International accounting standard IAS Essay

We say Impairment has taken place when an asset’s carrying amount exceeds its recoverable amount. Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and accumulated impairment loss. And recoverable amount is the higher of an asset’s fair value less costs to sell (sometimes called net selling price) & its value in use. Also the fair value is the amount obtainable from the sale of an asset in a bargained trasction between knowledgeable; willing party’s . on the other hand value in use is the discounted present of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Impairment of goodwill involves two steps: 1) Screening step 2) Computation step Impairment is calculated at a reporting unit level. Impairment is calculated when the carrying Amount of the goodwill for a reporting unit exceeds its implied fair value. A reporting unit is an operating segment, or one level below an operating segment. The Goodwill for one reporting unit may be impaired, while the goodwill for other reporting units may or may not be impaired Calculation of goodwill for impairment involves two major steps: Step 1: Identify impairment by comparing the fair value of each reporting unit with its carrying amount including goodwill. Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units. Determine the fair values of the reporting units and of the assets and liabilities of those reporting units. If the fair value of a reporting unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit’ goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for.. If the fair value of a reporting unit is more than its carrying amount, there is no impairment goodwill and Step 2 can be avoided. But where the result is vice versa step two can not be avoided a since goodwill impairment as taken place. Step 2: measuring the value for both tangible and intangible assets (impairment of goodwill) Step 2 is more complex than step1 because it requires that the fair market values of each of the identified tangible and intangible assets and liabilities of a reporting unit be estimated first before calculation takes place Value of Reporting Unit = Value of Identified Assets + Value of Goodwill = (Value of Reporting Unit- Value of Liabilities) = (Value of Identified Assets-Value of Liabilities) + Value of Goodwill = Fair Market Value of Equity = Fair Market Value of Net Assets + Fair Market Value of Implied Goodwill Summary and Conclusions Financial Accounting Standard 142 requires that goodwill emerging from acquisitions be tested to determine whether it has impaired or not because FAS 142 requires firms to effectively undertake a market test to see if Goodwill has been impaired. This test is completed in two steps as mentioned above. Reference: 1. International accounting standard IAS 36 2. Financial Accounting Standard (FAS) 142.