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An assessment of accounting practices for asset impairments is especially important in the context of financial reporting quality in that it requires the exercise of considerable management judgment and reporting discretion. The importance of this issue is heightened during periods of ongoing economic uncertainty as a result of the need for companies to reflect the loss of economic value in a timely fashion through the mechanism of asset write-downs. There are many factors which can affect the quality of impairment accounting and disclosures. These factors include changes in circumstance in the reporting period, the market capitalization of the entity, the allocation of goodwill to cash generating units, valuation issues and the nature of the disclosures.

 

Estoil is an international company providing parts for the automotive industry. It operates in many different jurisdictions with different currencies. During 20X4, Estoil experienced financial difficulties marked by a decline in revenue, a reorganization and restructuring of the business and it reported a loss for the year. An impairment test of goodwill was performed but no impairment was recognized. Estoil applied one discount rate for all cash flows for all cash generating units (CGUs), irrespective of the currency in which the cash flows would be generated. The discount rate used was the weighted average cost of capital (WACC) and Estoil used the 10-year government bond rate for its jurisdiction as the risk-free rate in this calculation. Additionally, Estoil built its model using a forecast denominated in the functional currency of the parent company. Estoil felt that any other approach would require a level of detail which was unrealistic and impracticable. Estoil argued that the different CGUs represented different risk profiles in the short term, but over a longer business cycle, there was no basis for claiming that their risk profiles were different.

 

Estoil is an international company providing parts for the automotive industry. It operates in many different jurisdictions with different currencies. During 20X4, Estoil experienced financial difficulties marked by a decline in revenue, a reorganization and restructuring of the business and it reported a loss for the year. An impairment test of goodwill was performed but no impairment was recognized. Estoil applied one discount rate for all cash flows for all cash generating units (CGUs), irrespective of the currency in which the cash flows would be generated. The discount rate used was the weighted average cost of capital (WACC) and Estoil used the 10-year government bond rate for its jurisdiction as the risk-free rate in this calculation. Additionally, Estoil built its model using a forecast denominated in the functional currency of the parent company. Estoil felt that any other approach would require a level of detail which was unrealistic and impracticable. Estoil argued that the different CGUs represented different risk profiles in the short term, but over a longer business cycle, there was no basis for claiming that their risk profiles were different.

Requirements:

a

Discuss the importance and significance of the various factors inside and outside an organization, when conducting an impairment test under IAS 36 Impairment of assets.

Marks: 6
b

Discuss the acceptability of the above accounting practices under IAS 36 Impairment of assets.

Marks: 6
c

Discuss the acceptability of the accounting practices of Fariole surrounding the preparation of cash flows for the purpose of imapirment testing under IAS 36 Impairment of assets.

Answers submitted

Created by Ref Marking Action
Kawsar Ahmed's picture
Kawsar Ahmed
04/13/2021 - 01:59
a
10281
6
Kawsar Ahmed's picture
Kawsar Ahmed
04/13/2021 - 02:24
b
10283
6
Kawsar Ahmed's picture
Kawsar Ahmed
04/13/2021 - 02:53
c
10285