Corporate Accounting Standard Board Method

Question: Discuss about the Corporate Accounting Standard Board Method. Answer: Introduction: As per an accounting concept, an asset should always be shown at a value that shows the value of upcoming financial welfares that will be derived within the asset. Another concept of true fair view states that all the items of financial statement should be stated at a value that give a real picture of the monetary position of the organisation. Thus all the possessions obligations should be valued fairly to give a factual reasonable view to the users of financial statement. Thus in order to find out whether all the assets are carried at a fair value or not, we need to conduct the impairment test. The purpose of conducting the impairment test is to find whether all the items appearing in the balance sheet are worth the amount that they are being carried at in the balance sheet. It comprises classifying damage pointers, measuring or reconsidering the money movements, decisive the reduction charges, challenging the sensibleness of the expectations with the market. Nobody likes surprises or anything new at the end of the day. Effect of Goodwill on Impairment Test: Goodwill is treated as a resource or in simple words we can say is an asset which actually gives us the future benefits which gives us benefits all the way till the business exists. It is seen that the amount which can be recovered from the sale of goodwill cant be easily identified and are not measurable and it does not generate or obtain money movements independently. Subsequent to a commercial gaining in which the resource recording was the goodwill. Post-acquisition accounting wants the asset goodwill to be purely identifies and tested to check if any loss needs to be impaired as proper treatment is required as the financial accounts wants proper value at the end and any asset or liabilities should not be overvalued or undervalued and should be properly disclosed in the statements of accounts. It is not necessary for goodwill to test at the end of the year, it can actually be tested anyway of the year. But certain exceptions exist that if any loss arises between the balance sheet date and the date of the test then proper updating should be there to avoid confrontation. Normally impairment test is undertaken when there are certain indicators present which shows that there are chances of assets of the organisation being impaired However in case of Goodwill (being intangible asset), goodwill needs to be annually tested for impairment even if there are no indicators present that hint towards impairment. There is an impairment if (and to the extent) the carrying value of goodwill exceeds its implied fair value. An impairment loss reduces the recorded goodwill and cannot subsequently be reversed. But certain exceptions exist that if any loss arises between the balance sheet date and the date of the test then proper updating should be there to avoid confrontation. Normally impairment test is undertaken when there are certain indicators present which shows that there are chances of assets of the organisation being impaired Second important thing about goodwill is that in case of an organisation where goodwill is present in the books, any impairment loss that arises is firstly assigned to these intangible assets, in the present case the same is goodwill (Australian accounting standard board, 2014) The first step for carrying out an impairment test is that we need to find out the Carrying amount of the asset for which we desire to carry out the impairment test, where the carrying sum of an advantage or the asset is nothing but the book worth of the advantage or asset after deducting the value of provision for depreciation created for that particular asset. Carrying Amount = Cost of the Asset Prov. for depreciation* created for the particular assets *NB: Amortisation in case of an intangible Asset (Television education network, 2004) Step 2: Recoverable Value Recoverable Value of an Asset is the upper of following: Fair Worth minus cost incurred for selling the product, Where Fair Value Mean the price that the asset will fetch when sold in an open market. Worth in use means the present value of all future cash flows generated from the asset that is being tested. Step 3 Computation of Impairment Loss: Impairment Loss is calculated as follows: Impairment needs to be checked and tested to know the accuracy of the asset and to know whether it is giving accurate value. Balance sheet needs to have accurate and carrying value of the asset. Carrying value, value in use and recoverable value are to be properly calculated to know the desired result. As evident, Crossbow Ltd. operates under a highly competitive environment wherein e-purchase is more preferred than the face to face store purchases. Thus, even after specialisation as a leather manufacturer and the aggressive strategy of buying out other companies that had competing productsit still faced difficulties. For an organisation, the indicators of impairment may arise from external or internal sources. Some of the examples of external sources being, decline in the bazaar price of the asset, technological obsolesce, alteration in the market interest rate, etc. On the contrary internal indicators would be like, physical deterioration of the asset, antiquity of sustained strength sufferers or losses of the cash flow, important change in the pattern of the use of the asset, etc. A loss is identified in the books when the amount prevailing of the asset in the books is more than its Amount which can be taken out from the sale of the asset (RA). RA or in other words the recovered amount is higher of Value-in Use and Net selling price of the asset. In calculating value that is been use, upcoming money movements should be projected for resources in their present state (Queensland treasury and trade, 2014) For future rearrangement, the costs and the profits associated with it should not be recognised or identified unless and until proper provisions are made in respect to that. The benefits that arise from the expenditure should not be recognised in the cash flows for the future. The flow of cash for the value in use test can actually does not match with the cash flow forecasts with the board acknowledged moneys in the upcoming years Now as given in the sum, the recoverable amount as calculated for Crossbow Ltd. assets turns out to be $1 420 000 (given) against the Carrying Amount of $1 680 000 fixing the impairment loss to $260 000 Intangible Assets (incl. Goodwill) are considered to the fastest impairing assets as per AASB 136, thus Brand and Goodwill of $160 000 $40 000 respectively are impaired @ 100%. There is a difference of $29 000 in the Carrying Amount of Land of $200 000 and the Fair Value of $171 000, thus $29 000 turns out to be the impairment loss for Land. The remaining loss of $31 000 is proportionately bifurcated to Inventory, Shoe Factory Machinery as per their carrying amounts in the ratio 12 : 70 : 40 Journal Entry Date Particulars Debit Amount ($) Credit Amount ($) 30th June 2015 Provision for Impairment loss A/c Dr To Brand Account . To Goodwill Account To Land Account To Factory Account To Plant Machinery Account To Inventory Account (Being Provision for impairment loss booked) 260,000 160,000 40,000 29,000 16,953 9,688 4,359 Total 260,000 260,000 Calculation of Impairment loss for the CUG as a whole Amount of the asset till date: $ 1,680,000 Less: amount that can be recovered: $ 1,420,000 Loss that needs to be impaired: $ 260,000 Impairment loss of Land: Carrying amount: $ 200,000 Less: Recoverable Amount: $ 171,000 Impairment Loss: $ 2900 References: Australian accounting standard board (2014).Impairment of asset. Retrieved 27December 2016 from https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf Television Education network (2004).Impairment of asset. Retrieved 27December 2016 from https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfmPaperDisplay=https://www.tved.net.au/PublicPapers/July_2004,_Corporate_Education_Channel,_Accounting_for_Impairment_of_Assets___Part_1.html Queensland tresury and trade (2014).Impairment of asset. Retrieved 27December 2016 from https://www.treasury.qld.gov.au/publications-resources/non-current-asset-policies/ncap-4-impairment-of-assets.pdf Krueger, R. (2002).International standards for Impairment. Retrieved 27December 2016 from https://www.imf.org/external/np/sta/npl/eng/2002/rk0702.pdf