Client_Understanding_Essay

Client Understanding Paper Adjusting Lower Cost of Market Inventory on Valuation As newly hired staff it is our responsibility to analyze adjusting lower cost of market inventory and explain the valuation. The value of inventory is important because inventory accounts for a large portion of assets, and inventory has a major effect on reported net profit according to Schroeder, Clark, and Cathey (2005). The valuation process for inventory differs from cash, cash equivalents, temporary investments, and receivables. These are reported on the financial statements as what is expected from future cash receipts. Inventory is recorded differently, and as the cost of the acquisition value. Quantity of inventory, cost flow assumption reasonable for the organization, and the decrease of market value acquisition are questions to consider with inventory valuation, according to Schroeder, Clark, and Cathey (2005). Historically, the idea of conservatism in accounting leads to inaccurate financial reporting. Current Generally Accepted Accounting Principles (GAAP) states the, “Lower of cost or market should not exceed the net realizable value, or not be less than net realizable value reduced by an allowance for an approximately normal profit margin,” according to Schroeder, Clark, and Cathey (2005). This holds true only for downward adjustments, or losses. Inventory is adjusted to lower cost of market value because the utility of inventory diminishes. These diminishes are due to damage, obsolescence, and economic changes. So, utility diminishes and original cost cannot be recovered. Under the IFRS, IAS No. 2 summarizes the proper principles and measurements of inventory. Inventory is recognized and recorded at the lower of cost and net realizable value. Net realizable value is the approximate selling price less the estimated costs associated with selling the inventory. Capitalizing Interest on Building Construction In 1979, the Financial Accounting Standards Board (FASB) issued SFAS No34, “Capitalization of Interest Costs,”, which states that interest should be capitalized only an asset requires a period of time to be prepared for its intended use (Financial Accounting Standards Board). There are several factors that we need to address concerning capitalizing interest on building construction. First, we need to break down what capitalizing interest is regarding a new build rather than a purchase of an already constructed building. Basically when we are constructing a building the interest of the building itself should not start accumulating until the building is completed. Second, we should note that utilities normally capitalize both actual and implicit interest, which directly affect costs of service and future rates on construction projects. Furthermore, the interest should be added into the selling costs because it is a financing charge rather than an operating charge and should not be charged against the asset. Last, the upfront costs that are associated in completing a new construction can become so excessive that companies sometimes have to delay or even cancel projects until new investors are located. Recording Gain or Loss on Asset Disposal When an asset is set for disposal, we must first determine our manner of disposal. Two ways to dispose of an asset is through a sale or an exchange. According to the International Financial Reporting Standards board (IFRS) to hold an asset for sale after a disposal is if its carrying amount will be recovered principally through a sale transaction rather than through continued use. For this to happen the asset must be available for immediate sale in its present condition and its sale must be highly probable. Once you have determined the type of disposal you are doing, you then need to understand how to record the disposal in your financial statements. To determine how you will record the disposal you must first decide if you will have a loss or gain on the transaction. To accomplish this we need to figure out what the fair value of the asset is. Once we know what the fair value of the asset is, then we can figure out if we have a gain or loss on the transaction. If we find that we received more than the fair value of the asset, then we would record the excess of fair value as a gain on the income statement. If we find that we received less than the fair value then we would record the difference as a loss on our income statement. Any gain or loss on the transaction must be recorded in the period it occurred. You would record the results of the discontinued asset, less applicable income taxes, as a separate component of income before extraordinary items (FASB, n.d.). If you happen to have a gain or a loss not previously recognized from the sale of the asset you will recognize it on the date of the sale. Adjusting Goodwill for Impairment According to the FASB, after issuing SFAS 142 in June 2001and it pertained to Goodwill and other Intangible Assets there was a major impact that this change had on how the accounting methods work. The new changes that were made to consist of “Amortization of all goodwill ceased regardless of when it originated Goodwill is now carried as an asset without reduction for periodic amortization.”(Huefner & Largay III 2009) ” The second change stated that a company is to assess goodwill for impairment at least annually. If goodwill is impaired its carrying amount is reduced and an impairment loss is recognized. (Huefner & Largay III 2009) By utilizing this new method for goodwill impairment that the company must report the goodwill to the reporting units. The fair value of the items has to be identifiable assets. The steps of this process have similar characteristics as the allocating assets process. According to Huefner & Largay III (2009) here is a test that is a two step process 1) the fair value of the reporting unit compared with the book value total equals to the recorded amounts of the assets. If the fair value is greater than the book value their cannot be an impairment and that will complete the first step. If the unit fair value is less than its unit book value may be impaired and next step need s to be followed. Step 2) the estimated fair value of the goodwill unit can be determined if this process is repeated. This process requires that subtracting the estimated current fair value of the identified assets units from the fair value units and compares the difference with amount of goodwill carried. If the goodwill fair value is greater than the goodwill book value than goodwill is not impaired and cannot be written off. If the goodwill fair value is less than the goodwill book value the company must record the impairment write-off equal to the difference.