Impairment asset

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Part A Measurement of Tangible and Intangible assets under Accounting Standards

Assets are classified according to their ¡¥tangibility¡¦, that are tangible assets or intangible assets. Under tangible assets, are classified as either current or non-current assets.

AASB1010 ¡§Recoverable Amount of Non- Current Assets¡¨, which applied to non-current assets measured on the cost basis that is requires the carrying mount of non-current assets to be written down to their recoverable amounts when their carrying amount is greater than their recoverable amount. (Parker C, 001, p47) While the carrying amount of a non-current assets is written down to its recoverable amount, the decrement in that carrying amount must be recognised as an expense in net P/L for the reporting period and must disclose the aggregate carrying amount of each of the assets. ASB101 ¡¥Depreciation¡¦ requires non-current assets that have limited useful lives to be depreciated over those useful lives.

AASB1041 ¡¥Revaluation of Non-Current Assets¡¦ which applies to non-current assets measured on either the cost basis or the fair value basis. AASB1041.6. requires that an increment shall be credited directly to an asset revaluation reserve account and decrement must be recognised immediately as an expense in net P/L.

On the other hand, intangible assets those are readily identifiable and unidentifiable. IAS8 ¡¥Intangible assets¡¦ defined intangible assets as an asset without physical substance held for use in the production or supply of goods and services, for rental to others, or for administrative purpose.

Under ED4 Accounting for identifiable intangible assets, identifiable intangible assets which have been purchased or developed internally by the reporting entity are brought to account as assets and they shall be classified in the financial statements according to type and the period of time over which the reporting entity expects to derive a benefit.

Unidentifiable intangible assets, goodwill must be amortised so that it is recognised as an expense in the profit and loss account on a straight-line basis under AASB101.5..

Part B Impairment of Assets

Impairment or asset impairment occurs when, due to changed circumstances, the previously allowed recovery of costs of a regulatory asset through rates is eliminated or removed by action of a regulatory body. An events or changes in circumstances are

¡P A significant decrease in the market value of an asset

¡P A significant change in the extent or manner in which an asset is used

¡P A significant adverse change in legal factors or in business climate that affects the value of assets

¡P An accumulation of significant costs in excess of the amount originally expended to acquire or construct an asset

¡P A projection or forecast that demonstrates a history of continuing losses associated with the asset.

(Richard G.Schroeder, 001, p5)

Expose Draft & 104 propose that an asset¡¦s recoverable amount need only be measured where there is an indication that the asset¡¦s carrying amount may exceed its recoverable amount. ED104 proposes measuring the recoverable amount of an asset at the higher of an asset¡¦s net selling price and its value in use. Where it is determined that an asset¡¦s recoverable amount needs to be estimated, am impairment loss must be recognised. An impairment loss must be recognised in net profit or loss or result as an expense. It is necessary of impairment test which to ensure that the carrying amounts of assets are recoverable from the future economic benefits they are expected to generate, and that any losses of future economic benefits are recognised in a timely manner.

ED & 104 propose that, for assets other than goodwill, an impairment loss recognised in a previous reporting period for an asset should be reversed only where the assets recoverable amount has risen above its carrying amount. Where impairment losses are recognised or reversed, certain information must be disclosed

¡P By class of assets; and

¡P For each reportable segment within the entity¡¦s primary segment reporting format.

Part C Rationale for the prescribed treatment of impaired assets under the proposed AASB1010

AASB1010 ¡§Recoverable Amount of Non-Current Assets¡¨ is principally a reissue of the requirements concerning the recoverable amount test for non-current assets set out in Accounting Standards. The standard requires the carrying amount of non-current assets to be written down to their recoverable amount. Recoverable amount means, in relation to an asset, the net amount that is expected to be recovered through the cash flows and inflows arising from its continued use and subsequent disposal. (AASB1010..1)

This standard applies to each entity which is required to prepare financial reports in accordance with Part M. of the Corporation Law and which

(1) is a reporting entity; or

() holds those financial reports out to be, or form part of, a general-purpose financial report.

(Parker C, 001, p.4)

This standard does not apply to non-current assets measured on the fair value basis as permitted by Accounting Standard AASB1041 ¡¥Revaluation of Non-Current Assets¡¦. The purpose of AASB1010 is to

¡P require the application of the recoverable amount test to non-current assets

¡P Require disclose relating to the application of the recoverable amount test to non-current assets (Parker C, 001, p.501)

On the other hand, the recoverable amount test is applicable to non-current assets to avoid the need to reissue AASB1041 when the requirements for the recoverable amount test are amended as a result of the Board IASC harmonisation project on impairment of assets.

By the recoverable amount test, when its carrying amount is greater than its recoverable amount which means that an asset is desired as impaired. A non-current asset must be written down to its recoverable amount. A recoverable amount write-down recognises that future economic benefits that had previously been assessed as being available to the entity no longer exist.

When the carrying amount of a non-current asset or a group of non-current assets is written down to its recoverable amount, the decrement in that carrying amount must be recognised as an expense in net profit or loss for the reporting period in which the recoverable amount write-down occurs. Moreover, the financial report must, in respect of each such non-current asset or class of non-current assets, disclose

¡P its carrying amount

¡P the recoverable amount write-down recognised during the reporting period

¡P the assumptions made in respect of its recoverable amount.

Where some or all of the assets within a class of non-current assets have been written down to their recoverable amount during the reporting period or a previous reporting period, the financial report must disclose the aggregate carrying amount of each of the following

¡P assets within that class of non-current assets which are carried at that recoverable amount less, where applicable, any subsequent accumulated depreciation

¡P any other assets within that class of non-current assets.

The financial report must, regardless of whether non-current assets have been written down to recoverable amount during the reporting period, disclose whether, the expected net cash flows include in determining the recoverable amount of non-current assets have been discounted to their present value. (Parker C, 001, p.50)

Part D Intangible Assets might be accounted for under current impairment principles

In Australia, classification and accounting for intangible assets is based on identifiability and manner of acquisition. According to the identifiability, intangible assets that are readily identifiable asset and unidentifiable asset. Identifiable intangible assets can be considered as a specific value can be placed on each individual asset, and they can be separately identified and sold. (Deegan C, 1, p.1) For example patents, trademarks, licenses, research and development and the others. Unidentifiable intangible assets, on the other hand, would be those intangible assets that cannot be separately sold. (Deegan C, 1, p.1) For example an organisation may be particularly successful because of factors such as loyal customers, established reputation and good employees. Rather, we may treat them as a composite asset entitled ¡¥Goodwill¡¦.

As with the majority of other assets, intangible assets, whether identifiable or unidentifiable, typically have a limited useful life. As such, intangible assets should be amortised over their useful lives. There is no requirement to amortise for identifiable intangible assets and it can be revalued. For unidentifiable intangible assets, there is a requirement to amortise over a period less than twenty years. Under identifiable assets, it can be raised as an asset if it is purchase or via an internally generated process, but unidentifiable assets can only be raised as an asset if it is purchased, no internal generation. To date, there are no specific Accounting Standards governs for identifiable intangible assets except for the AASB1011 ¡§Accounting for the research and development¡¨. Moreover, there is another Accounting Standard governs for unidentifiable intangible assets which is AASB101 ¡§Accounting for goodwill¡¨.

Excepting AASB1011, there are still have another two accounting standard which are relevant to the accounting for the identifiable intangible assets that are ED4 and IAS8. According to ED4, identifiable intangible assets that have been acquired are to be brought to account as assets as acquisition and recorded at their cost of acquisition. The proposed requirements of ED4 are

¡P to recognises internally developed identifiable intangibles

¡P to use independent valuations

¡P to amortise all identifiable intangibles

Within AASB1011, the research and development costs shall be charged to the profit and loss account as incurred, except to the extent that costs incurred during the financial year on a research and development project shall be deferred to future financial years to the extent that such costs, together with unamortised deferred costs in relation to that project, are expected beyond any reasonable doubt to be recoverable.

AASB101.5.1 applied that goodwill which is purchased by the entity must be recognised as a non-current asset at acquisition. Goodwill must be measured as the excess of the cost of acquisition incurred by the entity over the fair value of the identifiable net assets acquired. Where a variation in the cost of acquisition depends upon a contingency, which affects the determination of the fair value of net assets of the acquired entity, an adjustment to the individual assets or liabilities and to the purchase consideration must be made. Where the contingency does not affect the value of the net assets of the acquired entity, the acquiring entity must treat the variation as an adjustment to the purchase consideration, thereby increasing or decreasing the amount of goodwill or discount on acquisition. (Parker C, 001, p.561)

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