Advanced Accounting - Term Paper Example

Advanced Accounting According to International Accounting Standard 36, an asset is impaired when its carrying amount exceeds its recoverable amount. At each balance sheet date, all assets to are reviewed for any indication that an asset may be impaired, i.e., its carrying amount may be in excess of the greater of its net selling price and its value in use. IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then you must calculate the asset’s recoverable amount. Following are the indications of impairment as provided in IAS 36: External sources: Market value declines Negative changes in technology, markets, economy, or laws Increases in market interest rates Company stock price is below book value Internal sources: Obsolescence or physical damage Asset is part of a restructuring or held for disposal Worse economic performance than expected The above lists are not intended to be exhaustive. Further, an indication that an asset may be impaired may be indicated by the asset’s useful life, depreciation method, or residual value, which may need to be reviewed and adjusted. IMPAIRMENT OF GOODWILL (INTANGIBLE ASSET) If goodwill relates to a cash-generating unit, the entity must consider impairment of the goodwill. IAS 36 provides for 'bottom-up' and 'top-down' tests for identifying impaired goodwill. If a CGU is being tested for impairment, and there is any goodwill in the financial statements relating to that CGU, a 'bottom-up' test is performed. This requires the enterprise to determine whether the carrying amount of the goodwill can be allocated on a reasonable and consistent basis to the CGU under review. If such an allocation is possible (for example, if the goodwill relates entirely to an acquisition that is 100% included in the CGU), the portion of goodwill related to the CGU is simply included in the carrying amount of the CGU for impairment testing purposes. No further top-down test is required. If goodwill cannot be allocated to the CGU, the carrying amount of the CGU (excluding any allocation of goodwill) is compared to its recoverable amount to ensure that any impairment of the assets included in the CGU other than goodwill is identified. Since goodwill is not included in this assessment, a 'top-down' test is then undertaken. This requires the enterprise to identify the smallest CGU under review and to which the amount of goodwill can be allocated on a reasonable and consistent basis (the 'larger' CGU). The carrying amount of this 'larger' CGU (including the allocated goodwill) is then compared to its recoverable amount. The dilemma of the top-down approach is that by expanding the CGU, there may be no impairment recognized on an asset acquired as part of a business combination. That would happen if, by itself, one asset of the acquired business was performing poorly, but the acquired business as a whole is doing well. But if there is no reasonable basis to allocate goodwill to the asset, the enterprise has no choice but to expand the CGU. The fair value of an option on the grant date is estimated using any accepted option-pricing model that incorporates each of the following: exercise price, expected life of the option, current price of the underlying stock, expected stock return volatility, expected dividend yield, and the risk-free interest rate. While SFAS No. 123 mentions the Black-Scholes and binomial option-pricing models, any reasonable option-pricing model that incorporates the listed variables is acceptable. Annual stock option expense is computed by amortizing the fair value of options granted during the year over the period(s) the related employee services are rendered. Generally the service period is presumed to begin on the grant date and end on the vesting date. Firms opting to retain the intrinsic value approach must disclose in a footnote pro forma net income and earnings per share for every year that an income statement is provided. Firms must also provide a description of their plan (or plans) and the following information for each year they provide an income statement: 1. The number and weighted-average exercise price of options: 2. Outstanding at the beginning of the year 3. Granted during the year 4. Exercised, forfeited, or expired during the year 5. Outstanding at the end of the year 6. Exercisable at the end of the year 7. The weighted-average grant-date fair value of options granted during the year 8. The option-pricing model employed and weighted-average values of the assumed risk free rate, expected life, expected volatility, and expected dividend yield In adopting SFAS No. 123 firms must decide whether to use the fair value method or the intrinsic value method to recognize stock option expense. Given the furor surrounding the passage of SFAS No. 123, perhaps it is not surprising that the majority of firms chose the disclosure-only option. However, we find 100% of companies making this choice. Why is the case, when under different circumstances firms choose to voluntarily record larger expenses than required by accounting standards? For example, some firms voluntarily expense all software development costs even though capitalization is allowed, and even encouraged, under SFAS No. 86 (FASB 1985 [SFAS No. 86]). Perhaps the fundamental difference between these two accounting choices relates to their effect on cumulative earnings. The decision to capitalize vs. expense software development costs does not alter the firm's cumulative earnings, since the capitalized software development costs of today become the amortization expenses of tomorrow. However, the decision to recognize vs. disclose stock option expense results in a permanent positive difference in cumulative earnings, since options granted at-the-money never generate a charge to income under the intrinsic value method. This reason combined with the irreversibility of the adoption of the fair value method for recognition purposes provide little incentive for firms to discontinue using the intrinsic value method. Results are as follows: The impact of stock option expense on firm performance is material for the majority of the sample firms. Stock option expense will become even more economically significant in the near future, potentially doubling over the next three to five years. Not all firms comply with the disclosure requirements of SFAS No. 123. At initially the international accounting standards board has followed the principles based accounting methods for the setting of standards. Those standards provide the comparison with the FASB approaches. The principles based accounting for leases given by the sixth international accounting standards board with one interpretation. In comparison to those which are the generally accepted principles of US related to lease accounting are reported in 20 statements and nine FASB interpretation ten technical bulletins and 39 EITF abstracts. The deepness of generally accepted accounting principles coverage of leases comparable to the rules based accounting standards in US. SEAS 13 the primary standard for lease accounting in US GAAP is an example of the rules based accounting standards. SEAS were found in an attempt to force the companies to found the substance over the form of a leasing agreement. so for this enforcement in 1980s there were many companies who follow the leasing arrangements in the form of off balance lease financing .in some cases the companies buy a piece of equipment sell it to another entity and for avoiding the recording of an asset or a liability for the equipment they lease it back. SEAS 13th statement requires the need of differentiation between the capital and the operating leases with the use of four important criteria’s. This provides that the leases which are purchases must be treated with the differentiation of operating and capital lease. so if the contract satisfies any one of the four criteria it will be the in the form of capital lease in the financial statements FASB think that by providing explicit rules the individual judgment will be reduced and the consistency applied to the principles. In much of the case this practice is not followed because of the formation of more easily applied rules that the companies carefully classified the structured lease contracts to treat as the operating leases. So as the result of this the explicit rules are useful in off balance financing and the provision of reliability for the treatment. (www.nysscpa.org/cpajournal/2004/804/essentials/p34.htm) The effectively of rules based accounting system requires the support from the financial community in order to raise the quality of each rule. The rules based on real life practices reveal the true sense of standards and the attention of standards setting bodies. So the setting up of standards made with the changes in time and fashion. So it is to say that the accounting based on rules reveals that there is a relationship between the possible outcomes of the rules and the measurement based on accounting and its quality. So the rules based accounting system provides the accuracy and consistency to the makers and the high quality of financial statements which they need. References: 1. International Accounting Standard 19, 2. International Accounting Standard 36, 3. International Accounting Standard 38. 4. www.nysscpa.org/cpajournal/2004/804/essentials/p34.htm 5. Financial Accounting Standards Board (FASB). 1985. Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Statement of Financial Accounting Standards No. 86. Norwalk, CT: FASB. Read More