Impairment Testing in Accounting

Accounting Assignment

By student name
Professor
University
Date: 31st March 2019.
Page 1

Table of Contents
Question 1..................................................................................................................... 3
Question 2..................................................................................................................... 3
Question 3..................................................................................................................... 4
References............................................................................................................... 11
Page 2

Question 1
The board of directors of Simba Ltd believe adopting a method of fair value for the valuation of
the assets will help the company in making the financial statements look better, and that would
eliminate the need for depreciation for the company. Most of these assets are not possible to be
obtained easily and the overall valuation of the same is also very difficult. So, the board of
director has given this proposal.
Fair value measurement is a method that uses the current market prices of the assets to value
them. There are different approaches based on which fair value can be calculated which includes
market approach, income approach or cost approach. But this does not eliminate the need for
calculation of depreciation, it leads to the revaluation model, where the assets carried on the
books is equivalent to asset fair value reduced by the accumulated depreciation and accumulated
impairment losses. So, the best advantage of using such kind of method is that it helps in
maintaining accurate valuation, thus the users can refer to the financial statements of the
company and get a correct value of the company and its assets all over. It also makes sure that
the management of the company is not manipulating with its data and the reported net income of
the company. But it is affected by the market conditions which fluctuates on many ends. Thus, it
can be said that the board of directors should adopt these proposal and value their asset as per
fair value accounting.
Question 2
The main characters of impairment testing are to make sure that the assets are carried by the
company at a price that is not more than the recoverable amount of the asset. This helps in
ensuring that overvaluation of the assets is not done and so the financial statements shows a true
position of the company and its overall financial position. In case of the revaluation model the
carrying amount of the assets increases decreases in sync with the fluctuations in the fair value of
the asset. Even though both are fairly connected there is a difference in them and that is very
apparent from its accounting. In case a company ignores the recoverable value of the asset then
there are chances that the assets fair value might exceed its recoverable value, and this will
Page 3