Corporate Accounting Global Organisations

Question: Discuss about the Corporate Accounting for Global Organisations. Answer: Introduction: Nature of Impairment Loss and Needed Disclosures: The global organisations, comprising both profit and non-profit organisations, are the owners of several classes of assets. The assets could be further subdivided into several categories. In the words of Bhattacharyya (2012), the assets developed or utilised on the part of the organisations for running their day-to-day activities and operations are termed as the current assets. On the contrary, the fixed assets are mainly used for achieving the long-term goals from the organisational perspective. Despite these two sets of assets, many organisations embrace intellectual properties consisting of copyright, and trademarks. In addition, the assets obtained from merger or acquisition or client popularity like brand image or goodwill are also intellectual properties. As commented by Novotny-Farkas (2016), the organisations would not be able to utilise the intellectual properties directly for the generation of revenues. However, these assets could be indirectly used for boosting up the profit margin of the organisations. Such type of assets, which are intangible in nature and could not be expressed in monetary terms, are categorised as intangible assets. Therefore, these assets are recorded in the accounting books of the organisation based on the amount incurred for acquiring the same. In the recent times, it has been observed that the real asset values have begun to rise due to changes in the prevailing market conditions. Therefore, the organisations utilise impairment, in case, the book values exceed the real values of the fixed assets. Hence, in order to adjust the book values of the assets with the future market value, the organisations often develop Impairment accounts. In this context, Amiraslani, Iatridis and Pope (2013) mentioned that with the help of this method, the firms minimise the book value to the real value and the subtracted amount gets adjusted with the account of impairment. Thus, the loss arising out of such minimised asset value could be termed as the impairment loss. The asset values are changed due to several influential dynamics. Some dynamics are inherent for all the categories of assets, while some other dynamics are associated with minimising the value of particular assets. The production capacities of these assets tend to decline in future, in case, they are utilised for extensive production. In addition, the emergence of advanced technologies and equipments have lowered the market value of the traditional equipments and thus, getting obsolete. Furthermore, the land value has also been increasing with the passage of time. However, Goncharov, Riedl and Sellhorn (2014) argued that the land value might fall in situations of over population, localities, development of new towns and creation of public centres. The preferences of the customers and the introduction of contemporary technologies result in declined values of the trademarks and patent refights. Conversely, goodwill is the value at the time of acquisition of other organisation. Thus, the goodwill value is decreased, if the values of the takeover assets fall in the market. In the contemporary era, the organisations are required to make additional financial disclosures for meeting the stakeholders needs. From the perspective of the Australian government and the boards of accounting, the firms are required to represent the fair values of the assets and liabilities. This is because these stakeholders aim to ensure the interest of the other associated stakeholders of the organisations (Vernimmen et al. 2014). For instance, an organisation has bought high priced machinery five years ago. In the current conditions, the value of the machinery in the market has declined largely, which is less than half of the purchasing cost. This is because the modern machineries with advanced features are available in the market at a cheaper price. If the organisation presents the actual machinery price in its financial statements, it would be overvalued and thus, it would violate the fair accounting practices. In case, the organisations do not follow the fair value practices, the decision-making process of the shareholders could be negatively affected. Thus, in order to protect the rights of the stakeholders, the AASB has introduced the impairment concept. It has clearly instructed the Australian firms for asset impairment and accordingly, they could frame the financial reports. The impairment could only be applied when the recoverable amount of the asset falls below its carrying amount. The latter amount is kept in the accounting books of the organisational assets (Stenheim and Madsen 2016). In other words, the carrying amount related to an asset is the purchasing price and the asset value after depreciation. The recoverable amount for any asset could be of two categories, which include the actual value of the asset and the value in use. The actual asset value could be derived after subtracting the cost of expenditures from the recoverable asset amount. In the words of Ramanna and Watts (2012), the value in use is thee net cash inflow expected to be realised from the asset in future. According to IAS 36, it is viable to choose the highest of the two values, if both are available to the organisations. As per IAS 36, the impairment loss could be computed by subtracting the asset recoverable amount from its carrying amount. The loss from impairment is placed under the debit head in contrast to the particular asset for minimising its book value and preserving the same as the asset accounting amount. In addition, this loss is compromised with the income statement of the organisation by depicting it in the form of non-operating loss (Weil, Schipper and Francis 2013). In case, the organisation maintains an account for revaluation surplus, the impairment loss account is credited in contrast to the account of revaluation surplus. Hence, it minimises the value of the stockholders equity. There are certain group of assets, which are called units of cash generation like goodwill. In that case, the adjustment of tie impairment loss account is computed different from that of the discussed scenario. The impairment loss account is then adjusted with the goodwill account of the business. In case, any leftover amount is inherent even after the adjustment with goodwill, it is compromised with the units of cash generation depending on the book values of the properties or assets. Journal Entries for the Impairment Loss of Crossbow Limited at 30th June 2015: The journal entries for the impairment loss are briefly depicted in the form of a table as follows: In the Books of Crossbow Limited Journal Entries as on 30th June 2015 Debit Credit Date Particulars Amount (in $) Amount (in $) 30-Jun-15 Impairment Loss Account.Dr 260,000 To Goodwill Account 40000 To Land Account 26829 To Inventory Products Account 24146 To Brand Crossbow Shoes Account 21463 To Shoe Factory Account 93902 To Machinery Account 53659 (Being the net assets, liabilities and goodwill impaired depending on the amount of recovery) 30-Jun-15 Income Statement Account..Dr 260,000 To Impairment Loss Account 260,000 (Being the value of impairment loss relocated to the income statement) The journal entries have been formulated based on the below-depicted calculations: Calculation of Impairment Loss: Particulars Amount (in $) Assets' carrying amount (1) 1,680,000 Recoverable amount of the company (2) 1,420,000 Fair value of the assets (3) 171,000 Actual or real asset values (4) [Greater of (2) and (3)] 1,420,000 Loss from Impairment (5) [(1) - (4)] 260,000 Goodwill on acquisition of competing organisations (6) 40,000 Impairment loss from subtraction of goodwill (5) - (6) 220,000 Apportionment of Impairment Loss: Particulars Amount (in $) Percentage Impairment (in $) Land 200,000 12% 26829 Inventory Products 180,000 11% 24146 Brand "Crossbow Shoes" 160,000 10% 21463 Shoe factory 700,000 43% 93902 Machinery for manufacturing shoes 400,000 24% 53659 Total Amount of Assets 1,640,000 100% 220,000 References: Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013.Accounting for asset impairment: a test for IFRS compliance across Europe. 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