Perspectives The Relationship Between Tax -Myassignmenthelp.Com

Question: Discuss About The Perspectives The Relationship Between Tax? Answer: Introducation For the purpose of conducting impairment testing the management has to make estimates about the recoverable value of the assets. An estimation is made regarding the realisable value of the Cash Generating Unit if it is not directly possible to estimate the recoverable amount of the asset. It should be noted that the higher of fair value of asset less cost of disposal and value in use is regarded as the recoverable value of an asset or CGU is taken to be. In computation of value in use the management has to estimate the future cash flows of the asset and also the pre-tax discount rate (Cortesi et al., 2015). The pre-tax discount rate is estimated by the management by assuming the risk that is specific to the asset or the CGU. The pre-tax discount rates are used in discounting the estimated future cash flows of the assets or CGU. In addition to this, the current assessment of the markets time value of money is used for the estimation. Yes there is a lot of subjectivity involved in the process of impairment testing. The period after which the impairment testing has to be conducted depends upon the subjective judgement of the management. Further the realisable value of the assets and the discounting rate all depend upon the judgement of the management. This can significantly impact the outcome of the impairment testing (Beatty Liao, 2014). There may be instances where the management is unable to gauge the impact of the changes in the circumstances or events on the value of the assets. The thing I found interesting how the companys assign the recognisable value to the assets whose recognisable value is not readily available, by finding out the recognisable value of the Cash Generating Units of the class of assets it belongs to. The surprising thing was that it is completely on the judgement of the management to decide when to increase the frequency of the impairment testing base on the changes taking place in the circumstances (Com, 2016). The new insight that I got about impairment testing was that the company divide their intangible assets into two groups i.e. one with definite life and one with indefinite life and depending on this the interval of impairment testing is decided. The assets having an indefinite life like Brand Names in this case are tested for impairment annually and in presence of an indicator the interval is increased. Whereas in case of intangible assets having definite life impairment testing is conducted if it is indicated that the assets may be impaired. AASB 13 deals with the concept of Fair Value Measurement. It is concerned with the amount that is going to be realised from the sale of an asset or transfer of a liability. It lays down the provisions with respect to the procedures to be followed by the management in determination of the value of that can be realised. The reason for the belief of the chairperson of the AASB that the former accounting standard relating to leases did not reflect the economic reality is the separate treatment of the operating lease transactions and the financial lease transactions. Previously the companies in their financial statements were not supposed to record the assets acquired and the resultant financial obligation. Only the assets acquired by way of financial lease transactions were to be recorded in the financial statements. Despite the fact that the obligations arising out of acquisition of assets by way of operating lease is just as real as those arising out of financial lease, the recording of the same was prohibited. This created a loophole in the true and fair view reflected by the financial statements (Weygandt et al., 2015). The shareholders were generally unaware about the obligations the company has incurred by way of acquiring assets via operating lease as the same was not recorded in the financial statements. It can be said that the financial statements prepared as per the former accounting standards were not capable of showing the true and fair view of the companys performance and the financial position. The former accounting standard prescribed different accounting treatment for the finance lease transactions and operating lease transactions. As per the former standards, only the assets acquired by way of financial lease were to be recorded along with their resultant obligations in the statements of accounts of the company. The assets and the corresponding liability in case of acquisition by way of operating lease were not to be recorded in the financial statements of the company. But, the liability or obligation created by the operating lease transactions were as much real as that of financial lease transaction and increased the debt of the company significantly (Kahng, 2015). In case of airline industry significant assets were acquired on operating lease basis. However, there was no recoding in their respect in the financial statements as per the former accounting standard making them off-balance sheet items. The amount of such balance sheet grew significantly as the company need not worry about the position shown to the shareholders with respect to its debt amount as there was recoding of the debt in the balance sheet of the company. This amount became so large that it amounted about 66 times than the balance sheet items. The extensive use of operating lease impacted the debt amount of the company very significantly and negatively. The airline companies adopted different ways of arranging funds for the acquisition of the assets. Some firms took loans and borrowings from the bank and the public to finance their assets while others acquired them on operating lease. The companies which use the operating lease did not have to disclose the loan amount in their balance sheet as per the guidelines of the former accounting standard while the companies utilising the bank loans and borrowings had to disclose about their obligations in the financial statements of the their company (Gomes, 2017). This differential treatment of borrowing simply on the basis of the sources they are arranged from gave the entities using operating lease an undue advantage over their competitors. The shareholders of both type of companies made their economic decisions based on the information given in the financial statements of the company. The shareholders could not get the information about the operating lease obligations of the company and the depleted debt position of the company, using operating lease due to the non-disclosure in the financial statements. The financial statements of the companies using operating lease did not show the economic reality of the company hence the shareholders were deceived and the companies took unfair advantage by way of increased share price and a better balance sheet. This is the reason why the chairperson of the AASB said that the former accounting standard did not provide level playing field for the airline companies. The chairperson rightly believed that the new accounting standards wont be popular with everyone as it would require the recording of both financial as well as operating lease transactions. The companies using operating lease for the purpose of acquiring assets were able to acquire more assets and at the same time not record the resultant obligations in their financial statements (Ramirez, 2015). This gave them an added advantage over other companies utilising other sources of funding the assets of presenting a better balance sheet in front of the shareholders. The companies would no longer be able to utilise the provisions of the former accounting standard to cover up the deterioted solvency position of the company as a result of the obligations arising out of operating lease transactions. The companies share prices will take a hit when the shareholders would become aware about the amount of debt that the company has accumulated over the years and is due for payment. Because of thes e reasons the new accounting standard wont be welcomed wholeheartedly. The new accounting standard will definitely help the investors in making an informed choice in respect of their investment. This is because of the fact that the companies will have to show the actual amount of debt that has become outstanding in their financial statements. The shareholders will get a true view of the economic reality of the organisation with respect to its financial position and financial performance. The organisation on the other hand will have to make buy or lease assessment before acquisition of any asset for the company. This is because irrespective of the source they choose they will have to disclose it in the financial statements of the company (Beatty Liao, 2014). Hence, they must take the decision of borrowing the amount by keeping in mind that how it is going to affect the solvency position of the company. the new standard has paved way for the shareholders to know the economic reality of the companies by lifting the practice of differential accounting trea tment for operating lease transaction and financial lease transaction. With its advent disclosures in respect of both types of leases will be required. Reference Beatty, A., Liao, S. (2014). Financial accounting in the banking industry: A review of the empirical literature.Journal of Accounting and Economics,58(2), 339-383. Com, M. (2016). M. Com April-2013 Advanced Financial Accounting. Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I., Castoldi, S. (2015).Advanced Financial Accounting: Financial Statement AnalysisAccounting IssuesGroup Accounts. EGEA spa. Gomes, D. (2017). Book review: Accounting by the First Public Company: The Pursuit of Supremacy. Hoyle, J. B., Schaefer, T., Doupnik, T. (2015).Advanced accounting. McGraw Hill. Kahng, L. (2015). Perspectives on the Relationship between Tax and Financial Accounting. Ramirez, J. (2015).Accounting for derivatives: Advanced hedging under IFRS 9. John Wiley Sons. Weygandt, J. J., Kimmel, P. D., Kieso, D. E. (2015).Financial Managerial Accounting. John Wiley Sons.