Corporate Accounting and Reporting: Valuation of Assets and Impairment

This essay delves into the core concepts of corporate accounting and reporting, specifically focusing on the methods used to compute fair value, value in use, and recoverable amount. The author discusses the importance of these calculations in providing accurate financial information and the rol...Read More

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
Name of the Student:
Name of the University:
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1CORPORATE ACCOUNTING AND REPORTING
Introduction:
The current essay has been prepared with the intention of providing a description
of the process, which is used for computing different accounting concepts. These
include “fair value”, “value in use” and “recoverable amount”. The firms deemed to be
operating in the economy, focus on maintaining their financial information disclosures
and thus, they prepare financial statements, in which all transactions related to financial
assets and liabilities are recorded. The assets are to be provided with additional help for
conducting their valuation precisely so that the financial position of the organisations
could be understood effectively. Therefore, it is necessary that the items are computed
appropriately for providing accurate and fair financial reports.
Recoverable amount, value in use and fair value less cost of disposal:
One of the accounting concepts is recoverable amount, which addresses the
market values of assets provided by the business organisations and they are used in
the existing operating activities of the organisations. The term is used for gaining an
insight related to impairment of fixed assets in accordance with AASB 136. The amount
could be deemed as the optimum value to be attained by an asset (Bond, Govendir and
Wells 2016). In particular, there are two procedures, which assist in calculating this
value and they are obtained by either usage of the business assets or selling a portion
of the assets.
The amount of asset of an entity is represented in the form of the current value of
future cash flows that are estimated and they are used by the assets. The value of an
asset already sold is termed as the fair value subtracted by the amount incurred in

2CORPORATE ACCOUNTING AND REPORTING
selling off the asset (Aasb.gov.au 2019). The recoverable amount is the amount, which
is the higher between fair value and value in use. The amount is considered to be
necessary in order to undertake impairment. The item having the highest amount is
recoverable amount, since an alternative needs to be chosen by the management,
which would be able to provide the optimum ability (Goncharov, Riedl and Sellhorn
2014).
According to the accounting fundamentals, the organisations are required to
maintain records of their activities within the statements of financial position at the time
the carrying amount of the asset is higher than the recoverable amount. For instance, if
an entity undertakes efforts in anticipating the impaired asset values, there is
introduction of a formal estimated recoverable figure. This is evident in case of fall in
expenses or decline of market worth associated with inventory. AASB 136 states that
the accounting professionals have to follow the approach and they need to be
addressed with a number of phases. If the fair value of an asset is not computed after
disposal amount is deducted, there is no difference between the values of value-in-use
and cost of disposal (Komissarov, Kastantin and Rick 2014).
According to Linnenluecke et al. (2015), for the fair value less cost of disposal of
an asset and the worth of the asset used exceed the carrying amounts; it is not crucial
to determine to compute the recoverable amount owing to the fact that the asset does
not require impairment. Therefore, in order to compute recoverable amount, the higher
between fair value and value in use should be taken into consideration.

3CORPORATE ACCOUNTING AND REPORTING
With the help of value in use, it becomes easy to explain the present worth of
cash flows, which are observed in future and they are formulated with the help of asset
utilisation. In addition, the organisations have the objective of determining the value in
use related to an asset such as a portion the process looking to find out whether the
asset needs to be impaired. In such case, the official anticipation needs to be developed
for the recoverable amount. This method is in aligned with the minimised market value
or decline in expenses. According to the standard of AASB 136, if after subtracting the
disposal cost, the fair value is not determined; the recoverable amount becomes
identical to the value in use. There needs to be recognition of a number of elements for
computing value in use and the elements mainly include the rate of discount and cash
flow (Majercakova and Skoda 2015).
The cash flow estimations are reliant on the projections that take into
consideration the existing estimations as well as budget planning. As commented by
Whittington (2015), the organisations estimate their budget for five years and thus, the
analysts are enabled to analyse the information within a specific period. The value in
use is also termed as the present value of the benefits related to an asset.
Finally, fair value less cost of disposal denotes the expenses that are incremental
in nature and they could be categorised directly for asset elimination (Zhuang 2016).
This value is deemed to be necessary, since it aids in the analysis of the recoverable
amount and fair value minus disposal cost. The firms use this amount for impairment of
assets.
Conclusion:

4CORPORATE ACCOUNTING AND REPORTING
The justifications provided in the essay are in alignment with the answers that
have been asked and the explanations provided clearly validates that the three terms
have strong association among each other. This is because the computation of the
values is made in a similar fashion. It has been evaluated that in case of impairment of
assets, the values are computed mainly by the accounting experts. This would assist in
providing idea of the optimal amount, which could be achieved and utilised on the part
of the organisation for the ascertainment of assets along with market values. The
reliability of fair value needs to be taken into consideration, as it is difficult to obtain
reliable information. Finally, value in use is developed for defining the current worth of
the cash flows, which are observed in future and they are formulated with the help of
asset utilisation. In addition, the organisations have the objective of determining the
value in use related to an asset such as a portion the process looking to find out
whether the asset needs to be impaired.

5CORPORATE ACCOUNTING AND REPORTING
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 22 Jan. 2019].
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.
Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of
Accounting Studies, 19(1), pp.210-241.
Komissarov, S., Kastantin, J.T. and Rick, K., 2014. Impairment of Long-Lived Assets: A
Comparison under the ASC and IFRS. The CPA Journal, 84(5), p.28.
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.
Majercakova, D. and Skoda, M., 2015. Fair value in financial statements after financial
crisis. Journal of Applied Accounting Research, 16(3), pp.312-332.
Whittington, G., 2015. Fair value and IFRS. In The Routledge companion to financial
accounting theory (pp. 237-255). Routledge.
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.