CO5122 Financial Accounting Assignment Sample
Here’s the best sample of CO5122 Financial Accounting Assignment, written by the expert.
Introduction
The main aim of this report is to enhance the knowledge and understanding of the financial accounting term that is impairment test. However, impairment test has the same meaning in the both accounting standard such as international accounting standard and Australian accounting standard board. In this manner, this report depicts the purpose of the impairment test for the assets in the accounting process (Tuijl, et al., 2012). Furthermore, this report also discusses when the impairment test is conducted in the accounting process. This report is also helpful to determine the effect of the impairment test on the goodwill of the company. In additionally, this report is also important for the readers to learn the steps involved in the impairment test. The next part of the report is also significant to improve the understanding because this part is based on the case study of Singtel that is Singapore based organization. In this part, it is found that different measurement basis for assets for Singtel. At the same time, this report also determines the company’s assets including the property, plant and equipment with other intangible assets. Therefore, this report is also significant to determine the impaired value of the assets in the financial annual report.
Part A
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The purpose of the impairment test for assets
In the accounting language, impairment test measures the value of the organizational assets. It main function is to determine in the balance sheet that whether the worth of the assets increased or decreased. The worth of the assets decreases in the case of the impairment test shows the lower value. In the Australian accounting standard board, the section 136 defines the concept of the impairment test. According to AASB 136, the main purpose of this test is to determine the value of the organization assets. It also has aimed to determine the changing value of assets in the balance sheet during the current financial year (Abdel-Aziz and Larner, 2015). In the other words, the objective of this standard is to carry out a process that is able to determine the whether the assets values is increased or decreased in the particular time. The reason because the impairment test is conducted for the assets is that accounting thinks that it is not necessary that determined value of assets is actual or fair always. It means that it is not guarantee that determine or carrying value of assets provide the same among at the time of sales. It is because most of the time, the carrying amount of the assets is based on the estimation and judgment developed by the accountant in the financial statements. At the same time, depreciation is an amount that will be charged on the assets. So that the main purpose of impairment test is to find out the actual value of the assets (Larner, 2015).
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When to undertake an impairment test
Jefferies and Gale (2013) defined that in order to record the accurate value of the assets in the balance sheet, it is essential to determine or evaluate the fair value of the assets at the current time. In this process, impairment test helps the company. But, at the same time, impairment test is applicable in the context of the long term depreciated assets. This test is conducted when any internal and external factor indicates that assets value may be worth less as compared to starting value in the financial statement.
Impairment can be defined as the unexpected and sudden decline in value of the assets of the organization. It is conducted only for those assess on which accounting charges depreciation. However, there is no particular timing determined for this but companies and accountant conduct this test at time of preparing the balance sheet for the ending of financial year. At the same time, this test can also be conducted at the time of the sales of any physical assets because it helps the company to determine accurate value of the assets at the time. In additionally, in the financial market, the investors also conduct the impairment test when they are going to buy an asset (Ramanna and Watts 2012.). It helps the investors to make the decision whether it should buy or not.
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How the existence of goodwill will affect the impairment test
There is the significant impact on of the impairment test on the goodwill of the company because the result of the impairment test affects the company goodwill. However, it will be negative or positive, it depends on result of impairment test in the accounting process. According to Australian accounting standard board, generally the goodwill of the company is affected negatively when the impairment test provide the negative results. It means that when the value of the organizational assets is found less as compared the carrying value then it is possibility that goodwill of the company will decline (Shroff et al., 2011). Moreover, it is also found that when in the case of value of the organizational assets increased in the impairment test as compared to carrying value.
In the accounting, the value of the goodwill can be change due to impairment test. In this, it is determined that companies record the goodwill when the organizational assets value is increased as compared to fair value. The changing amount is recorded by the goodwill. In the accounting language, the term goodwill can be seen when a company acquires the assets and liabilities. It can also be seen when the price of assets is found exceed as compared to its identifiable value (Chalmers et al., 2011). Goodwill impairment is influenced when company found that decline in the value of organizational assets. It is because it also influences the company ability to generate the cash from the assets. In this, the fair value of the assets is measure less as compared to book value of the organizational assets.
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The basic steps to be followed in applying the impairment test for (a) individual assets and (b) cash generating units
Goodwill impairment happens when recognized goodwill is linked with the acquisition value is high than the fair value of assets. In Australian accounting standard, the term impairment refers to the asset which value will not be same for the long time. In the impairment test, the accountant measures the change in the value of the impairment. Impairment test is conducted when value of company goodwill is declining in the context of the assets value (Abughazaleh et al., 2012). In order to conduct the impairment test, some steps are followed by the accountant:
Select assets to test: It is first step of impairment test in the accounting process. In this process, company and accountant selects the particular asset from the balance sheet of the company. In process, only fixed assets are considered and all other assets are ignored for impairment testing.
Determine impairment level: In this step, fixed asset accountant calculates the undiscounted cash flow of the selected fixed assets from the balance sheet. Therefore, it prepares the list of the fixed assets resisted next to the selected items. In this process accountant also prepares the list or notes of the situation where the carrying amount of an asset is greater than its undiscounted cash flow. Thus, the accountant calculates the difference between the carrying amount and undiscounted cash flow (Darrough et al., 2014).
Update accounting records: After getting the information on the difference between the carrying amount and undiscounted cash flow, general entry is prepared by the accountant. In this process, document is also prepared for justification of the impairment value.
Revise depreciation calculations: In the process, the new depreciation value and new amount of assets is updated with the old value and information.
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How to account for reversals of Impairment losses
In the impairment test, when the actual value of the asset is found less as compared book value then it is concerned as the loss or depreciation. It is recorded in the depreciation account of the ledger. At the same time, when company sales the asset in the loss then impaired loss is recorded as the loss by the sales of the assets (Alves, 2013).
Part B
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The measurement basis for assets
In the Australian accounting standard board, it is clearly defined that companies are impairment test is only conducted for the fixed assets of the company. The annual financial report of the Singtel shows that company has Property, Plant & Equipment in the context of the fixed assets. These assets can be considered for the impairment test. In this, it is also found that the value of property, plant and equipment is S$ 11,892 million in 2017. After one year, it is found in 2018, the value of the property, plant and equipment is found S$ 11,800.8 million. These assets can be considered as the impairment test because a decline can be seen the value of the assets (Olante, 2013).
The measurement basis for assets is that it should the fixed assets. At the same time, it is also found that the impairment test avoid the other assets in the balance sheet. Moreover, it is also analyzed that that the assets that is considered for the impairment test is also called the impaired asset. Each assets of the company has the market price. In the market, price of the assets is less compared the value listed on the company financial statements then the companies and accountant concern assets for the impairment test (Chen et al., 2014).
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What are the company’s assets, including Property, plant and equipment
The asset is the significant part of the balance sheet that includes the various kinds of the assets such as the tangible assets and intangible assets. Tangible asserts can be seen in the balance sheet of Singtel in the context of the current assets and fixed assets. In this, it is found that the main fixed assets of the company are plant, property, and equipment. There are no other assets on which impairments test can be conducted. However, there are some current assets that are recorded in the balance sheet (Camodeca, et al., 2013). Moreover, it is also found that annual report of the company doesn’t show that there is goodwill.
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Have any assets been impaired? Is there an explanation for this?
In the annual financial report of Singtel is also found that company did not conduct the impairment test. In this, it has been seen that in the section of the non-current assets, carrying value and accounting standard changes of the balance. In the impairment test, the depreciation value of the assets is also concerned. In balance sheet of the Singtel, it is found that depreciation value on the assets is forwarded (Devalle and Rizzato, 2012).
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Has any reversal of impairment losses occurred?
By the help of the analysis the financial statement of the Singtel, It is found that company did not conducted any impairment test due to this, there is no loss of occurred by changing the value of the assets. However, the decline in the amount of the assets may be due to depreciation and loss that is considered in the current business year.
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What is the effect of asset impairment/reversals of asset impairment on the balance sheet and the income statement?
There is a significant impact of the asset impairment/reversals of asset impairment on the balance sheet and the income statement. It is because it affects the value of the balance sheet and income statement. In this, it is found that asset impairment/reversals of asset impairment in the context of the increases increased the value of the goodwill in the balance sheet that improve the overall performance of the company in the market and in the financial statement. Beside of the, income statement includes the depreciation amount on the fixed assets. Therefore, it will influence the result of the income statement.
Conclusion
On the basis of the above discussion, it can be said that impairment test is one of the main term of the financial accounting process. According to Australian accounting standard board, it is found that Impairment test enables the accountant and company to determine the different between the carrying account and accurate value of the assets. Mainly, the basic purpose of the impairment test is to determine the different between the book value and faire value of the assets. Along with this, the impairment test is also conducted when company is going to acquire to new assets. In this, it is also found that there is also significant impact of the impairment test on the goodwill of the company. The main concerning aspect is that impairment test is only focused on the company fixed asset. At the same time, the intangible assets are avoided in the test. The increase in the value of the assets is known as the goodwill and decrease value of the assets is known as impairment loss.
References
Abdel-Aziz, K. and Larner, A.J., 2015. Six-item cognitive impairment test (6CIT): pragmatic diagnostic accuracy study for dementia and MCI. International psychogeriatrics, 27(6), pp.991-997.
Abughazaleh, N., Al-Hares, O. and Haddad, A., 2012. The value relevance of goodwill impairments: UK evidence.
Alves, S., 2013. The association between goodwill impairment and discretionary accruals: Portuguese evidence. Journal Accounting Business and Management-International, 20(2).
Camodeca, R., Almici, A. and Bernardi, M., 2013. Goodwill impairment testing under IFRS before and after the financial crisis: evidence from the UK large listed companies. Problems and perspectives in management, 11(3), pp.17-23.
Chalmers, K.G., Godfrey, J.M. and Webster, J.C., 2011. Does a goodwill impairment regime better reflect the underlying economic attributes of goodwill?. Accounting & Finance, 51(3), pp.634-660.
Chen, L.H., Krishnan, J. and Sami, H., 2014. Goodwill impairment charges and analyst forecast properties. Accounting Horizons, 29(1), pp.141-169.
Darrough, M.N., Guler, L. and Wang, P., 2014. Goodwill impairment losses and CEO compensation. Journal of Accounting, Auditing & Finance, 29(4), pp.435-463.
Devalle, A. and Rizzato, F., 2012. The quality of mandatory disclosure: the impairment of goodwill. An empirical analysis of European listed companies. Procedia Economics and Finance, 2, pp.101-108.
Gu, F. and Lev, B., 2011. Overpriced shares, ill-advised acquisitions, and goodwill impairment. The Accounting Review, 86(6), pp.1995-2022.
Jefferies, K. and Gale, T.M., 2013. 6-CIT: six-item cognitive impairment test. In Cognitive Screening Instruments (pp. 209-218). Springer, London.
Larner, A.J., 2015. Implications of changing the Six‐item Cognitive Impairment Test cutoff. International journal of geriatric psychiatry, 30(7), pp.778-779.
Olante, M.E., 2013. Overpaid acquisitions and goodwill impairment losses—Evidence from the US. Advances in accounting, 29(2), pp.243-254.
Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in required goodwill impairment. Review of Accounting Studies, 17(4), pp.749-780.
Shroff, P.K., Venkataraman, R. and Zhang, I.X., 2011. Causes and consequences of goodwill impairment losses. Review of Accounting Studies, 16(4), pp.745-778.
Singtel 2018. Annual Report 2018. [Online] Available At: http://info.singtel.com/annualreport/2018/financials.html (Assessed: 17 August 2018)
Tuijl, J.P., Scholte, E.M., de Craen, A.J. and van der Mast, R.C., 2012. Screening for cognitive impairment in older general hospital patients: comparison of the Six‐Item Cognitive Impairment Test with the Mini‐Mental State Examination. International journal of geriatric psychiatry, 27(7), pp.755-762.
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