Acquisitions Postacquisition Performance - Myassignmenthelp.Com

Question: Discuss About The Acquisitions Postacquisition Performance? Answer: Introducation Impairment tests are an essential process that is undertaken by each corporate entity in order to make sure that the assets have not been understated or overstated. The particular problem that the organizations face is the identification of the assets that need to be impaired. However, the accounting regulations and procedures list down the assets that do not require the impairment test. These inventories, deferred tax assets and non-current assets are held for sales. This particular study is aimed towards the identification of the issues in regards to when to undertake an impairment test (Saastamoinen and Pajunen 2016). The process of impairment refers to the un-estimated or the unexpected decline in the utility of an asset in regards to the service provided by the particular asset. Impairment is different from depreciation as depreciation refers to the planned reduction in the value of the asset. The scope of impairment also includes the act of obsolescence of the assets due to innovation of the technological implementations in the firm or alterations in the legislation (Bond, Govendir and Wells 2016). The Australian Accounting Standards Board in AASB 136 mentions the situations that leads to the impairment of a particular asset. An asset is impaired when the carrying amount of that particular asset is more than the recoverable amount. The Australian Accounting Standards Board makes it compulsory for the entities to ascertain the fact that whether there are any indications for the impairment of the assets at each reporting date. In the existence of such an indication, the recoverable amount of the particular asset has to be determined (Saastamoinen and Pajunen 2016). Moreover, the intangible asset of goodwill that has been acquired as a result of the business combination, must be tested for impairment annually Furthermore, the entity also has to test an intangible asset with indefinite useful life for impairment in spite of the absence of an indication (Bond, Govendir and Wells 2016). Thus, it has been clear from the discussion in the preceding paragraphs that the assets that must be tested annually for impairment are as follows: Assets that display indications in regards to the impairment tests Intangible assets that have an indefinite life Goodwill that has been acquired as a result of business combination The indicators in regards to the impairment of an asset that have been stated in the accounting principles provided by AASB 136 have been segregated into two sources namely external sources and internal sources. The external sources that are treated as indicators for impairment of an asset are as follows: The fall in the market value of the assets is a potential indication for execution of the impairment test of the assets. This might be due to the improvement in the technological implementation within the firm (Boennen and Glaum 2014) The changes that are adverse in nature in regards to the environment or market in which the entity operates. This might be explained by the singular example of a competitor firm that has acquired the patent of a new product that results in the fall in the market share of the entity (Boennen and Glaum 2014) The increase in the rates of interest also leads to the impairment of the assets (Yao, Percy and Hu 2015). The capitalization of the market might be a potential indicator of asset impairment (Yao, Percy and Hu 2015) The internal sources of potential indicators include: The physical damage or obsolescence of a particular asset might be a potential indictor for the impairment of the asset The alteration in the utilization of the asset The economic performance by a particular asset being worse than estimated The procedure for the impairment test for an individual asset can be conducted by the determination of the recoverable amount. The recoverable amount is higher of the two financial components of fair value of the asset and the value in use of that asset (Su and Wells 2015). To be more precise, the comparison between the recoverable amount and the carrying amount of the asset is drawn. If the recoverable amount is more than the carrying amount then the asset has invariably passed the impairment test. On the other hand, if the recoverable amount is less than the carrying amount then the impairment test has resulted in a loss. The determination of the fair value of a particular asset can be carried out by finding out the value hierarchy (Su and Wells 2015). The value in use of a particular asset refers to the present value of the future cash flows that is estimated to be obtained from the particular asset. The elements that are to be considered while determining the value in use of the asset are the estimation of the future cash flows, estimated variations in the future cash flows, the time value of money and the associated risk. The appendix of the AASB 136 lists down the two approaches for determining the value in use are traditional approach and the expected cash flow approach. The rates of discount that is used in determining the value in use of a particular asset should invariably reflect the time value of money and the risks in relation to the particular asset for which the future cash flows have not been adjusted (Linnenluecke caes et al., 2015). The impairment test for a particular asset that results in a loss is recognized by the amount is less that the carrying amount of that particular asset in regards to the recoverable amount of that asset. The impairment loss, according to AASB 136 should be immediately recognized in the income statement or the profit or loss statement of the company. Moreover, the amount that has been computed as an impairment loss that exceeds the carrying amount of the asset should only be recorded as a liability if it is required by another AASB standard. Post the realization of the impairment loss, the depreciation or the amortization amount also has to be adjusted in the future periods for the allocation of the revised carrying amount of the asset (Linnenluecke caes et al., 2015). References Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature. Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting Finance, 56(1), pp.259-288. Bugeja, M. and Loyeung, A., 2015. What drives the allocation of the purchase price to goodwill?. Journal of Contemporary Accounting Economics, 11(3), pp.245-261. Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment. Accounting Finance, 55(4), pp.911-929. Saastamoinen, J. and Pajunen, K., 2016. Management discretion and the role of the stock market in goodwill impairment decisions-evidence from Finland. International Journal of Managerial and Financial Accounting, 8(2), pp.172-195. Su, W.H. and Wells, P., 2015. The association of identifiable intangible assets acquired and recognised in business acquisitions with postacquisition firm performance. Accounting Finance, 55(4), pp.1171-1199. Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting Economics, 11(1), pp.31-45. Yao, D.F.T., Percy, M. and Hu, F., 2015. Journal of Contemporary Accounting Economics. Journal of Contemporary Accounting Economics, 11, pp.31-45.