Answer to Question #208714 in Economics for Joseph zimba

Question

 Using hypothetical but realistic organizations, present different scenarios that may lead to a deviation from the proper use of the following accounting standards:.

3. IAS 36 Impairment

4. IAS 37 Provisions, contingent assets

Answer 1

The fair value of any of the assets of a commercial company cannot be static. Some assets under the influence of macroeconomic factors rise in price, while others undergo a process of depreciation over time. In a general sense, the concept of asset depreciation is a multi-stage process of reducing its financial and economic potential, reducing its liquidity and profitability in excess of the cost reduction as a result of depreciation and inflation factors. As a result, the carrying amount of the asset could exceed the theoretical amount of consideration expected to be received from the sale of the asset in the fair value market.

IAS 36 is designed as a regulation that defines the accounting treatment for the assets of a commercial company in such a way that the amount of the balance sheet estimate does not exceed the fair value of the asset. At the same time, it is customary to recognize the excess of the book value not only as of the excess over the selling price but also the excess over the total amount of economic benefits and income that the company can derive from the use of this asset. When such a moment occurs in relation to the financial value of the asset, such an event indicates that the asset has been impaired, and then, in accordance with IAS 36, the company must record its impairment loss (IM).

IAS 36 is used to measure/account for impairment of all assets of a commercial entity, regardless of type and market of use, except for those that are subject to other standards. For example, inventories, assets under construction contracts, investment property, and some other categories of assets of commercial firms are excluded from the scope of IAS 36. However, IAS 36 applies to financial assets such as subsidiaries, associates, and assets arising from joint ventures.