FASB cases Essay

Published: 2020-04-22 08:25:56
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Category: FASB

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The Financial Accounting Standard Board NO. 34 allow for the capitalisation of interest accrued for the number of days that an asset or a loan capital has not been operation. It is the interest for the period of time the assets are being readied for the expected use. Interest capitalization is the process whereby interest is deferred to take a form of an asset. Contrary to being calculated as an expense as it usually the case, the FASB standards allow for capitalization of assets in only two cases. The first case is the interest on borrowed capital intended to construct assets for companys own use.

The second case is for what are referred to as discrete projects. These are assets constructed with the sole intention of leasing or selling, an example is ships and real estates. The above professional pronouncement creates some controversies as far as adopting the financing interest rate is concerned. Controversies also abound the ambiguity of borrowing costs and qualifying assets. These definations differ from one standard to another. For example the amount one gets after capitalising and IFRS differs from the GAAPS.

The statement 34 of FASB posits that interest should only be capitalized for only that money or resources that have been used up when acquiring an asset. This means that the total interest capitalized in the cost of a particular asset can in no way exceed the interest paid by the company. This is logical as it means the total cost of acquiring an asset together with the interest earned are included in the historical cost of that particular asset. Other approaches should be incorporated into G. A. AP to widen the scope and interpretation of the interest capitalization concept.

In present times, there has been a sense of discussion between the FASB and IAS bodies to try and harmonize the standards touching on interest capitalization cost and borrowing costs. There exist some differences in how FASB and IAS perceive interest capitalization. IAS 23, on paragraph 11 (IAS borrowing costs, n. d), allows borrowing costs to be treated as expenses for the period that they are incurred. Borrowing costs are any expenses incurred to a company, inclusive of interests, in the process of borrowing capital. These are those costs regarding the acquisition and production of that asset.

Only the amount of funds to be capitalized, according to IAS 23, shall be carried at by deducting any benefits or income arising from any investment of the borrowings from that amount of borrowing costs that should be capitalized. While IAS allows two approaches, either expensing the borrowing costs or capitalizing the borrowing costs that can be attributed to the qualifying assets. FASB does not allow for immediate expensing. It only allows for borrowing costs capitalization. The IAS approach and other standards should also be considered and incorporated into GAAP.

Definition of the term qualified assets should be harmonized by the international accounting standards. While some would wish to capitalize interest on qualifying assets by using a rate that incorporates the existing market risks, others prefer to capitalize the interests as they incur. Case 2 FASB impairment loss is applicable to long term assets, intangibles and the goodwill on these assets. Impairment is hereby considered when an asset has been unable to recover its carrying amount over its estimated useful life.

There are a few indicators or examples that are likely to show that an asset has impairment (Financial Analysis, 2002). Any significant decline in the market value of an asset requires that asset to be revalued. For example, if the price of oil undergoes a significant decrease in price at the moment, it may cause any acquisition in the recent years to be revalued. A decline in the price of land, equipment or other long term machineries will require the firm to revalue its assets, to incorporate that change in market valuation.

Any considerable adjustments in legal business climate that is likely to have an impact on the valuation of the assets can also lead to an impairment loss. If for example the state passes a legislation outlawing the usage of a specific type of machinery because of its environmental implications,this would affect its utility to a firm and consequently its valuation. Major changes in the way an asset is being used may also affect the recoverability of the carrying amount. Any addition or reduction of inputs in machinery such that it prompts major physical changes that affect the way an asset is being utilized in its day operations.

If there exists any expectations in the firm that there is a likelihood of disposing or selling off an asset before its originally expected useful life,it indicates that the carrying amount of that asset is not recoverable. If the actual cost incurred in the process of acquisition of an asset exceeds the budgeted amount, this is an indicator that the value of the asset should be reviewed to cater for the increase in the lost. There is also a need to revalue an asset if in its current use it is incurring heavy losses coupled with past evidence of losses. This indicates a need to recognize impairment.

The FASBS impairment recognition criteria are applied when there are indicators that an asset carrying amount is not under any improved circumstances, likely to be recovered. After the above has been established the next stage should be to focus on the assets expected undiscounted net cash flows. If it emerges that the book value of an asset is greater than the undiscounted net cash flows, then there is an impairment loss as this is a strong indicator that the carrying value cannot be recovered. The recognition for impairment utilizes undiscounted cash flows.

This is because they should not put into consideration any arising capital expenditure in the future or any alternative use of the asset. If it utilizes the discounted cash flows, there might be absurd results htat indicate negative cashflows. All this is in the knowledge that discounting rates might change from time to time and hence the application of discounted cash flows might give exaggerated low or high amounts. The undiscounted cash flows tend to ignore factors such as timings and events that are uncertain assuming that all the assets in the firm have equal values.

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