assignment 1 acct theory
Question 1 (25 marks)
Several accounting standards include ceiling tests (also called impairment tests).
Required:
a. What is a ceiling test? Identify two IASB accounting standards that contain a ceiling test and describe the test. (7 marks)
The ceiling test is an accounting standard that stipulates that capital assets such as property, plant and equipment must be written down if their net carrying value exceeds the net recoverable amount. This is to prevent overvaluation of capital assets.
b. Ceiling tests are usually regarded in this course as one-sided examples of the measurement approach. However, they can also be regarded as examples of conservative accounting, as assets are written down but not written up. Ceiling tests are an example of conservative accounting. Why do bondholders favour ceiling tests? How do bondholders reward the firm for conservative accounting such as ceiling tests? (6 marks)
The Bondholders favour ceiling test as they prefer to use a conservative accounting standards to value the firm as this will indicate the risk of their investments the likelihood of them receiving their interest / coupon and also this helps determine the value of their bonds at that point. By having an idea of the firm value this will permit the bondholders to make decisions on their investment strategies regarding their bonds.
c. Explain briefly why auditors favour ceiling tests. (6 marks)
Auditor favour ceiling tests as this permit the company to be valued fairly or even undervalued rather than overvalued. This situation protects auditors from being faced by lawsuits, as it’s less likely to be sued by stakeholders for undervaluation of a company.
d. Outline the accounting for research and development (R&D) under IASB standards. Is this accounting conservative? Why? Explain why accountants account for R&D as they do. (6 marks)
IAS 38 requires that research costs are completely excluded from the balance sheet and are expensed as incurred
Several accounting standards include ceiling tests (also called impairment tests).
Required:
a. What is a ceiling test? Identify two IASB accounting standards that contain a ceiling test and describe the test. (7 marks)
The ceiling test is an accounting standard that stipulates that capital assets such as property, plant and equipment must be written down if their net carrying value exceeds the net recoverable amount. This is to prevent overvaluation of capital assets.
b. Ceiling tests are usually regarded in this course as one-sided examples of the measurement approach. However, they can also be regarded as examples of conservative accounting, as assets are written down but not written up. Ceiling tests are an example of conservative accounting. Why do bondholders favour ceiling tests? How do bondholders reward the firm for conservative accounting such as ceiling tests? (6 marks)
The Bondholders favour ceiling test as they prefer to use a conservative accounting standards to value the firm as this will indicate the risk of their investments the likelihood of them receiving their interest / coupon and also this helps determine the value of their bonds at that point. By having an idea of the firm value this will permit the bondholders to make decisions on their investment strategies regarding their bonds.
c. Explain briefly why auditors favour ceiling tests. (6 marks)
Auditor favour ceiling tests as this permit the company to be valued fairly or even undervalued rather than overvalued. This situation protects auditors from being faced by lawsuits, as it’s less likely to be sued by stakeholders for undervaluation of a company.
d. Outline the accounting for research and development (R&D) under IASB standards. Is this accounting conservative? Why? Explain why accountants account for R&D as they do. (6 marks)
IAS 38 requires that research costs are completely excluded from the balance sheet and are expensed as incurred