Comprehensive Analysis: Corporate Accounting & Financial Reporting

This report provides a detailed analysis of corporate accounting and financial reporting, focusing on the computation of recoverable amounts, value in use (VIU), and fair value less cost of disposal. It explains how to determine impairment loss when the carrying amount of an asset exceeds its recoverable amount, referencing AASB 136 standards. The report outlines the steps for measuring VIU, including projecting future cash flows and applying appropriate discount rates. It also discusses how to measure fair value less cost of disposal, considering factors like binding agreements and active market prices. Furthermore, the report includes a practical application with journal entries for Gali Ltd, demonstrating the allocation of impairment loss across various assets, excluding inventory. The analysis is supported by academic references, providing a comprehensive overview of the principles and practices involved in corporate accounting and financial reporting.

Running head: CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Corporate Accounting and Financial Reporting
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1CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part A
Computation of recoverable amount, value in use and fair value less cost of
disposal
If the carrying amount of individual asset or its CGU (cash generating unit) is
more than its recoverable amount then the excess amount of carrying amount over
the recoverable amount is known as the impairment loss. However for computing the
amount of impairment loss other factors like VIU (value in use), recoverable amount
and fair value less cost of disposing it shall be taken into consideration. VIU of the
asset PV (present value) of future cash flows likely to arise from the cash generating
asset or any other specific asset. On the other hand, recoverable value for individual
assets or its CGU is among the VIU and fair value less cost of disposing it,
whichever is higher. Fair value less cost of disposing it is considered as the value
that is expected to be generated from the sale of the asset or it’s CGU at arm’s
length price of transaction among the knowledgeable and willing parties and the
amount s reduced by the cost associated to sales (Legislation.gov.au 2019).
As per the definition provided AASB 136 on impairment, recoverable value for
individual assets or its CGU is among the VIU and fair value less cost of disposing it,
whichever is higher. Para 19-57 stated the requirement for measuring the
recoverable amount for the purpose of computing the impairment loss of the asset, if
any. Though this requirement is applicable for the term ‘an asset’, it is applicable for
individual asset as well as CGU both. Always it is not required to measure both fair
value less disposal cost as well as VIU for the purpose of impairment testing. Even if
one of these values exceeds carrying value of asset, the asset is not considered as

2CORPORATE ACCOUNTING AND FINANCIAL REPORTING
impaired and the other value is not required to be computed (Bepari and Mollik
2017).
Sometimes it’s become quite impossible to compute the fair value less cost of
disposing is there is no active market for the asset or no reliable basis can be
determined for making reliable judgement and estimates to estimate the amount
obtainable from selling the asset. This may be due to the fact that the VIU of the
asset held to dispose includes the net proceeds from the disposal measured through
computing the future cash flows from continuous usage of the asset till the disposal
of the asset is of the negligible value (Legislation.gov.au 2019). For individual asset
recoverable amount is determined except where the cash flow is largely depends on
any other asset or on CGU. If the cash flow of the asset is largely depends on any
other asset or on CGU, the amount recoverable from the CGU is determined.
However, this concept is not applicable where – (i) fair value less cost of disposing
exceeds the carrying value or (ii) VIU of asset can be determined that is close to fair
value less cost of disposing the asset. However, in some cases the estimates,
averages and short cuts with detailed computation or reasonable approximations are
used for determining the VIU or the fair value less cost of disposing the asset
(Vanza, Wells and Wright 2018)
For measuring the VIU various factors those are accounted are (i) projection
of future cash flows likely to be generated by the company that is obtainable from
asset (ii) expected changes in market with regard to amount or timing of future cash
flows (iii) time value of money represented through risk free rate of interest
prevailing currently at the market (iv) price contributed for bearing the inherent
uncertainties associated with asset (v) various other factors such as liquidity that
may be reflected by the market participants for pricing of the future cash inflows

3CORPORATE ACCOUNTING AND FINANCIAL REPORTING
likely to be created from asset (Rennekamp, Rupar and Seybert 2014). Steps used
while measuring VIU are – (i) determining future cash inflows as well as outflows
likely to be generated from continuous use of the assets and subsequent disposal (ii)
applying appropriate discount rate to future cash flows. To estimate the VIU, the
basis that is used for projecting future cash flows is estimating base cash flow on
reasonable and supportable assumption and judgements that will be considered as
management’s best estimate (Su and Wells 2018).
To measure fair value less cost of disposing the asset, the best evidence with
regard to the value is the price that is stated in the binding agreement for sale in
accordance with the ALP (arm’s length price). Amount arrived at after making the
adjustments for incremental cost that is attributable directly towards disposing off of
the asset (Legislation.gov.au 2019). However, if there is no binding agreement for
sale and the asset is being traded under the active market, fair value less cost of
disposing the asset will be considered as the market value less cost of disposing the
asset. For considering the market value, the asset’s bid price is considered. In case
where the bid price is not available, most recent price of the transaction is
considered to estimate fair value less cost of disposing the asset. However, for
considering this value there shall not be any significant changes in the economic
circumstances (Kabir, Rahman and Su 2017). In case where binding sale
agreements as well as active market both for the asset are not found, the fair value
reduced by cost of disposing the asset is determined through the information best
available that can be acquired by the entity on reporting date. While determining this
amount the firm must consider outcome of recent transaction for the similar asset
under the same industry. Fair value less cost of disposing the asset does not include
the forced sale except the management is obliged to sell the asset immediately

4CORPORATE ACCOUNTING AND FINANCIAL REPORTING
(Bond, Govendir and Wells 2016). Selling cost or disposal cost includes various
costs like legal cost, disposal cost, cost required for removing asset, direct
incremental cost incurred for bringing asset in position of sale and stamp duty.

5CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part B
Computation of impairment loss
Journal entries in the book of Gali Ltd as on 30th June 2015

6CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Note – for allocating the impairment loss, inventory is not considered as it is valued
at cost or market value, whichever is lower.

7CORPORATE ACCOUNTING AND FINANCIAL REPORTING
References
Bepari, M.K. and Mollik, A.T., 2017. Regime change in the accounting for goodwill:
goodwill write-offs and the value relevance of older goodwill. International Journal of
Accounting & Information Management, 25(1), pp.43-69.
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.
Kabir, H., Rahman, A. and Su, L., 2017. The Association between Goodwill
Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Legislation.gov.au., 2019. AASB 136 - Impairment of Assets - August 2015 . [online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download
[Accessed 21 Jan. 2019].
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects
of asset impairment reversibility and cognitive dissonance on future investment. The
Accounting Review, 90(2), pp.739-759.
Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of
identifiable intangible assets in business combinations pre and post IFRS
adoption. Accounting Research Journal, (just-accepted), pp.00-00.
Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated
disclosures resolve uncertainty about future returns and reduce information
asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.22-40.