How Impairment Testing and Off-Balance Sheet Liabilities Affect the Essay

How Impairment Testing and Off-Balance Sheet Liabilities Affect the Reliability of fiscal Statements - show ExampleWhen an instrument is not traded in an active market there is great uncertainty or so the ultimate amount that can be realized from the instrument in a transaction mingled with knowledgeable forgeting parties in an arms length transaction (Eipstein and Jermacowicz 2007).In July 2002, the European Union issued a regulation requiring all EU-listed companies to prepare their year-end accounting standards in compliance with IFRS as from December thirty-first 2005. Following the recent wave of accounting scandals at Enron, Tyco International and WorldCom, as well as the greater concern for off-balance sheet liabilities, the IFRS has issued a number of standards (IAS 32 Financial Instruments Disclosure and Presentation, IAS 39 , IFRS 7 Financial Instruments Disclosures, and IAS 17 Leases) to help reduce bright lines that enable companies to use off-balance sheet financing. In this paper the developments in attentiveness of convergence between national and international accounting standards since 1st January 2005 to present day will be discussed. The impact that off-balance sheet financing and scathe testing may have upon the reliability of pecuniary statements will also be discussed. In the light of all these, the next section argues in respect to the theme of this paper.1.1.1 How trauma testing and off balance sheet Liabilities affect the Reliability of Financial StatementsIAS 36 requires companies to test assets for impairment. Basically, the standard requires that tangible assets should be tested for impairment when there is an indication that an asset mogul be impaired. (Epstein and Jermacowicz, 2007). However, intangible assets having an indefinite useful life must be tested annually for impairment. The impairment test is required to be applied to a specie generating unit, that is, the smallest group of assets for which the entity has iden tifiable cash flows. During an impairment test, the carrying amount of an asset or group of assets in the cash generating unit is compared with the fair rate or value in use (value in use is calculated as the present value of the cash flows expected to be generated from using the asset). The higher of value in use and fair value is taken and compared with the carrying amount and an impairment loss is recognized if the carrying amount is higher than the higher of fair value and value in use. (Epstein and Jermacowiz, 2007). IAS 36 also requires a company to determine at each reporting date stamp whether there are conditions that would indicate that impairment may have occurred and further provides a set of indicators of potentiality impairment some of which include (Epstein and Jermacowiz, 2007 p. 247)Market value declines for specific assets or cash generating u