Impairment of Assets and Intangible Assets Treatment

The assignment provided is related to accounting for impairment of assets and intangible assets treatment as per MFRS 136. It involves analyzing Favelle Favco Berhad's annual report, specifically their impairment of assets and intangible assets, and discussing the correct treatment according to the Malaysian Financial Reporting Standards (MFRS) 136. The assignment requires understanding and application of accounting standards to determine the appropriate method for impairing assets and recognizing losses in a company's financial statements.

Intermediate Financial
Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Point 1 – Explaining five items of MFRS 136 requirements for disclosure in annual report of
company.................................................................................................................................2
Point 2 – MFRS 136 disclosure compliance and format presented by organisation..............3
Point 3 – Discussing recognition and measurement requirements in MFRS 136 standard....5
SUMMARY.....................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Favello Favco Berhad is a private investment holding organization working in
manufacturing, supply and sevice, designing industry. The company was founded in 1962 and its
main branch of the company is located in Senawang, Malaysia. It is a subsidiary of Muhibbah
Engineering Berhad. It operates through inside and outside Malaysia segments. The product line
of this company includes, heavy lift offshore, tower, wharf and crawler cranes. It consists of
mainly 2 international brands working together, i.e. Favelle Favco and Kroll. Tower cranes
which include Kroll cranes are basically heavy lifting electric hammerhead cranes and Favelle
Favco cranes are high speed diesel hydraulic luffing cranes.
The company offers two main series to their customers, which include rope luffing and
ram luffing set-ups. Their crawler cranes has lattice boom and telescopic boom present in it.
Wharf cranes of this company includes level luffing bulk handling cranes. Wharf cranes offers
both luffing and hammerhead cranes with diesel hydraulic and electric setups with it. Favelle
Favco Berhad company's subsidiaries includes Favelle Favco Cranes (M) Sdn. Bhd., which
provide services related to designing, manufacturing, supply, servicing, trading and renting of
cranes, and FES Equipment Services Sdn. Bhd., which works basically in supply of spare parts
related to cranes, provision of crane maintenance services and renting of cranes. Apart from this
Favello Favco includes up-to-date and well maintained equipment to their clients and deliver
their service on time. The main activity of this company is to manufacture unique and different
cranes which can be used for the purpose of construction.
Financial accounting plays crucial role in the business in getting clarity in the business
transactions accounted for. Present report deals with Favelle Favco Berhad which is engaged in
manufacturing industry and engaged in constructing cranes in effective manner. Adequate profits
are being attained by company as financial report clarifies that turnover in 2017 was 526,484.
Profit Before Interest and Tax were 83,277 in 2017 in comparison to 79,782 in previous year.
Profit attributable to shareholders in the same year was 63,097 while, total equity to investors
were amounting to 629,509. Share capital was 155,170 and EPS (Earnings Per Share) was 28.50
and net assets per share was 2.84. This means that profit is increased in 2017 financial year.
1

Point 1 – Explaining five items of MFRS 136 requirements for disclosure in annual report of
company
There are five items which are required to be included in an annual report as it is
mandatory to be included so that financials may be presented in accordance to MFRS (Malaysian
Financial Reporting Standards) 136 which is dedicated to impairment of assets. These assets
include tangible as well as intangible assets and as such, these should be showed in annual report
of the business quite effectually. The items included in annual report are listed below-
1. Property, Plant and Equipment (PPE)-
The PPE is an fixed asset which should be disclosed in annual report along with
impairment on it. There are various assets of fixed nature used in the business and economic
benefits are aroused in the future course of action (Rahman, & Mohamed 2018). It is required
that it should be disclosed so that impairment amount can be deducted for which damage is
occurred or because of time, fixed assets have lost their value. This will help in correct
ascertainment of profits as depreciation will be charged on it along with carrying amount
disclosed in financial report in the best possible manner.
2. Goodwill-
Goodwill is an intangible asset which builds because of brand image of organisation in
the market as customers are satisfied in effectual manner. This should be increased up to a high
extent as it shows that firm provides quality goods and services to customers and as such, market
value of organisation enhances in a better way. Goodwill should be disclosed at cost by
deducting impairment losses. The amount of goodwill is included in carrying amount and as a
result, it is made in relation to impairment if any.
3. Investment in associates-
The investment if made in associate firm should be included in the annual report so that
correct ascertainment may be made in the best possible manner. This means that investor has an
influence over other company and as a result, he can take participation in operating and financial
decisions. The information related to the company must be disclosed as required by MFRS 136
and impairment losses if any found must be shown as well. This will provide with useful
information to external parties and they will be benefited up to a high extent.
2

4. Intellectual Property-
Intellectual Property is another intangible asset to be disclosed in annual report which
organisation has hired to make its brand different from competitors and also to protect its
activities and functionalities from them (Golinghorst, 2017). It includes right of company to
trade its name which is differentiated from the rivals and customers may be attracted towards
particular brand. It should be stated at cost by deducting amortisation and impairment on it for
which loss has been occurred in the financial year. Hence, disclosure is mandatory in accordance
to MFRS standards.
5. Amortisation-
The amortisation is accounted for in effective manner. However, goodwill and related
intangible assets are not usually amortised and instead testing for impairment losses if any is
made on yearly basis. Moreover, there is an indication regarding that it may impaired in future
course of action. Other assets apart from this are amortised from the date they are hired and
organisation has started using it. The amortisation is recognised in financials of Favelle Favco
Berhad in 2017 year in Profit and Loss account on the basis of straight line method.
Point 2 – MFRS 136 disclosure compliance and format presented by organisation
The impairment of assets means that when carrying amount exceeds that of its
recoverable amount and as such, loss is suffered by company (Zhang & Ji., 2018). It is
essentially required as per the guidance of MFRS 136 that an asset should be effectively assessed
as per each year's balance sheet so as to identify whether indication prevails that an asset may be
impaired at future date or not. Hence, external and internal sources of information is recognised
to carry out analysis with regards to impaired assets. The disclosure compliance as provided by
MFRS 136 is listed as under-
Each of class of assets, financial statement must disclose related information-
 Amount of impairment losses should be included in income statements and also the line
item of such statement and losses included in the Profit and Loss account.
 Amount of reversal on such statements and line statement on losses on which reversal of
impairment is found.
 The amount which is recognised directly in equity in the financial year
 The impairment amount on reversal recognised in equity during financial year
3

Class of assets of similar nature should be disclosed in the financial statements. The
information can be presented and reconciled on the basis of carrying amount of PPE (Property,
Plant and Equipment) at opening and closing of reporting period quite effectually (Kortokrax,
2017). On the other hand, if organisation comes under the MASB 22 relating to segmental
reporting should disclose information with regards to each of its segment such as amount that has
been recognised in the income statements and also in the equity in the financial period.
Moreover, it has to include amount on reversals of such losses recognised in Profit and Loss
account and in equity for the particular period in the best possible way.
The impaired losses have been found on an asset or cash generating unit or be it reversed,
then also it contains material information and should be disclosed in the financials. It should
have events or circumstances led to impairment recognition, amount of reversal attained on such
reversal. If individual asset is found, then nature and segment to which it is attributable should be
disclosed. On the other hand, if cash generating unit is there, then description of the same must
be made, amount of impairment losses and aggregation of assets should be disclosed in a better
way by identifying that estimate has been modified. Thus, former and current amount should be
aggregated to attain reasons for such change in cash generating unit (Ahmad, 2018).
Moreover, to assess in case of cash generating unit that recoverable amount is net selling
value or its use of value. If recoverable amount is attained as per net selling price and it is to be
utilised with reference to net selling price and if other method is used, then discount rate should
be accounted for with reference to current and previous year estimate. Apart from this, if
impaired losses are in terms of material in aggregation of financials, then enterprise must
disclose brief classifying main classes of such assets and main event leading to recognition in
case of reversals. Key assumptions must be presented for any of the impairment losses incurred
in financial year. The sample format for Favelle Favco Berhad is-
4

Illustration 1: Intangible assets impairment treatment
Point 3 – Discussing recognition and measurement requirements in MFRS 136 standard
The recognition of impairment loss is required to be made as over the time, measurement
and recognising becomes important in order to correctly ascertain profits by deducting such
losses on the impaired assets in the best possible manner. Furthermore, if carrying amount is
more than that of recoverable amount, then impairment exists and as such, loss prevails which
needs to be accounted by Favelle Favco Berhad to make adjustments accordingly (Annual report
of Favelle Favco Berhad. 2017). Moreover, individual and cash generating unit are differently
treated by the organisation. Hence, recognition and measurement can be easily analysed by
taking into consideration provided by MFRS 136 standard. It may be assessed that if recoverable
5

amount is lower than that of carrying one, then it should be minimised in relation to recoverable
one and as such, reduction is known as impairment loss on an asset.
The company if identifies that asset is indicated to be impaired, then it should be taken
immediately. Loss should be instantly recognised as expenditure in Profit and Loss account.
However, it does not apply when asset has been revalued. On revaluation, value should be
decreased as per the standard. Revalued asset is recognised as surplus on it which is applicable
up to some extent till loss does not exceed amount in revaluation basis of such gain or surplus.
When carrying amount is less than amount in estimated to which it relates and organisation
should identify relating to and as a liability (Dhakal, Chintzoglou & Zhang, 2018).
After company has been identified or recognised, impairment loss should be included,
depreciation should be adjusted in relation to the asset in future years for allocating revised
amount by deducting residual value recognised on useful life of an asset in effective manner.
Hence, company may be able to ascertain correct profits and external parties may be benefited as
decisions can be made by them in according to their individual requirement. Thus, by comprising
with MFRS 136 standard of Malaysia, Favelle Favco Berhad can easily attain clarity regarding
financial performance and health and can provide well-structured financial statements
highlighting true and fair view of company.
The MFRS 136 standard is required to be followed by the business so that correct
estimation of impaired assets can be made and as such, correct profit may be ascertained in the
best possible manner. The recognition is needed to be made particularly when impaired assets
are taken into consideration. The carrying amount is more in comparison to recoverable amount
and thus, impairment exists which need to be taken into account and hence, profits can be
correctly obtained. MFRS 136 states that when carrying amount is in excess, then impairment of
assets are extracted which is treated as loss. As such, it is deducted from overall profits in order
to ascertain fair net profits. Hence, Favelle Favco Berhad which is engaged in constructing of
cranes is required to make adjustments of impaired assets. If there is possibility in the future that
assets might be impaired and thus, it should be recognised by firm and measure accordingly.
Hence, by complying with such standard, impaired assets' deduction can be made and profits can
be ascertained in a better way.
6

SUMMARY
Hereby it can be summarised that financial accounting play a crucial role in the company
and as such, organisation may be able to comply with financial requirements to be met in
accordance to standards issued by the board. Business transactions are needed to be accounted
for by organisation so as to maintain clarity regarding operational tasks attained. Furthermore,
firm is able to know about expenses made and income earned in effective manner. Without
complying with the financial principles, final accounts cannot be prepared accurately. Hence, it
is required that business should properly include each and every transaction so that firm may be
able to carry out final accounts in effective manner.
In relation to this, MFRS which is Malaysian Board guiding company to prepare
financials in the context of guidelines initiated by the professional body. The standard MFRS
136 which is related to impairment of assets is included in the board guidelines which provides
way to prepare and include losses identified in impairment of assets be it tangible or intangible.
This is essentially required so that financials may be formulated by correctly in the best possible
way. On the other hand, impaired amount on assets must be accounted for ascertaining correct
profits of company. Recognition and measurement of assets are required so that they may be
correctly accounted for and as a result, amount can be deducted to ascertain true value of asset.
It is compulsory required that if Favelle Favco Berhad identifies that an asset will be
impaired in the future as indication is clarified, then immediate action must be made in effective
way. The standard imparted by MFRS has to be followed to conduct operations legally and
providing true and fair view of financial information to external stakeholders with much ease.
There are various items that are to be included in annual report of organisation in order to fulfil
requirements of MFRS 136 and assets to be recognised and measured in relation to the same.
Hence, impairment losses can be effectively met and taken into account to exhibit true financials.
7

REFERENCES
Books and Journals
Ahmad, N., (2018). Responsive Regulation and Resiliency: The Renewable Fuel Standard and
Advanced Biofuels.
Dhakal, S. K., Chintzoglou, G. & Zhang, J., (2018). A Study of a Compound Solar Eruption with
Two Consecutive Erupting Magnetic Structures. The Astrophysical Journal. 860(1). p.35.
Golinghorst, K. M., (2017). Meet Me in the Middle: The Search for the Appropriate Standard of
Review for the APA's Good Cause Exception. Iowa L. Rev.. 103. p.1277.
Kortokrax, S. A., (2017). Erroneous Deviation or Faithful Restoration: An Examination of the
NLRB's Browning-Ferris Joint-Employer Standard. Ohio St. LJ. 78. p.227.
Rahman, A. A., & Mohamed, A. S. (2018). Investigating the Early Implementation of MFRS
136 Disclosure among Top 50 Firms in Malaysia. Asian Journal of Accounting and
Governance. 8. 59-76.
Zhang, Q. M. & Ji, H. S., (2018). Vertical oscillation of a coronal cavity triggered by an EUV
wave. The Astrophysical Journal. 860(2). p.113.
Online
8

Annual report of Favelle Favco Berhad. 2017 [PDF] Available Through:
<http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?
id=186966&name=EA_DS_ATTACHMENTS>
9