Newcrest Mining Ltd - Impairment of Assets - Assignment Example

Name: Lecturer: Course name: Course code: Date: Question one Introduction An asset impairment test concerns with market price drop of the company’s fixed asset. Impairment of asset is realized when the carrying value is greater than the fair value. This occurs due to the fact that many companies inflates the values in the balance sheet, Many accountant do not perform an impairment test each accounting period or on every the fixed asset of the company, performing an impairment test on each asset is unnecessary and thus, the impairment test is always conducted every year based on the proper approach specified by the accounting standards Condition for an impairment test to be conducted Asset impairment test is always conducted when there is a decline in market price of the asset or where there are a key changes in the usage of the asset or changes in legal factors on the manner in which business employ its assets. This condition will make an accountant performance and impairment test in order to test for materiality of the impairment loss and to document such impairment loss in order to ensure that the users of the financial statement are provided with reliable annual report for investment decision making as well as ensuring that the company financial statement portrays a true and fair view of its performance. Ways of conducting impairment Accountant ascertains impairment in to distinct ways, First the accountant ought to compile the past value for the entire asset documented on the company’s general ledger. Air value for the entire assets of the company emanates from the current market prices where they may dispose the asset and therefore, an asset with higher fair value than book value depicts asset impairment. The second methodology of testing for impairment requires a practitioner to undertake a cash flow analysis against the current asset cost. This is done by calculating the sum of total unrecognized cash flow from the future years and thus the sum of each asset represent the future benefit from each asset. Where the future benefit exceeds the book value, then there is an impairment of the assets. Accounting for impairment loss Corporation are required to write off the impairment loss against the income realized from a given financial year, The accounting system provides for different approach to writing off the asset impairment such that, total impairment loss may be divided into portion to be accounted for in different accounting period in order to reduce the consequences of lampsum deduction of impairment loss from the reported net income. Corporation therefore must disclose such impairment to the shareholders in order to make them know of the major business changes and ensuring that information are accurate concerning the business situation and financial difficulty it is facing. Documentation of the impairment loss is a compliance of International accounting standard 36 as well as the international financial reporting standard 3 (Accounting for impairment) the standard provides that every organization should account for impairment loss in the incomes statement as well as the financial statement to ensure that shareholders are give an accurate information concerning the company’s financial position. Question two Newcrest mining limited The cause of asset impairment fro Newcrest mining is both operational and financial in that, it is operational since, the company revised its operating cost and forecasted that there will be a reduction in total operation cost but instead, the company experience huge operational cost that lead to asset impairment. The financial factor such as the Australian dollar pressed a review of the asset book value since; the board had forecasted a steady growth in Australian dollar that never remained constant. This changes lead to review in Newcrest asset book value and thus the company encountered a huge sum of asset impairment. Question three Effect of impairment on cash flow A. On effects cash flow The cash flow statement will remain unaffected by impairment loss since the impairment loss is non monetary item and cannot be quantified and exact value based on economic condition be ascertained. In this regard, a company cannot pay for the impairment loss and thus the cash flow statement of the company will remain unchanged. B. Effect on balance sheet The long-term assets are minimized by the impairment since, the book value of the asset is lower as compared to market value and therefore, to obtain a precise value of the asset is to reduce the value of the impaired asset in order to match the current market of the same asset. This will as a result lead to reduction in conseqeunces of overstatement of the balance sheet item that might lead to misleading of shareholders and investors. A differed tax asset is created and the shareholders equity is minimized due to the impairment loss included in the income statement. The net effect of impairment loss is reduction in value of the company’s equity as well as the capital base and shareholders are the one to suffer huge losses since, they are the key financiers of the business and thus the company loss are equally shared amongst themselves in order to rescue the business from suffering more losses in the near future or even being liquidated. C. financial performance The financial performance of the company will be enhanced since; the debt to equity ratio will be minimized due to lower stakeholder equity and high turnover. The company intends to have a debt to equity ratio of 15% so that shareholders liabilities will be reduced leading to minimized debt to equity ratio, The future net income will be higher since there will be lower asset worth and hence the depreciation expense will be minimal leading to increase in return on asset and equity Question four How impairment of asset affect the strategic planning of NCM LTD. The strategic investment decision will be negatively affected by the impairment loss in that, the company will be forced to reduced the budget estimates as well as the investment budgeted in order to finance those project that can easily be executed under the available funds. This is because, impairment loss reduce the value of the existing asset as well as the worth of the shareholders equity and consequently the existing budget will change making the management to revise its budget estimates and planning in order to fit current economic condition as well as business situation. This will in turn affect the strategic planning of NCM ltd and thus the company will not achieve its strategic planning objectives within the stipulated timeframe. The pressure of capital rising in NCM Ltd comes from the top executives and the budget committee who are responsible for preparing and forecasting budget estimates (Hennie van Greuning 2001). The teams are faced with challenges of forecast the budget under the condition of uncertainties as well as considering the mode of raising the capital for the business as well as ascertaining the risk that capital budgeting technique will bring to the company (G. K. Everingham 2009). Consequently, the budget committee strives to ensure that the company’s shareholders do not suffer more losses or be considered to raise extra capital to finance the business but instead ensures that the company adopt the cheapest method of raising capital that is most efficient and affordable to the business during the period of financial difficulty and unfavorable economic conditions that affect the general operation of the business. Question five Materiality of impairment Materiality principle in accounting means express that a firm might violate accounting principle where the value of the in doubt is inferior such that the financial statement will not be deceptive to users. The material assumption merely draws round that practitioners are mandated to adhere to the general accounting principle (GAAP) unless there no difference where the rules are overlooked as well as when doing so would be exceptionally costly or hard. Under the principle of materiality, where an accounting rationale is overlooked in a definite circumstances, then the net income of the firm do not ought to be importantly affected nor is the firm’s financial statement impaired (Gupta 2008). The point of materiality standard is that, where the value is immaterial then it might not need to be treated in the similar manner as material transaction The impairment of NCM Ltd is material since; the value of the impaired asset affects the net worth of the company as well as the financial statement and therefore must be documented and properly accounted for in the books of account. This will as a result lead to investors not being deceived. Ascertaining the materiality for impaired asset of NCM ltd requires professional judgment, materiality is merely concern with the monetary worth of the impaired asset but as well as the nature of the item in doubt (James Wahlen 2010). The company should record the value of impairment in the financial statement since it is material and thus affect the net income of the company and thus in order to ensure that users of the financial statement are provided with the right annual report that reflect the company, true and fair financial position of their performance, the practitioners need to account and document for the value of the impaired asset. Impairment discloses requirement by NCM ltd Since the impairment for NCM Ltd is material, the disclosure requirement is that, the company ought to disclose the event and situation resulting in the impairment loss as well as the value of the impairment loss (Barry J. Epstein 2009). According to IAS 36,130, the impaired asset, nature and section to which the impaired asset related should be disclosed as well and therefore, where the impairment loss reclosed are material in aggregate to the financial statement as a whole then NCM ltd ought to document information concerning the estimates employed to ascertain the recoverable amount of cash generating units inclusive of the intangible asset with indefinite asset useful life. Compliance with the above disclosures of impaired asset will make NCM ltd less accountable loss suffered by the company since, accountant will be complying with international accounting standard 36 impairment of asset and disclosures and hence, the company will be providing reliable information to investors and shareholders concerning the business situation of the company and hence the investment decision made by any shareholders or investors will not be liable by the company incase of future loss or profit. Reference list Barry J. Epstein, ‎Ralph Nach, ‎Steven M. Bragg. Wiley GAAP 2010: Interpretation and Application of . 2009. G. K. Everingham, ‎J. E. Kleynhans, ‎L. C. Posthumus. Principles of Generally Accepted Accounting Practice. 2009. Gary Porter, ‎Curtis Norton. Financial Accounting: The Impact on Decision Makers . 2010. Gupta, Ambrish. Financial Accounting for Management: An Analytical Perspect. 2008. Hennie van Greuning, ‎Marius Koen. International Accounting Standards. 2001. Irene M. Wiecek, ‎Nicola M. Young. IFRS Primer International GAAP Basics - Page 152. 2009. James Wahlen, ‎Stephen Baginski, ‎Mark Bradshaw. Financial Reporting, Financial Statement Analysis . 2010. Jarnagin, Bill D. U.S. Master GAAP Guide - Page 342. 2008. Jay Rich, ‎Jeff Jones, ‎Maryanne Mowen. Cornerstones of Financial Accounting - Page 392. 2013. Opperman. Accounting Standards - Page 585. 2009. Rolfe, Tom. Financial Accounting and Tax Principles 2007 - Page 345. 2009. Subramani, R. Venkata. 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