profit making as well as non- profit making companies. Assets are classified as current assets, fixed assets and intangible assets that are recognized in the statement of financial position during the accounting year. Current assets are the assets used by the companies for conducting day-to-day business operations and pay off the current obligations (Christensen and Nikolaev 2013). Besides, fixed assets are the assets used as business resources held for more than one year while intangible assets are long- term assets that are either self-generated or purchased. Accordingly, with due course of time, the real value of the fixed assets as well as certain intangible assets like goodwill, begins to decline. Such reduction of asset value is tested for impairment as for measuring the asset valuation worth recognizing in the statement of financial position (Gros a nd Koch 2015). Therefore, impairment is an accounting regulation that measures the reduction in the assets value for fixed assets and goodwill by comparing the actual value and carrying value. However, it is essential to consider the impairment test for measuring the reduction value as per the value in use, future cash benefits or expected recoverable amount. Impairment of assets depends on various internal and external resources along with the determination of recoverable amount and future cash benefits (Lange, Fornaro and Buttermilch 2014). Certain external sources that provide information to impair the assets involve decline in market value of assets, adverse effect on the company or increase in the market interest rates. In addition, internal source of information for availability of asset obsolescence asset along with the significant changes in the organization requires impairment test (Aasb.gov.au. 2017). Hence, the primary purpose of impairment test is to measure the reduction in actual valu e of long- term assets. Impact of goodwill on impairment test Impairment test is conducted on long- term fixed assets that includes goodwill as intangible asset for the financial year. Impairment on goodwill is a measure recognized by the companies when the carrying amount of goodwill exceeds the fair value. The value of goodwill is recognized in the financial statements while acquiring assets and liabilities along with the payment of purchase price if the value exceeds identifiable value. Accordingly, impairment of goodwill arises if the ability of companys assets is lower than the book value in terms of generating cash flows or profitability (Chen, Krishnan and Sami 2014). Goodwill is an intangible asset acquired by the companies with respect to brand valuation or acquiring assets and liabilities in connection with merger or acquisitions. Accordingly, if the value of goodwill exists in the companys balance sheet then the management is required to assess the qualitative factors for the purpose of impairment test. Existence of goodwill affects the impairment test for identification of potential impairment factors in terms of cash flow benefits and value in use. Impairment test involves comparison of fair value and carrying amount, which is difficult to identify for goodwill since it is an intangible asset and varies as per the organizational values. For instance, if the fair value of reporting unit exceeds the carrying amount, then the goodwill cannot be impaired (Izzo, Luciani and Sartori 2013). Further, existence of goodwill affects the impairment test with respect to other fixed assets that considers market interest rates, market value as well as market rate of return implement the factors appropriately. Steps to be followed for application of impairment test For conducting impairment test, Longreach Ltd requires to follow several steps that are stated as under: Step 1: First step to be followed for application of impairment test is to identify the assets or cash- generating unit that should be impaired. It includes the identification and planning to measure the recoverable amount to measure the impairment loss. Step 2: Next step is to identify and analyze the internal sources for considering impairment of assets by evaluating the evidences on obsolescence or damage with respect to the long- term assets. Step 3: After analyzing the internal sources, external sources are required to be analyzed to assess the actual market value as well as the significant changes to evaluate the adverse effect (Knauer and Whrmann 2016). Step 4: On considering the required analysis on impairment test, recoverable amount is to be computed by deducting cost from the fair market value of the impaired assets. Step 5: Recoverable amount is then compared by the value of carrying amount to assess lower of actual value and recoverable value. Thereafter, the amount of impairment loss is allocated on goodwill first and the balance amount on other assets based on the percentage of actual values (Badia et al. 2017). Conclusion Impairment test is essential for the companies to determine the actual worth of the assets employed to run the business activities. The assets are recognized in the financial statements of the company to determine the financial position of the company during the financial year. Hence, it is important to determine the correct value after considering the impairment test as per the regulations of international accounting standards and AASB 136. The study covers the impact of goodwill on impairment test with respect to assessment of impairment factors and identification of potential impaired assets. Further, basic steps required to be followed for applying impairment test has been identified that the management of Longreach Ltd can consider during the financial year. The identified steps include identification of impaired assets, analysis of internal and external sources and determination of recoverable amount that requires to be compared to the carrying value to measure the impairment l oss. In the Books of Crossbow Ltd. Journal Entry as at 30 June 2015 Dr. Cr. Date Particulars Amount Amount ($) ($) 30/06/2015 Impairment Loss A/c. Dr. 2,60,000.00 To Goodwill A/c. 40,000.00 To Land A/c. 26,829.27 To Inventory Products A/c. 24,146.34 To Brand "Crossbow Shoes" A/c. 21,463.41 To Shoe Factory A/c. 93,902.44 To Machinery A/c. 53,658.54 (Being the net identifiable assets liabilities and goodwill impaired based on the recoverable amount) Income Statement A/c. Dr. 2,60,000.00 To Impairment Loss A/c. 2,60,000.00 (Being the amount of impairment loss on machinery transferred to Income Statement ) Working Note: Calculation of Impairment Loss Particulars Amount Carrying Amount of Assets (A) $16,80,000 Recoverable Amount of Assets (B) $14,20,000 Fair Value of Assets ( C) $1,71,000 Real Value of Assets (D = Higher of B C) $14,20,000 Impairment Loss (A-D) $2,60,000 Less : Goodwill on Acquisition $40,000 Impairment Loss Less Goodwill $2,20,000 Allocation of Impairment Loss Particulars Amount Percentage Impairment allocation Land 2,00,000.00 12% 26,829.27 Inventory Products 1,80,000.00 11% 24,146.34 Brand "Crossbow Shoe" 1,60,000.00 10% 21,463.41 Shoe Factory 7,00,000.00 43% 93,902.44 Machinery for Manufacturing Shoes 4,00,000.00 24% 53,658.54 TOTAL 16,40,000.00 100% 2,20,000.00 Reference List Aasb.gov.au., 2017. Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au/ [Accessed 12 Jan. 2017]. 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