Accounting Earnings and Cash Flows

Question: Discuss about the Accounting Earnings and Cash Flows. Answer: Introduction: Longreach Ltd has adopted the international accounting standard and the objective of the standard in relation to the impairment of assets is prescribing the procedures to ensure that the assets are carried at not more than recoverable amount. Since the assets are described as impaired under this standard, it is required by the entity to recognize the loss arising from impairment. There are several types of assets included in the entity in both the profit and non-profit organization. Such assets are segmented into various section and those employed for carrying out the current operation are deemed as the current assets (Bevis 2013). Fixed assets on the other hand serves the entity for longer period. An entity may comprised of several intellectual assets other than current and fixed assets such as trademark, copyright assets and many more. It also comprised of assets emerged from the acquisition or due to the growing popularity among consumers are also included along with the goodwill and brand. The organization can increase its revenue by directly employing such assets. There are also intangible assets, which are not physical and cannot be measured in units. In the books of account, such assets are maintained at the amount purchased (Briloff 2013). There is a significant decline in the real value of the assets with the time. The company at the real time value applies impairment and the decreased amount is adjusted in the impairment account. Decline in the value of asset leads to loss, which is viewed as loss due to impairment. There are certain common factors applicable to the numerous assets and several factors influences the asset value. Value of machinery, equipment and several tools is based on the manufacturing capability and usage. It is viewed that the upcoming g production capability of these assets might decrease due to their increased usage in the production (Dechow 2012). The older equipment and machineries decreases in the value and eventually it becomes obsolete because of the emergence of modern machineries and equipment. The value of land gradually increase due to various factors such as over population, new cities emergence and transformation of the locality. Due to the alterations in the choice of consumers and modern technology emergence, the trademark along with the patent right tends to fall in value. Goodwill is falsified in the event of acquiring any acquisition and it serves as an additional value (Gray et al. 2013). The goodwill imbibed in purchasing the assets falls significantly when there is the reduction in the value of the assets. There is need to the financial report as per the requirement of the stakeholders because the stakeholders have different interest over the organization. Government and the accounting standards signifies huge importance in the interest of shareholders. It is desired by the stakeholders that financial reports must represent the true and fair value of the asset and liabilities of the listed companies. Due to the emergence of the modern machineries at the lower price, the market value of the machineries has turned out to be half of the real value cost. There can be the case when the organization has acquired the machinery before five years. If the cost price of certain machinery is presented in the financial report, it would indicate that the asset are overvalued. This would not represents the true and fair value of the assets. Valuing the assets of the organization are considered an efficient investment option by the shareholders (Maas et al. 2016). Shareholders of the company may take faulty investment decision if the shareholders rely their investment decisions on the overvalued financial statements, if the organization does not represents the fair and true value of the assets. The accounting board for gaining the shareholders interest has introduced the impairment concept. Introduction of the government policies and the accounting standards outlines the instruction for the impairment of the assets along with the general financial statements. When the carrying amount of the assets exceed the recoverable amount, it is required to carry out the test of impairment at that time. In the books of accounts of the assets, the carrying amount is recorded. The purchasing cost of the assets represents such amount and it is depreciated in relation to the appropriate technique of depreciation (Huian 2013). The asset fair value can be selected as the amount recovered after all the anticipated expenses of the assets are reduced by the organization. Asset value can be regarded as another recoverable amount. The net cash flow of the entity anticipated to be collected from the assets is referred to as the value. The higher value among the two can be chosen in accordance with the IAS 36. If we consider IAS 36, the loss arising from the impairment is measured by reducing the recoverable amount of assets from their carrying amount (Aasb.gov.au 2017). Since the book value of the asset is reduced, the impairment loss attributed to the respective assets are debited. In addition to this, the maintenance of the accounting amount of the assets has decreased the value. Such impairment loss is adjusted in the income statement in the year-end along with the profit and loss account. The loss is representing as the non-operating loss in the income statement. The overall value of the shareholder is decrea sed if the impairment loss is credited in the revaluation surplus account. In case of the assets that are generally considered as the Cash Generating Units that encompasses the goodwill, which has resulted from the acquisition of the assets. The impairment loss is not adjusted accordingly in this case. The impairment loss can be calculated as per the aforementioned method if the overall value of the cash-generating unit requires being impaired. Moreover, the loss is adjusted with the Goodwill account. In the event of making adjustment with the goodwill, certain amount is left, and then the remaining amount is aligned with the CGU assets (Rappaport 2012). This is relied on the book value of the assets. Reference and Bibliography: Aasb.gov.au. (2017). Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed 18 Jan. 2017]. 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