Accounting and Financial Reporting

This document discusses the nature of reserves and impairment loss of goodwill in accounting and financial reporting. It explains the methods that organisations have to adopt to ensure that assets are carried at amounts, which do not exceed their recoverable amounts. It also discusses the transfer of reserves and the accounts where reserves could be transferred. The document includes references and is suitable for students studying accounting and finance.

Running head: ACCOUNTING AND FINANCIAL REPORTING
Accounting and Financial Reporting
Name of the Student:
Name of the University;
Author’s Note:
Course ID:

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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question 2:................................................................................................................5
References:.................................................................................................................................9

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Answer to Question 1:
Reversal of an impairment loss of goodwill:
Introduction:
According to the accounting principle, there should not be any overvalued asset in the
balance sheet statement of an organisation. Thus, some value concepts are needed in contrast
to which the carrying amount of the asset could be compared to determine if this is actually
overvalued. As per “Paragraph 1 of AASB 136”, impairment of assets helps in explaining
the methods that all organisations have to adopt in order to ensure that assets are carried at
amounts, which do not exceed their recoverable amounts. Moreover, the above paragraph
emphasises on the fact that the expected recoverable amount from sale of assets must not
exceed the carrying value (Aasb.gov.au 2019). In this situation, the asset is impaired and
thus, impairment loss has to be recognised, which should be followed by the time the loss
occurred and necessary disclosures.
Discussion:
When the recoverable amount of an asset goes beyond its carrying value, there is
recognition of impairment loss, which is the greater of the fair value of the asset less selling
cost and value in use. “Paragraph 1 of AASB 136” states that it is necessary to minimise the
carrying value of an asset to its recoverable amount, when the latter is lower compared to the
former. This minimisation is considered as impairment loss (Darrough, Guler and Wang
2014). However, there would be variation of the technique in recording impairment loss
depending on whether the asset is pursuant to the revaluation model or reported at cost.
According to “Paragraph 60 of AASB 136”, immediate recognition of impairment loss is
necessary; the only exception is available when the carrying value of an asset is adjusted at its

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re-valued amount by adhering to any other standard. This standard indicates towards the
revaluation model, which could be found in AASB 116. Hence, the impairment loss related to
a re-valued asset is required to be treated in the form of a revaluation decrease in accordance
with the other standard.
All classes of assets including goodwill could be impaired in accordance with the
revaluation model and cost model. “Paragraph 61 of AASB 136” emphasises on the cost
model, in which when cost is utilised for recording impaired asset, impairment loss has to be
recognised immediately in the income statement. More precisely, such loss needs to be
reported in the form of expense in the income statement of a business organisation (Chen,
Krishnan and Sami 2014).
“Paragraph 61 of AASB 136” emphasises on the revaluation model, in which when
the carrying value of an impaired asset is conducted at a re-valued amount, there is no
difference in the treatment of revaluation decrease and impairment loss. In order to ensure
reiteration, the impairment loss on re-valued asset is recognised in the statement of profit or
loss initially in order to limit the same in exceeding the amount of revaluation surplus for that
similar asset (Li and Sloan 2017). The objective is met by debiting the balance revaluation
surplus account applied to the asset and related deferred tax liability before any loss balance
is recognised in the form of expense in the statement of profit or loss.
However, there are chances of certain situation, in which the recoverable amount of
an asset has been written off in the previous period going past its carrying value (Filip,
Jeanjean and Paugam 2015). “Paragraph 110 of AASB 136” needs an organisation to
identify any sign that an impairment loss previously recognised for any asset might have
fallen or they have no existence. Hence, “Paragraph 111 of AASB 136” requires various
internal and external indications that would assist in reversing an impairment loss of

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goodwill. Some of these situations might be in the form of significant increase in the market
value, significant variation with favourable effect on the organisation, decline in market rates
of interest, suitable changes associated with utilisation of assets and evidences representing
that the economic performance of an asset is better compared to the expectations
(Abuaddous, Hanefah and Laili 2014).
It has already been identified that reversing an impairment loss could be conducted
either with the help of the cost model or the revaluation model. In case, the asset is associated
with the cost model, the impairment loss reversal could not be able to increase the carrying
amount of the asset going beyond the amortisation amount of goodwill. However, it is to be
borne in mind that the asset is subject to the actual policy of amortisation (Hamberg and
Beisland 2014). Hence, for assets like goodwill, the reversal of impairment loss should not be
recognised as an income item in the profit and loss statement of the organisation, which is
mentioned in “Paragraph 119 of AASB 136”.
However, it is noteworthy to mention that it is not possible to conduct reversal of
impairment loss of goodwill in a subsequent period, as AASB 136 prohibits the recognition
of goodwill, which is generated within the organisation. Any rise in the recoverable amount
of goodwill in the periods after realising an impairment loss for that goodwill is probable to
be a rise in goodwill generated within the organisation (Avallone and Quagli 2015). Thus,
there would not be reversal of impairment loss recognised for the goodwill acquisition.
Instead, the amount of goodwill would be subtracted from the carrying amounts of assets and
pro-rata would be used for apportioning the amount of impairment less to other assets.
Conclusion:
Based on the above discussion, it could be stated that impairment of assets helps in
explaining the methods that all organisations have to adopt in order to ensure that assets are

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carried at amounts, which do not exceed their recoverable amounts. Moreover, the expected
recoverable amount from sale of assets must not exceed the carrying value. However, it is not
possible to conduct reversal of impairment loss of goodwill in a subsequent period, as AASB
136 prohibits the recognition of goodwill, which is generated within the organisation. Thus,
there would not be reversal of impairment loss recognised for the goodwill acquisition.
Answer to Question 2:
Nature of reserves and account for movements in reserves, including dividends:
Introduction:
Reserves form a crucial part in the statements of financial position of the business
organisations. Reserves could be taken into account as a portion of business profit that the
organisations include for different specific purposes. The main reason that the organisations
create reserves is for mainly the purchase of any type of non-assets, repair for payments along
with maintenance and others. Along with this, reserves are transferred mainly for payment of
dividends to the shareholders (Lee and Parker 2014).
Discussion:
At the time of discussion regarding the nature of reserves, it is noteworthy to mention
that a reserve could be taken into account as a portion of profit that the organisations have
until the time the money is needed for business purposes. This method is considered as
accounting appropriation. The primary objective of reserves could be obtained from the
reserve account label (Lee and Parker 2014). Reserve accounting could be deemed as a part
of net worth of the organisation owing to which reserves are represented in the equity section
of the statement of financial position. In this context, it is to be borne in mind that the
reserves are created for different particular as well as general purposes. When the general

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reserves are created, the organisations do not have any particular purpose; the only exception
is the business security and in developing at necessary times (Brief 2014).
In addition, it is possible for the business organisations to create special reserves when
different predetermined purposes are present, since these reserves need to be used for only
particular purposes. Besides, in analysing the nature of reserves, it is necessary to concentrate
on the reserve creation process (Azmat 2014). When a particular reserve amount is
appropriated, the organisations are required to record entries so that signals could be provided
to the investors that the profit amount would not be divided among them. After such decision,
the amount necessary to save for the organisation mandates the need for creation of reserve
account by crediting the specific or general reserve accounts and debiting retained earnings
account. In this regard, Riccardi (2016) mentioned that retained earnings are the remaining
amount of profit after settling the dividend payments of the shareholders.
The transfer of reserve is deemed to be a significant portion in the reserve accounting
process for the organisations. It could be observed that reserves are transferred in different
accounts and one such account is the capital reserve account where progress could be
witnessed owing to the outcome of the issuing shares in excess of par value (Patatoukas
2014). This account is one of the significant accounts in order to ensure transfer of reserve.
Retained earnings are another account, which mainly occur owing to the presence of any
previous profitable activities. Retained earnings include the percentage of net income that the
organisations do not distribute to the shareholders in the form of dividends. Besides, fair
value reserve is another account, in which reserve is transferred and it constitutes of
adjustments for securities and assets, which are available for sales. This reserve is crucial for
the organisation due to covering uncertainties inherent in casualty insurance, property and
others. After this, hedging reserve account could be observed for transferring reserve and this

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progress could be observed due to the hedges of the organisation in order to combat with
volatility and others.
Asset revaluation reserve is another account, in which reserves are transferred and the
formation of this reserve could be witnessed when it is necessary to adjust the values of assets
developed in the asset section of the balance sheet statement (Reid 2018). The other account
includes foreign currency translation reserve, in which the transfer of reserves is made and
the creation of this reserve could be observed owing to the variation in the relative currency
value where the balance sheet reporting is conducted. Statutory reserve is deemed to be the
net account, in which reserve is transferred as well. This is a special kind of reserve required
to be developed to comply with the necessary standards and guidelines. However, the balance
of this reserve could not be divided among the shareholders as dividends.
Dividend is identified as another account where it is possible to shift business
reserves. In compliance with the accounting guidelines, when the organisation does not have
enough profit or no profit at all, it has the right of paying the dividends from free reserves.
Therefore, free reserves are considered as the reserves, which could be distributed as
dividends, as per the audited statement of financial position (Sikalidis and Leventis 2017). It
clearly denotes that the organisations suffering losses without any reserve account do not
possess the ability of paying dividends to their shareholders. However, they need to take into
account other aspects as well while conducting the same.
Before dividend is deflated in the existing year, it is necessary to transfer a portion of
part, which would be appropriate for their reserves. The organisations are obliged
compulsorily in transferring a percentage of profit to general reserves before making dividend
declarations. When such percentage of profit is transferred, it assures that a particular amount

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of general reserve is present. As a result, the organisations could conduct payment of
dividends in the upcoming year when there is considerable amount of profit.
Conclusion:
Based on the above discussion, it could be inferred that one of the primary
responsibilities of any business organisation is the development of a reserve account. This is
because such account would assist them in meeting different obligations such as dividend
payment, buying assets and others. Moreover, the above analysis makes it evident that there
are a number of accounts, in which the reserve accounts could be transferred and they include
fair value measurement reserves, hedging reserves, statutory reserves and other reserves. By
maintaining these reserve accounts, the organisations gain the ability to combat with
unforeseen future circumstances as well as other crisis scenarios and thus, they could ensure
sound flow of their business operations.

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References:
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
[Accessed 26 Jan. 2019].
Abuaddous, M., Hanefah, M.M. and Laili, N.H., 2014. Accounting standards, goodwill
impairment and earnings management in Malaysia. International Journal of Economics and
Finance, 6(12), p.201.
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill
impairment test under IAS 36. Advances in accounting, 31(1), pp.107-114.
Azmat, Q.U.A., 2014. Firm value and optimal cash level: Evidence from
Pakistan. International Journal of Emerging Markets, 9(4), pp.488-504.
Brief, R.P., 2014. Valuation, Matching, and Earnings: The Continuing Debate. The
Continuing Debate Over Depreciation, Capital and Income (RLE Accounting), p.38.
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.
Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill
impairment losses: Evidence and effect on future performance. Journal of Business Finance
& Accounting, 42(3-4), pp.515-554.

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Hamberg, M. and Beisland, L.A., 2014. Changes in the value relevance of goodwill
accounting following the adoption of IFRS 3. Journal of International Accounting, Auditing
and Taxation, 23(2), pp.59-73.
Lee, T.A. and Parker, R.H. eds., 2014. Evolution of Corporate Financial Reporting (RLE
Accounting). Routledge.
Lee, T.A. and Parker, R.H., 2014. Company financial statements: an essay in business history
1830–1950. In Evolution of Corporate Financial Reporting (RLE Accounting)(pp. 27-51).
Routledge.
Li, K.K. and Sloan, R.G., 2017. Has goodwill accounting gone bad?. Review of Accounting
Studies, 22(2), pp.964-1003.
Patatoukas, P.N., 2014. Detecting news in aggregate accounting earnings: implications for
stock market valuation. Review of Accounting Studies, 19(1), pp.134-160.
Reid, W., 2018. The meaning of company accounts. Routledge.
Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 30—Presentation of
Financial Statements. In China Accounting Standards (pp. 227-238). Springer, Singapore.
Sikalidis, A. and Leventis, S., 2017. The impact of unrealized fair value adjustments on
dividend policy. European Accounting Review, 26(2), pp.283-310.