Corporate Accounting Standard Board

Question: Discuss about the Corporate Accounting Standard Board. Answer: Introduction Longreach Ltd, an ASX listed company, is seeking consultancy about the implementation of practicing impairment test of assets. As per their requirement, this report is being prepared highlighting different aspects of this issue including objective of this practice, treatment of goodwill for impairment test of assets, and basic steps for implementation of impairment test of assets. Impairment testing of assets is mandatory as per requirement of International Accounting Standard Board through their standard 36. As per the objective of convergence with IASB, AASB is also implementing this practice which is being implemented through the standard 136. The main goal of impairment testing of assets is to arrive at the logical value of the assets of any business entity in perspective of true time factor. Normal practice of deriving present value of assets is done by following the procedure of comparing fair value of assets with logical increment or decrement as per progress of time. Basic fe ature of impairment of assets is depending upon logical decline of value of assets in perspective of its return to the firm in money value concept. The basic reason of impairment testing of asset is done to recognize the amount of cash flow, undiscounted in nature of future period of any specific asset with the derivation of quantity of carrying amount of specific assets for the purpose of evaluating the loss of those specific assets (Longreachltd, 2016). Normal process of calculation of impairment loss of any asset is ensured through the practice to find the current value of assets in comparison with the fair value of assets. Several globally acknowledged accounting standards emphasizes on the logical finding of impairment of assets. This is for its importance in accounting practices. AASB, with the effort to ensure convergence with IASB, is striving hard to ensure a logical platform for this issue in order to ensure proper treatment of present value of assets through derivation of impairment loss by following process of testing. It is a continuous effort and AASB is complying with the changed scenario of world accounting procedure by making necessary changes of the prevalent standards. Present following of standard by AASB is AASB 136 which is at par with IASB standard 36 and is effective since 2004 (Aasb, 2007). Purpose of Impairment testing of Assets AASB has brought Standard 136 to enforce impairment of assets with guideline as per endorsement of Section 334 of Corporation Act. This standard is introduced since 15th July 2004 for logical discussion amongst the experts and ultimately it had been enacted through insertion in AASB from 1st July 2007. AASB 136 had replaced old AASB standard 116 related to this issue. Main objective of this change is to implement logical platform for the subject of impairment of assets value. In order to ensure proper financial presentation for the stakeholders of the business entity, impairment testing of assets is necessary. Audited financial reporting is the basic document on which investors depend to make decision of their further action. The stakeholders of the company depend upon the annual financial report endorsed by Directors and certified by auditors as true and fair, and they should be fed with proper financial information in order to guide them towards their logical decision. Basic guidel ine for impairment of assets is ensuring guidance to the business organization for evaluation of the assets. This is as per the guideline which states that carrying amount of asset should not exceed recoverable amount of asset. Impairment testing of asset is mainly practiced to make assessment of loss of assets by respective business entity through proper disclosure. This practice is mandatory for those entities who are preparing financial report as per Part 2M.3 of Corporation act for General Purpose Financial Report or GPFR (Aasb, 2009). Impairment Testing of Goodwill Impairment testing of goodwill is discussed in AASB standard 136 as per several paragraphs with numbers 80 to 84. In paragraph 80, importance has been given on the fact that consideration of goodwill in any business is to be reckoned as per allocation of cash generating units of any organization. Evaluation of goodwill allocated to the entity is instrumental to represent the minimal value within the organization as per internal consideration with the acknowledgment of the management. The valuation of goodwill should be restricted to the value of operating segment which is directed through AASB 8. Paragraph 81 is there to recognize goodwill with the clarification of treating it as an asset with the nature of non-recognizable and non-identifiable so far its material value is concerned. It is also decided that role of goodwill will not dictate generation of cash flow individually to any asset of the entity; Instead goodwill does value addition to several units responsible to generate ca sh for such business entity. Paragraph 82-84 are mainly there to guide the entity for following proper evaluation process of impairment testing of goodwill as decided by the management with allocation of the same (Accountingexplained, 2015). Basic steps for impairment testing of assets As per AASB standard 136, six steps are defined for this purpose: Cash Generating Units (CGU) Life Movement of Working Capital Flow of Capital Expenditure of the entity Tax Payment to derive interest benefit Industry Discount Rate Perpetuity or terminal value of EBIT or EBITDA with future cash flow (Bdo, 2016). Conclusion As per requirement of Longreach Ltd, the above report has been made in order to make them understand the implication of impairment testing of assets of any entity as per AASB standard 136. It is recommended that this practice is to be implemented to comply with the basic requirement of Corporation Act 2001 of Australia. As AASB is converging with the IASB standard, said standard AASB 136 is complying with the IASB standard 36 for this said purpose. This implementation will raise confidence of the stakeholders including investors of the entity and help them to find true and fair financial statement for their future decision. As it is compulsory for the companies listed in ASX, Longreach Ltd should follow the guideline and norms of AASB standard 136 when they are thinking of implementing impairment testing of their assets. References Aasb, 2007. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed 10 January 2017]. Aasb, 2009. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf [Accessed 10 January 2017]. Accountingexplained, 2015. Impairment of Fixed Assets. [Online] Available at: https://accountingexplained.com/financial/non-current-assets/impairment-of-assets [Accessed 10 January 2017]. Bdo, 2016. Blind Freddy- Common Errors in Accounting for Impairment. [Online] Available at: https://www.bdo.com.au/getattachment/Microsites/Accounting-News/Accounting-News-May-2016/Home/elements/In-this-issue/1605_Accountingnews.pdf.aspx [Accessed 12 January 2017]. Crossbowinvestments, 2016. Crossbow. [Online] Available at: https://www.crossbowinvestments.co.uk/#intro [Accessed 13 January 2017]. Longreachltd, 2016. The company. [Online] Available at: https://www.longreachltd.com/the-company.html [Accessed 13 January 2017].