Deconstructing an accounting paradigm shift - MyAssignmenthelp.com

Question: Discuss about the Deconstructing an accounting paradigm shift. Answer: Part A: Impairment has a primary doctrine that an asset might not be carried on the balance sheet statement beyond the recoverable value, which is the greater of the fair value of the asset less cost to sell and value-in-use. The comparison between the carrying value and the recoverable value of the asset is made and the asset is impaired at the time the former is more than the latter (Bond, Govendir and Wells 2016). Any allocation of impairment is made to the asset at that point of time with the impairment loss realised in profit or loss. All assets subject to the review of impairment are tested for impairment, in which there is an indication that the asset might be impaired. However, there are different assets like infinite intangible assets and goodwill, which are tested for yearly impairment in the absence of any impairment indicator (Laing and Perrin 2014). The computation of recoverable amount is made at the individual asset level. However, an asset leads to cash flows independently of other assets and majority of the assets are tested for impairment in classes of assets explained in the form of cash-generating units (Linnenluecke et al. 2015). According to Paragraph 104 of AASB 136, the impairment loss for cash-generating unit (CGU) is realised, if the recoverable value related to the CGU is lower compared to the carrying amount of that CGU. The allocation of impairment loss is made for reducing the carrying value of the unit assets and they are followed sequentially in two steps. Firstly, the carrying amount of any goodwill apportioned to the cash-generating unit would be minimised and secondly, the other asset units pro-rata based on the carrying amount of each assets in the unit would be reduced. Such minimisations in carrying amounts need to be treated in the form of impairment losses on individual assets and they are to be realised with adherence to Paragraph 60 of AASB 136 (AASB 2014). Moreover, Paragraph 105 of AASB 136 states that for allocating impairment loss, an organisation need not minimise an assets carrying amount below the greater of three possible alternatives. These alternatives include fair value minus disposal costs, value-in-use and zero. The impairment loss amount, which would have been allocated differently to the asset, need to be allocated pro-rata to the other unit assets. Paragraph 106 of AASB 136 cites that it is not possible all the time to anticipate the recoverable amount associated with each individual asset of a cash-generating unit. Hence, this standard needs a random apportionment of impairment loss between the units assets except goodwill. This is because each asset of a cash-generating unit is involved in working together (Kabir, Rahman and Su 2017). Moreover, Paragraph 107 of AASB 136 denotes that in case, the recoverable amount associated with an individual asset is not ascertained, it might lead to two different situations. Firstly, an impairment loss is realised for the asset, in case; the carrying amount is higher in contrast to the fair value minus disposal cost and the outcomes of the procedures of allocation laid out in Paragraphs 104 and 105 of AASB 136 (AASB 2015). Secondly, the realisation of impairment loss is made for the asset, in case; the associated cash-generating unit is not impaired. This is applicable when the fair value of the asset less the disposal cost is lower in contrast to the carrying amount of that asset. For instance, a machine has encountered physical damage; however, it is still in working condition, even though the performance is not effective, as it was before. The fair value minus disposal cost of the machine is lower compared to its carrying amount. In addition, it does not fetch independent cash flows. The smallest identifiable class of assets including the machine along with fetching cash inflows independent of the cash inflows from other assets is the line of production to which the machine belongs. The recoverable amount related to the line of production depicts that such line is not impaired fully. In this case, two different assumptions could be made. The first assumption is that the forecasts or budgets that the management approved signify lack of commitment level of the management in replacing the machine. The machines recoverable amount could not be anticipated, as the value-in-use of the machine might vary from the fair value minus disposal costs and it could be ascertained for the CGU to which the machine belongs (Banker, Basu and Byzalov 2016). Hence, there is no realisation of impairment loss for the machine. Thus, it is necessary for the organisation to re-evaluate the period of depreciation or the method of depreciation related to the machine. It is recommended to the organisation to adopt shorter period of depreciation or faster method of depreciation for signifying the remaining life of the machine or the way in which the economic benefits are estimated to be consumed. The second assumption is that the forecasts or budgets that the management approved symbolise its commitment in replacing the machine by selling it in the upcoming years. The cash inflows from the continual usage of the machine until its disposal are projected to be little. In this case, the value-in-use of the machine could not be anticipated as close to the fair value minus cost of disposal. Hence, it is not possible to ascertain the recoverable amount associated with the machine (Zhuang 2016). Henceforth, there is absence of any consideration to the cash-generating unit, in which the machine belongs, which is the line of production. As the fair value less cost of disposal of the machine is lower in contrast to its carrying amount, an impairment loss is realised for the machine. Based on the above discussion, it could be inferred that when an impairment loss takes place in a CGU excluding goodwill, the loss is apportioned throughout all the assets in the CGU based on pro-rata, which is relative to the overall carrying amount of the CGU. Finally, the accounting of losses is carried out in the same way like that for the individual assets. Part B: References: AASB, C.A.S., 2014. Business Combinations.Disclosure,66, p.77. AASB, C.A.S., 2015. Investments in Associates and Joint Ventures. Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and Assets' Cash-Flow Horizons for Conservatism Research.The Accounting Review,92(2), pp.41-67. Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance,56(1), pp.259-288. Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models.International Journal of Critical Accounting,6(5-6), pp.509-519. Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment.Accounting Finance,55(4), pp.911-929. Zhuang, Z., 2016. Discussion of An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance,56(1), pp.289-294.