Question

Identify a specific asset that could be significant to a business and perform the following:

Describe the asset and identify a potential change in the estimated life of this asset.

Analyze the impact this change would have on the financial reporting, specifically identifying the accounts and the financial statements where these impacts would be reported.

Evaluate whether you believe this change it ethical or not and why.

Answer 1

a. The asset which I’m considering very significant to a business is Land property.

b. Land property is significant to business because every think of expansion. Land acquired earlier can be used by the company for their expansion ideas. It is also useful in case the company thinks of disposing it in future for a better price.

c. There is a change in the expected life of the property because of the earthquake in that area. A major part of the property has faced erosion and the expected industrial growth has taken a major setback. It is also predicted that there is a possibility of repeated earthquakes within next 5 years and the likely 50% of the land facing the river bank may go under water because of which the value of land has gone down by 60%.

d. As there has been a significant reduction in the carrying value of the asset the impairment of the land property is necessary. The land property needs to be shown in the balance sheet at current market price and the impairment loss is required to be shown in the accounts.

Impairment loss though has no impact on the company’s Cash balance but will be shown in the Other operating income and expenses section of Income statement and will reduce the Asset value in the Balance sheet.

e. It is very much ethical to show the Impairment loss in the Financial statements as the Investors and outsiders should have a true and fair view of the company’s position. An increased value of the asset will increase the company’s Total asset and the shareholders equity position. This will lead to false presentation of the financial statements which is not accepted by the accounting policies. Hence, presentation if Impairment loss is justified.