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+--- Thread: IAS 36 (/showthread.php?tid=1795)
IAS 36 - katya1707 - 03-16-2005
SOS![0]
im absolutely desperate to find disadvantages of impairment.Was searching everywhere but the books give only a summarised desription.Any idea what they might be?
- CBPian - 03-21-2005
The concept of impairment is at the heart of recognition principle of assets.
Certain criteria needs to be fulfilled to recognise an asset and one primary criteria is its ability to generate future cashflows.
If an asset cannot generate cashflow it should be written down to realisable value.
Why? Because we have certain principles in accounting such 'matching principle' which mean that recognition of costs should match with recognition of revenue from period to period. Therefore if certain assets do not provide benefit (cashflows) for more than one accounting period, we have to charge these to income in the period when the benefit is accrued.
Now coming back to disadvantages of impairment. Disadvantages of impairment is a misnomer because if we don't perform impairment review, we do not follow proper accounting.
However notwithstanding everything said above, impairment means accelerated recognition of asset costs to income which mean unavailability of hidden reserves when assets are disposed off; comparitively high asset turnover ratios; low breakup values and a balance sheet which is compartively more volatile.
http//s4.invisionfree.com/AccountingWorld/
- Desert Sleet - 03-21-2005
<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by katya1707</i>
<br />SOS![0]
im absolutely desperate to find disadvantages of impairment.Was searching everywhere but the books give only a summarised desription.Any idea what they might be?
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
There are many issues to consider including identifying the reporting units, complying with all new disclosure requirements, and assessing the effect on combinations already consummated (e.g., if in a prior business combination identifiable intangibles were separately valued but were included in goodwill, then upon adoption the company must reclassify that intangible asset out of goodwill).
The most complex implementation issue is the fair-value-based goodwill impairment test. Companies can use different methods to determine fair value, including a market approach, which estimates fair value by analyzing the characteristics of comparable companies or the recent sale of similar companies; an income approach, which is based on discounting expected future cash flows; or a cost approach, which estimates fair value by determining the cost of replacing the depreciated asset. All of these methods have advantages and disadvantages that are important for companies to understand. For example, the market approach appears to be fairly straightforward and intuitively appealing, but what is comparable? Comparable industries? Comparable growth? Comparable cashflow? Comparable risk? The income approach is intuitively appealing, but requires an estimate of future cash flows and an analysis of risk of achieving those. The cost method is generally the easiest to apply but the least useful, because it does not take into account earning power.
As the SEC chief accountant has indicated, whether it is in conjunction with the acquisition of a business, the performance of the impairment test, or the evaluation of recorded intangible assets in transition, companies should generally obtain the assistance of a competent and knowledgeable professional to assist in the process. While companies may not want to budget for the cost of an outside professional to assist in the process, it will almost certainly be money well spent.
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