Standard of decline in the value asset first episode

Egyptian criterionNo. 31modifited in 2015

And International criterion No. 36

A very important criterion used very widely in our practice life

The asset impairment criterion can not be apply to some other assets

Stock

Deferred tax assets

Employee benefits assets

Biological assets

Real Estate Investment

Non-current assets held for sale

 first we need to know is what assest means
Assets are future economic benefits to the company, and assets arise from a financial transaction or other past event.

Terms of avowal the assets

In order to recognize the original, a set of conditions must be met

1. There are future economic benefits from this asset

2- The company should be in control of this asset and its use

3- A basic and important rule in the standard in accounting in general

4- It is not beneficial to record the asset in the books greater than the future economic benefit
That can be obtained from using the asset and is called recoverable amount

What is the recoverable amount?

The recoverable amount is the largest value between the net present value of the expected future cash flows from the use of the asset or the net sales value of the asset.

_ (Net selling value) of the asset as well as the net (present value) of the (future) cash flows expected from the use of this asset (and we compare them to each other and choose)

Prospects for recoverable value

1 / The recoverable amount is greater than or equal to the book value, if there is no impairment.
2 / The recoverable amount is less than the book value. If there is impairment here, the asset value must be reduced to the recoverable amount.

Rule: No asset may appear in the financial statements at a value greater than the redeemable value.

In practice, the net sales value of the asset is more easy and available, while the net present value of the expected future cash flows from using the asset, it is difficult to calculate it accurately as you rely on estimates in its calculation.

Estimation of cash flow

Although the estimates of future cash flows must be based on reasonable basis and realistic assumptions, for example on the basis of the latest estimated budgets, as well as considering the economic conditions in the market, this is clear.

Asset impairment or impairment tests

If the book value of the asset is greater than the recoverable value of the asset, then the asset in this case is deemed to have experienced impairment in value, and the difference between the book value and the recoverable value is considered an impairment loss. Impairment losses are considered an expense that is deducted in the income statement with signs or indicators indicating the impairment of assets that would be in long-term assets.

First, external sources

A decrease in the market value of the asset during the financial period more than expected due to the passage of time and progress
The occurrence of tangible changes that have a negative impact on the assets of the company, such as changes in the technological environment, legislation and the economic climate in which the company operates.

In the case of legislation, for example, what company bought a device for a million pounds and imposes a customs tax of 200 thousand on it, for example, and after a month the government decided to reduce or cancel the customs tax on the device, and therefore its price in the company will be greater than its price in the market. This is an example for clarification as well as the change in the technological environment

An example of external sources

A company has machines with a book value on 31/12/2019 about 200 thousand pounds, as a result of the emergence of a great technological development in the manufacture of these machines. The expected future cash value of the asset is approximately 180 thousand.

Required: To indicate whether there is impairment or not, with the calculation of the impairment

What is the solution

The first step :

 The recoverable amount is determined and is the largest of the two values

The present value of expected cash flows for future 180 000

The sale value of the asset is 145 thousand

If the recoverable amount is 180 thousand pounds

Second, the second step:

The recoverable amount is compared to the book value

 Value recoverable 180 200 book value, if there is decay in the value of the asset in the amount of

180-200 = 20 thousand must reduce the asset value of this amount,

How is the accounting treatment of impairment

 Asset value is reduced to the original 180 instead of 200 by 20 as follows

 20 of h / losses of impairment of such and such .. This is the income statement account

               20 to h / accumulated impairment losses in the value of assets, this is a financial position account

We will also see with us the decline in current assets, uniforms of clients and other debit assets.

Decline in other debit stocks and impairment in investments

At each balance sheet date the Company estimates if there is objective evidence of impairment of assets or a combination of these uniform asset impairment in the balance of customers & Decay in the city and other stocks
And the impairment in investments and determine the value of losses resulting from the impairment of the asset when there is objective evidence of the existence of an event that led to the impairment of value.

Refund of impairment losses previously recognized

When there are losses in the decay of a single asset, occurs in the financial period incidental to the consequent increase in value (redemption) means a reflection of the previous loss Fa is increased value of the asset provided
Decay response example
Continuing the previous example, in the following year, there were some indications of an increase in the asset's recoverable amount, as the recoverable amount reached 250 thousand.

Required: Proof of impairment losses, if found

The timing of a decline in the value of the test

An impairment test can be done at any time of the year, provided that the test is performed at the same time every year for the tangible assets.

There are some assets whose recoverable value must be calculated annually without regard to the presence or absence of indications of depreciation

Like intangible assets, which of course have their own standard
Intangible assets that do not have a specified useful life

Intangible assets that are not yet ready for use
the fame

Goodwill is one of the items of intangible assets

The month does not have a specific life, and therefore it is not depreciated, but the impairment test is performed at different periods

The parent or controlling company recognizes goodwill in its financial statements under the heading of non-current assets

The internally generated goodwill is not recognized in the company’s records
It appears when a business is merged. It is that we compare the amount paid to buy the company with the net identifiable asset value, taking into account the minority share, meaning, for example, the net value of identifiable assets is 5 million, and the amount paid to buy the company is 6 million.

The value of the goodwill remains one million pounds, the internal publication is not recorded in the books of the company, and when the goodwill has a decrease in the value during the period, the decrease is recognized, and in the subsequent financial period if there is a response to the value of this decrease, the value of the decrease is not recognized.

The value of goodwill remains its cost minus any impairment losses, and we show them with examples.

Know the importance of cash generating unit

They are specific to a group of identifiable assets and generate cash flows separately from the rest of the other cash-generating assets, such as a fleet of buses, so the idea is that when there is a decline in the assets of this group, for example during a financial period

A response to this decrease occurs in a subsequent financial period, as the value of the decrease is refunded and distributed to all assets in proportion to the book value of the assets, meaning in proportion and proportionality.

Financial assets

Financial assets fixed in depreciated cost centers, such as loans, debts, or investments held to maturity and recorded at amortized cost

The value of the impairment loss is measured as the difference between the asset's carrying amount and the present value of future cash flows discounted at the effective interest rate calculated upon initial recognition of the asset.

Another point in the criterion of decline in the value of assets

Another point in the criterion of decline in the value of assets
Like what we say, the company is assessing if there is objective evidence of impairment of the value of financial assets, the most famous types of declines in assets, and that it will be largely present in practice, the most famous types of decline in assets, which are largely present in practice.

Decline in customers

It was called a time before the amendment in the standard with the provision for doubtful debts. It is the same method of calculation in which we used to calculate the allowance for debts, which is that the company estimates the percentage of doubtful debts from the aging report.
The method of depreciation in the value of customers is also in line with the idea of the principle of the corresponding between revenues and expenses and the value of the decrease expense that is recognized during the financial period or year is recognized in the income statement as an expense
The limitation is as follows

H / depreciation expense of customers

                  to me

    H / Compound depreciation in customer value

The customer balance that appears in the balance sheet will be the total customer balance in the audit balance minus the balance of customer decline

We will see it in front of a practical example

There are two methods for calculating the decline in customer value

The first method is the income statement method

The second method is the budget method

The first method is a method used in very small companies, and it is an unprofessional method
It is not recognized in international accounting standards by showing your deferred sales during the year and multiplying by the percentage of doubtful debts and the percentage estimated by the company’s management based on its experience

An example of the income statement method

Assuming that the total balance of customers at the end of the year in the balance of the audit is 100000, and the company has a balance of depreciation in the value of customers at the beginning of the year 1000 and the forward sales amounted to 3500000 and the debt ratio to the company estimated that it will not be collected during this year. 1% = 3,500

The limitation is

H / Decrease in the value of customers 3500

to me
H / Decrease in the value of customers 3500

It is assumed that the total balance of the decline in the value of customers is 4,500

Thus, the balance of the clients appears in the balance sheet at a value

4500 - 100000 = 95500

This method is like what we are telling us, and it is only used in very small companies

The second method is the budget method

It is assumed that any company has a system of customer accounts that it divides customers into credit periods and let it be 30, 45, 60 or 90 complete, which is called the age of receivables to is AGING RECEIVABLE
Account management evaluates debts to the probability of their uncollectibility in each credit period, for example, total indebtedness
Clients have a credit period of 30 days, let it be 5 million, and the company has healed, for example, that in 2% of this debt may not be collected, so the value of the decrease in the value of customers = 2% * 5 million = ****
Thus, in each credit period, the company estimates the potential percentage in non-collection of debts and multiplied it by the existing debt completely

Practical example

Assuming that the clients owe less than 30 days to 70,000
Customer indebtedness from to less than 60 days 18000

Customer indebtedness less than 90 days 10,000

Customers' indebtedness to more than 90 days in 2000

Total 100,000

Percentage of estimated outstanding debt

Less than 30 days 2% = 70,000 * 2% = 1400

Less than 60 days 5% = 18,000 * 5% = 900

Less than 90 days 13% = 10,000 * 13% = 1300

Greater than 90 days, 20% = 2000 * 20% = 400
Total balance of the decline in the value of customers = 4000

These percentages are different from one company to another according to the quality and quality of customers or not, and the companies ’estimates differ according to the nature of the industry and other factors.

Go back to our proverbs again

The company had a balance of the decrease in the value of its customers 1000 assets from last year and the company calculated the decrease in this year and its capacity is 4000
The difference is 3000 entries as follows

H / Decrease in the value of customers 3000

H / Decrease in the value of customers 3000

The expense, of course, goes to the income statement

The customer balance appears in the balance sheet at 97,000
4000 - 100000 = 96000

Ok, assuming that the balance of the decrease in the value of customers or the period was 5000 not 1000

This means that I have the balance of the decrease in the value of customers 5000 greater than the required amount in this year 4000

The difference is Cam 1000, the entry is as follows

1000 h / depreciation of customers

H / Refund of the decline in the value of customers Revenue in the income statement 1000

The customer balance is shown in the balance sheet at a value

100,000 - 4,000 = 96,000

This method is used and it is applied in international standards. We concluded the issue of the decline in the value of customers to the provision for doubtful debts

Presentation and disclosure in the financial statements

In the financial statements and in the disclosures, we make an explanation of the decline in assets
The book value of the assets owned by the company (except for inventory that has its own standard and method) is reviewed at the balance sheet date to determine if there are any indications of a decline in the value.
Studies are prepared to determine the expected recoverable amount of the assets
The assets are recorded at the recoverable value and in the event of a decrease in the recoverable value from the book value, this difference is carried to the income statement and the decrease in the value of the asset is returned in a way that does not exceed the book value of the assets after deducting the depreciation and depreciation and before recording the decrease in the value if the impairment loss is not recognized.
We make an explanation of all the declines in the assets to our name of the account, the balance of the first component during the period used during the period, the return of the decrease, the balance of the end of the decline in the assets, and of course, any asset that appears in the balance sheet, net after deducting the balance of the end of the period for the decrease in the original. In the next episode, we will talk about examples of Decline in assets

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