corporate accounting and reporting Assignment
Added on 2021-06-18
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ImpairmentTime and again we have been confused about the three very important accountancy concepts that are the depreciation, amortization, and impairment. Depreciation is the book adjustment of reduction in the value of tangible assets, which are attributed to the use and normal wear and tear of such assets. The wear and tear have been apportioned to, as depreciation and charged to the value of assets. Amortization and impairment, however, are both reductions in the value of intangible assets. Intangible assets are reduced in value on the basis of their estimated lifespan (Melville, 2013). This reduction is intrinsically depreciation of the asset but is done as an equal charge over its estimated lifespan.Impairment, however, is the reduction in the recoverable value of fixed assets, including goodwill, below its book value. The main difference between amortization and impairment, which look alike and are often misunderstood for each other, amortization is a gradual and constant and common decrease in the value of an asset, impairment is a sudden and irreversible decrease in the recoverable value of the asset (Melville, 2013).Cash generating units are the smallest group of assets clubbed together which can independently generate cash flows. The Cash Generating Units are formed when certain assets cannot generate cash independently. We can also club the entire assets into one group, but as the definition of CGUs or Cash Generating Units suggests, the CGU should be the smallest group of asset individually generating cash flows.Goodwill is the intangible asset which is a result of the reputation which the company earns over a period of time-based on its activities. The goodwill of the company is its brand value, which is non-physical. The goodwill of a company helps it realize profits, and sustain in a competitive market. In order to understand the concept in common terms, if a company is sold today, the amount the company gets, over and above the difference of its assets and liabilities, is goodwill (Parrino et. al, 2012). It can be negative or positive.The basic reason as to why we depreciate an asset is very logical and simple. It is to ensure that a company cannot carry its assets in its financial statements below its recoverable amount. To impairment, we need to first understand recoverable amount. The recoverable amount is the value the asset would fetch if it was sold as on today (Leo, 2011). To arrive at this value of recoverable amount, we compare two values:1. Asset’s fair value as reduced by its cost of disposal2. Value in use2
ImpairmentBefore conducting this calculation and testing for impairment, first, it is mandatory to check whether the indications for impairment exist. Theories on this concept suggest many internal as well as external indicators for impairment. Once the existence of an impairment is confirmed, the assets are tested and computed for impairment. Goodwill cannot be separated from other assets which are acquired by the parent company. Also, goodwill which is impaired is always acquired or purchased as a part of an acquisition plan. Self-generated goodwill can never be impaired. Hence, going forward in the write-up, any goodwill addressed to, will be acquired goodwill only (Needles & Powers, 2013).Goodwill is always grossed up for the parent if the goodwill is computed on a proportionate basis. Any impairment loss so computed is allocated towards the sum of recognized and unrecognized goodwill in the profit and loss sharing ratio of the parent and subsidiary (Petty et. al, 2012). The amount which is written off against the notional goodwill will not affect theconsolidated financial statements. It also does not affect the non-controlling interest of the parent company. However, any portion of recognized goodwill so written off will be attributed to only the parent company. It will, however, not affect the non-controlling interests (Marsh, 2009).Any excess of impairment loss over the recognized goodwill will be attributed to other assets on a proportionate basis. This will be absorbed by the parent company and the non-controlling interest in the profit and loss sharing ratio (Merchant, 2012).However, when the goodwill is already grossed up in nature, the impairment loss is simply shared between the parent and the non-controlling interest in the normal profit and loss sharing ratio.The above scenario exists when there is a goodwill in the balance sheet of a financial statement. For a company with no goodwill, the computation of impairment for a CGU is the same as that for any individual asset (Porter & Norton, 2014).It’s better to analyze both the situations with the help of an example.Assuming the following scenario:The assets of a 70% owned subsidiary are being tested for impairment. The carrying amount of the net assets (assets-liabilities) was $420 million. Parent’s goodwill was computed to be $400 million. The recoverable amount if the subsidiary was $800 million.3
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