Accounting Policy And Discretionary Accrual â€Myassignmenthelp.Com

Question: Discuss About The Accounting Policy And Discretionary Accrual? Answer: Introducation The impairment testing of all intangible and tangible assets are dealt with International Australian standard 136 that requires assets should not be carried at amount that is excessive of recoverable amount. The objective of this standard is to ensure that assets are not carried at more than value of their recoverable amount. This particular standard for asset impairment is applicable for the general purpose of financial report of entities and requiring entities to prepare their financial report according to part 2M.3 of the corporation act. In order for meeting this particular objective, it is required by organization when there exist any potential for asset impairment, then all the assets within the scope should be tested for impairment (Bhasin 2015). At each reporting date, an entity is required to make the assessment about the indicator of impairment of assets as per the standard. Assessment by entity would be done by gaining information from both internal and external sources. S ome of internal sources involve physical damage to assets, internal restructuring and any obsolescence. On other hand internal sources are adverse changes in economy, marketing and technology, changes in the market interest rates, net value of assets higher than market capitalization and legal environment in which entity operates (Arnold et al. 2016). The application of IAS 136 is provided to all assets excluding: Deferred tax assets Investment in property that is carried at fair value Inventories Insurance contracts assets Assets that arise of generates from employees benefit Agricultural assets that assets carried at fair value Assets generating from contracts of construction Noncurrent assets that are held for sale Financial assets Application of IAS 136 is mostly to the following assets: Machinery and equipments Goodwill Assets that are carried at revalue amount Intangible assets Buildings and lands The assets impairment loss other than goodwill is decreased or they do not exist might be indicated by some internal as well as external informational sources. Some of internal changes might be favourable and significant changes in the performance or use of assets and external conditions might be positive change in the assets value and market conditions. Previously recognized impairment loss of assets is reversed if there is improvement in recoverable amount since the recognition of last impairment loss. Therefore, it can be said that any favourable changes in the market conditions and with passing of time, there cannot be recognition of an impairment reversal. The carrying amount of assets should be more than the adjusted carrying amount of assets when there is recognition of an impairment reversal. Such amount would have been determined if there were no previously impairment loss. Their arises the need to review residual value of assets, it useful life and amortization and deprecia tion method. The reversal of impairment loss for goodwill is specifically prohibited by IAS 136 (Chaibi et al. 2014). Assets recoverable amount is the greater of its value in use and fair value less cost to sell. Carrying value of assets is compared with their recoverable amount for measuring the impairment. Amount that is obtained from selling an asset between willing parties in an arms length transactions by reducing the disposal cost is fair value less cost to sell. Determination of fair value in use for assets has a hierarchy that is established by IAS 136 (Gordon and Hsu 2017). On other hand, present value of future cash flows that is derived from cash generating unit of assets is referred to as value in use. There is no need for entities to carry out annual impairment tests for intangible assets having indefinite lives or for goodwill. Irrespective of indication of impairment, the recoverable amounts of assets are compared with their carrying value. Changing circumstances indicating the impairment of assets calls for the need of testing for impairment on frequent basis (Penner et al. 2016). Nonetheless, the impairment calculations for previous period can be used by entities for impairment calculations of intangible assets when meeting some of the criterias. Extensive disclosures are required by IAS 136 in regard to recognition of impairment and performing of impairment tests. Compared to other assets impairment, disclosures for goodwill are more extensive. Following points depicts some of the key requirements for disclosures: Application of valuation method and determining the appropriate assumptions by using that approach. Cash generating unit goodwill amount Conducting impairment using sensitivity analysis indicating possible change in key assumptions (Rennekamp et al. 2014). Circumstances causing and leading to impairment and the amount of impairment reversal and recognition. There needs to be disclosure of discount and growth rate used and other assumptions that are required for valuation purpose. The recognition of impairment loss is done to the extent that recoverable amount of assets is less than its carrying value. There are two method for assessing the carrying value of assets that involves historical cost method and revaluation method. Recognition of impairment loss of assets is treated as an immediate expenses if the statement of profit and loss if the assets are carried at historical cost. On other hand, Loss related to impairment is treated is decrease in revaluation if the revaluation of impaired assets are done under IAS 138 or IAS 16. This decrease in revaluation is directly recognized in the statement of comprehensive income that lead to reduction of surplus generated from revaluation for that particular asset. If the surplus generated from revaluation is lower than impairment loss, then the remaining loss is recognized and treated as expenses in the profit and loss statement. When an entity is to recognize the impairment loss, there will never be reduction of car rying value of assets below the recoverable amount that is higher and zero (Penner et al. 2016). The key elements of financial reporting process of an organization are impairment despite the fact that entity has adopted the standard for first time. Impairment assessment process can be time consuming and complex and in this regard, it is essential on part of entities to have access to right models and skills such as forecasting and modelling (Goswami 2014). Particulars Amount Fair Value,less, Cost to Sell $0 Value in Use $3,30,000 Recoverable Amount $3,30,000 (Higher of Fair Value Value in use) Less: Carrying Amount of CGU $3,66,000 Total Impairment Gain/(Loss) ($36,000) Allocation of Specified Impairment Loss: Particulars Carrying Amount Fair Value Impairment Loss Total Impairment Loss $36,000 Less: Plant $2,46,000 $2,37,292 $8,708 Goodwill $12,000 $0 $12,000 Balance Impairment Loss $15,292 Impairment Loss Allocation as per Weightage: Particulars Carrying Amount Weightage Impairment Loss Balance Impairment Loss $15,292 Equipment $57,000 52.78% $8,071 Fittings $36,000 33.33% $5,097 Inventory $15,000 13.89% $2,124 Total $1,08,000 100% $15,292 In the books of Gali Ltd. Journal Entries Dr. Cr. Date Particulars Amount Amount 30/06/2017 Impairment Loss A/c. $36,000 Plant A/c. $8,708 Equipment A/c. $8,071 Fittings A/c. $5,097 Inventory A/c. $2,124 Goodwill A/c. $12,000 (Being assets under the specific cash generating unit impaired) Profit Loss A/c. $36,000 Impairment Loss A/c. $36,000 (Being impairment loss transferred to P/L A/c.) References: Arnold, L.W., Harris, P. and Liu, M., 2016, January. CORPORATE ACCOUNTING MALFEASANCE: AN OVERVIEW. In Global Conference on Business Finance Proceedings (Vol. 11, No. 1, p. 202). Institute for Business Finance Research. Bhasin, M.L., 2015. Corporate accounting fraud: A case study of Satyam Computers Limited. Chaibi, H., Trabelsi, S. and Omri, A., 2014. Investment opportunity set, corporate accounting policy and discretionary accruals. Journal of Economic and Financial Modelling, 1(1), pp.1-12. Gordon, E.A. and Hsu, H.T., 2017. Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under US GAAP and IFRS. The Accounting Review. Goswami, M., 2014. Corporate Environmental Accounting: The Issue, Its Practices and Challenges; A Study on Indian Corporate Accounting Practices. IOSR Journal of Business and Management, 16(5). 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. Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment. The Accounting Review, 90(2), pp.739-759.