Financial accounting 5 - Impairment and leasing

dexazuxo's version from 2018-01-16 14:16

Section 1

Question Answer
What is IAS 36?IAS 36: impairment of assets. This requires companies to test all non-current assets for impairment if there is some indication that the asset may be impaired.
When does impairment occur?Impairment occurs if carrying amount is higher than the recoverable amount (VIU, Net selling price-amount disposed-selling price)
What might signal impairment?External indicators: Decline in market value of assets, adverse changes in business environment, rising interest rates
Internal indicators: evidence of damage, plans to discontinue operations assets is used, business reorganisation, loss making unit.
What is VIU?This is the value that you get out of utilising that asset. Also known as the present value of expected future cash flows from assets use in the business and its ultimate disposal. Remember to add the disposal value to the cash flow of final year.
This is the PV is future expected cash flows from assets use in business and ultimate disposal.
- Cash flows are to be taken from formally approved budgets
- Growth rates over a long term should not exceed average growth rate of the economy. If economy grows by 2%, cannot say store will grow at 10%
- The PV calculation requires a discount rate – Market rate for equally risky investments
How often should non-current assets be tested for impairment? Reviews for impairment if expected net selling price deteriorates below carrying amount (eg. Property crash?). Then, the recoverable amount is determined as the highest between net selling price and value in use amount.

Section 2

Question Answer
Which assets gets tested every year for impairment?Goodwill and intangible assets.
How to work out VIU?Value In Use (present value) = (CF1*1/1+rt) + (CF2*1/1+rt) + (CFt*1/1+rt)
Cash Generating Units (CGUs) Smallest Individual assets grouped together that generates a single cash inflow. This assists with the Value in Use calculations. BUT Can hide poorly performing units hence only small as possible units to be grouped together (grouped larger items can hide from impairment).
Treatment of Impairment loss:After impairment occurs, the revised carrying amount of the asset will show on balance sheet. A loss recorded as expense on IS in year loss arises. Dr Impairment loss expense Cr asset value in balance sheet (only individual assets).
Reasons why it may not be possible to determine an individual asset’s recoverable amount:The asset does not generate cash inflows that are largely independent of those from other assets, so their value in use cannot be determined independently AND The fair value less costs to sell cannot be used as the asset’s recoverable amount, because value in use might be materially more than fair value less costs to sell.

Section 3

Question Answer
What is leasing according to IAS 17?It is an agreement whereby the lessor conveys to the lessee the right to use an asset for an agreed period of time, in return for a payment or series of payments.
What is leasing according to IFRS 16?A contract that conveys the right to use an asset for a period of time in exchange for consideration.
At the commencement of a lease: Lessee should recognise a RIGHT-OF-USE ASSET and a corresponding LEASE LIABILITY. A right-of-use asset is "an asset that represents a lessee's right to use an underlying asset for the lease term".
generally applies to all leases (two exceptions: short-term leases and low value ones).
Problems with IAS 17Provides possibility of 'Off balance sheet financing' where The company has use of an economic resource that was not on the balance sheet therefore no liability is shown on the balance sheet in relation to this asset. Thus, the company will appear less geared, and could attract more/cheaper debt funding. (new standards will correct this).
IAS 17: Types of leasesFinance lease: A lease that transfers substantially all the risks and rewards of ownership of an asset. The title may or may not eventually be transferred.
Operating lease: Not a finance lease.
Leases accounting treatmentsFinance leases. Capitalise the assets: record as an asset on bs, and recognise the liability on bs (future payment), interest charges go on IS expenses. Assets should be shown as the value which is lower from: present value of lease payments or its fair value. Also, annual depreciation charge is calculated over the shorter period from: estimated useful life OR the lease period ->the net book value is then reduced by this depreciation charge.
Operating leases. Lease payment is recognised as an expense on IS
IAS 17: Controversy for any transaction, pay attention to economic substance and not legal form of transaction. Economic substance more important to pay attention to. Eg. Not recognise revenue until actually occurred. Same idea on leasing. (whether lease is a finance lease, or operating lease). Corrent way = include a liability on lesses BS, include as asset representing the asset supplied under the lease (both based on its substance).