Impairment Test for Models from Investment - myassignmenthelp

Question: Discuss about theImpairment Test for Models from Investment. Answer: When to Undertake an Impairment Test Before the examination of the circumstances under which an impairment test can be done, it is important to first of all understand what it is. An impairment test refers to the checks that are done on the balance sheets to ascertain that the value of the items recorded depict the actual value in reality. In the event that this test is conducted and there are disparities, then the records on the balance sheets are often adjusted to reflect the actual value of such an item. (Haller et al. 2013) This test is conducted basically in regard to two accounts which include commercial or audit accounts and the other one is tax accounts. Each country has a distinct set of principles in relation to what should be tested. Likewise, the different tax regimes and the standards of accounting dictate the parameters that should be used in conducting the impairment test. Each of them defines the method and period under which the exercise has to be carried out. The international financial reporting standards (IFRS) have been adopted by various countries as a set of guidelines that would guide them in the process of undertaking the impairment tests. For instance, IFRS describe various technical terms which include carrying amount. (Viebig et al. 2008)This is a value that is derived after depreciation and accumulated losses of imparment are deducted from an amount that indicates the value of a given asset. Precisely, this is the value on the balance sheet which represents either an asset or li ability. The IFRS also demystifies the meaning of the life assets that are indefinite. These in essence, are assets that are not subject to depreciation and they can last for very long periods of time. An example of such assets includes goodwill. There are other assets under the branding category that also form indefinite assets. The indefinite life assets should be tested for impairment on an annual basis and also under the circumstances where there are signs that the assets ought to undergo impairment. Such indications may be exhibited from both the internal and external environments of an organization. Internal signs are associated with management and they may include organizational controls whereas external signs cannot be determined by the management. They border on the economic situation and the government policies. (Haller et al. 2013) As opposed to the indefinite assets, the contrasting life assets that are definite can last for longer periods but they are subject to depreciation. For such assets, the test of impairment can be conducted if there are both external and internal indications that they will be a lesser value than their carrying amount. Impairment is not just a preserve of the assets but also liabilities. A specific example under which the test can be performed is when an acquisition is done. What happens is that there are earn-outs that are recorded in previous transactions. If the organization that is acquired does not perform to the expectations, then the earn-out will not be achieved. Apparently, there is every reason to believe that the earn-out was impaired. (Viebig et al. 2008) Many companies have a set of portfolio which generates cash. The types of businesses under the portfolio have been diversified extensively so that the companies can minimize the risks associated with the business environment. In this kind of arrangement, the impairment tests are conducted at the individual business units in the portfolio. (Haller et al. 2013)The test is conducted in tandem with the requirements of the IFRS. This guarantees an accurate process which produces reliable results. The balance sheet may sometimes have goodwill recorded but it is not a factor that is comparable to the recoverable amount. Goodwill is a concept in accounting that cannot be isolated; it must be conjoined with the company thus its value cannot be arrived at separately. Essentially, the impairment tests for goodwill are done together with the value of the organization or the business entities within a portfolio. (Haller et al. 2013) As mentioned before, there must be strict adherence to the rules and principles that have been instituted by the standards of accounting and the tax regimes. For example, there are circumstances that demand that the test be done after tax while others would be done before the imposition of tax. In particular, the selling costs may not be adjusted to their fair values in the event that there are impairments in tax. A standardized rule that has been adopted by many organizations in regard to the impairment tests for assets or liabilities is to conduct the tests upon the items in their existing values. (Viebig et al. 2008) Impairment test is an approach that should be conducted in a plain form whereby every stakeholder is exposed to information that is simple to comprehend. The assumptions must be clear as well as the calculations so that any interested party can retrieve the information that is being communicated. The first type of accounts that are subject to the impairment tests as mentioned earlier are the commercial or audit accounts. They hold this name because their impairment tests are often subjected to an audit check by a combination of audit specialists and the auditors of the companies. The process of reviewing is quite tedious and the specialists have a lot of projects to attend to. It is for this reason that the simple and straight forward reporting is recommended. (Viebig et al. 2008) In conclusion, the exercise of impairment testing is very essential in the field of finance. Nonetheless, there are normal challenges that occur given that the process is not entirely perfect. For instance, the mistakes that are made relate to calculations to determine the rates of discount and the values of the carrying amount. There is also an urgent need to examine the models of valuation which are the basis under which the income and market values of approach can be determined. If there exist a large discrepancy between the figures, the relevant stakeholders must be held accountable. An adequate amount of time is required so that they can prepare substantive documentation which will limit the time that is used by the auditors in trying to retrieve information that would otherwise be accessed easily. References Haller, A., Raffournier, B., Walton, P. (2013). International accounting. London: Thomson. 67(43), 89-93 Viebig, J., Varmaz, A., Poddig, T. (2008). Equity valuation: Models from leading investment banks. Chichester, England: John Wiley Sons. 43(54), 67-71