Testing the Value of an Asset

I need an explanation for this Accounting question to help me study.

Companies are often faced with the aspect of having to test the value of an asset on their books to see if it has been impaired.

The company uses one of two values in the testing that is compared to the book value of the asset. One of those values is the present value of the future cash flows and the other is the value of the asset on the open market. Both of these values involve estimations as to the true value of the asset.

What do you feel are some of the issues that could arise from these types of situations? Why do you feel they are issues?

Just do response each posted # 1to 3 only

Posted 1

My first issue is as the professor stated, accountants are not appraisers. They do not have the ability predict future outcomes. I currently have a real estate license, one of the things that I have to educate my clients about, that are looking to sell their homes, is that they cannot set their on selling price. I let them know that I understand what amount you want but you also have to understand that the market is dictated by the buyers. If there are several homes in the area for sale of similar style and features, you are not getting more than the market rate. When you are the only house being sold in the neighborhood then you can manipulate your way to the price you want.

That is the way I see asset valuations. How can I tell now about the future if their will be other assets in the market that will make the value of my asset decrease or if I will be the only one selling my asset at that future time. I can not tell. Just like the Covid-19 came from no where. People did not know three years ago that they were going to have to sell of their store/office/restaurant equipment for such discounted rates because more and more placed are going out of business and goods are currently saturating the market.

If we lived in a perfect world accountants can be appraisers, and forecasters. They can estimate a price and the future value, and not have anything go wrong and get that price for their assets. But we do not live in a perfect world, everything that can go wrong will go wrong. You might not get the full use from an asset, or their might be down time for repair etc. the possibilities are endless.

Posted 2

What is great about being an accountant is the money whether it is the present or future, it is not our money. We can tell you how much money you have and how many years of depreciation is left on a big tractor, but it is not our money. I see an estimation as a gamble, gambling is something I steer away from. Yet whether it is a guaranteed profit and a value is guaranteed to increase or decrease, it is a gamble. Investors and shareholders must gamble their money into assets they believe in, and maybe they might just get a hit (Kieso, Weygandt, & Warfield, 2018). Is an open market a greater opportunity for a larger gain whether present or future, open to any bargain or impairment at any time?

I believe what would work best is going by the quote, “Do not put all your eggs into one basket”! A company can trade, hold, or in

vest, there are many ways a company can test present value and future cash flows. An investor is better off doing tests, they may run into many tests with out comes of a loss. What we must do as accountants is provide the most obvious data available during a present period or moment. A loss or gain could be caused by our valued information, or information can be considered an asset, we are assets, and we make sense of values. We do not predict or estimate, the information we provide is the value a company will use to decide what they choose when making predictions or estimations (Kieso, Weygandt, & Warfield, 2018).

Posted 3

When a company buys an asset they choose a method to depreciate and the period of time that the asset is expected to benefit the company. The key word here is ‘expected’. Many issues arise that can cause an asset to not last as expected. It may wear out sooner than expected, become outdated due to changes in technology, among many other reasons. When this happens the carrying value on the company’s books is no longer accurate and must be evaluated for impairment.

‘To determine whether an asset is impaired, on an annual basis, companies review the asset for indicators of impairments-that is, a decline in the asset’s cash-generating ability through use or sale.’¹ Users of financial statements are assuming that the company is selecting the best depreciation method and useful time period, and that their annual valuation of assets is made in good faith. I worry that it could be undetected if a company chose to misrepresent these numbers to manipulate their net income. Since depreciation expense and impairment loss both reduce the net income of the company these estimations become important. Are there new rules and regulations that could help streamline this process? I believe there could be, but until then as accountants we will act in good faith to give the most accurate financial report possible.