The accountant uses significant judgment in the valuation of assets. How does th

Question

The accountant uses significant judgment in the valuation of assets. How does the accountant use estimates and judgment in the valuation of long-term assets? Is it ethical for an accountant to use estimates and varying methodology to achieve desired corporate results? Participate in follow-up discussion by challenging or confirming your classmates' positions. Support your challenges with external references. Your initial post should be 250-500, and should demonstrate solid academic writing skills.

Explanation / Answer

Answer

Accountant uses estimates and judgments in the valuation of long-term assets in following manner.

The preparation of the financial statements in conformity with generally accepted accounting principles (IFRS) requires accountant to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future period affected.

Information about critical judgments in applying the accounting policies that have the most significant effect on the amounts recognized in the financial statements is explained as below.

Recoverability of long-lived and intangible assets

Accountant assesses the carrying values of property, plant and equipment, and intangible assets annually or more frequently if warranted by a change in circumstances. If it is determined that carrying values of assets or goodwill cannot be recovered, the unrecoverable amounts are charged against current earnings. Recoverability is dependent upon assumptions and judgments regarding market conditions, costs of production, sustaining capital requirements and mineral reserves. Other assumptions used in the calculation of recoverable amounts are discount rates, future cash flows and profit margins. A material change in assumptions may significantly impact the potential impairment of these assets.

Cash generating units

In performing impairment assessments of long-lived assets, assets that cannot be assessed individually are grouped together into the smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Accountant is required to exercise judgment in identifying these CGUs.

Provisions for decommissioning and reclamation of assets

Significant decommissioning and reclamation activities are often not undertaken until near the end of the useful lives of the productive assets. Regulatory requirements and alternatives with respect to these activities are subject to change over time. A significant change to either the estimated costs or mineral reserves may result in a material change in the amount charged to earnings.

Mineral reserves

Depreciation on property, plant and equipment is primarily calculated using the unit-of-production method. This method allocates the cost of an asset to each period based on current period production as a portion of total lifetime production or a portion of estimated mineral reserves. Estimates of life-of-mine and amounts of mineral reserves are updated annually and are subject to judgment and significant change over time. If actual mineral reserves prove to be significantly different than the estimates, there could be a material impact on the amounts of depreciation charged to earnings.

Purchase price allocations

Purchase prices related to business combinations and asset acquisitions are allocated to the underlying acquired assets and liabilities based on their estimated fair value at the time of acquisition. The determination of fair value requires accountant to make assumptions, estimates and judgments regarding future events. The allocation process is inherently subjective and impacts the amounts assigned to individually identifiable assets and liabilities. As a result, the purchase price allocation impacts Company’s reported assets and liabilities, future net earnings due to the impact on future depreciation and amortization expense and impairment tests.

It is ethical for an accountant to use estimates and varying methodology to achieve desired corporate results when such use of estimates and varying methodology is permitted as per generally accepted accounting principles (IFRS).

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