Client Understanding Paper
I am looking forward to working with you and your organization on this project. I have requested additional information from your organization in reference to capitalizing interest on building construction, adjusting lower cost of market inventory valuation, recording gain or loss on asset disposal, and goodwill impairment adjustments. From my understanding, you are unclear to why I have requested additional information. ???Statement of Financial Accounting Standards (SFAF) No. 34??”???Capitalization of Interest Cost, states the amount capitalized is to be an allocation of the interest cost incurred during the period required to complete the asset??? (Financial Accounting Standards Board). Statement of Financial Accounting Standards No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets. ???In 2001, the FASB issued STAS No. 142, ???Goodwill and Other Intangible Assets, which changed the method of accounting for some intangible assets??? (???Financial Accounting Standards Board???, 2001). I will be explaining each item in full detail of the accounting principles and practices improve the organization??™s practices and knowledge from this analysis.
Lower Cost of Market
The lower-of-cost or market (LCM) is defined by ???a basis whereby inventory is stated at the lower of either its cost or its market cost as determined by current replacement cost??? (Kimmel, Weygandt, & Kieso, 2007, p. 280). When the cost is lower than the value of inventory, businesses can write down there inventory to market value. The word market in lower-of-cost or market means the cost to replace the item by purchase or reproduction. The word cost means the acquisition price, which inventory is computed using the historical cost-based method. Under the LCM, market also is referred as current replacement cost, not selling price. ???Using replacement cost allows a company to maintain a consistent rate of gross profit on sales??? (Kieso, Weygandt, & Warfield, 2007, p. 280). The lower-of-cost or market rule occurs when companies value inventory using lower-of-cost or market, with the market amount cannot be more than the net realizable value or less than net realizable value less a normal profit margin. The maximum limit cannot exceed the net realizable value (ceiling). ???The upper (ceiling) is the net realizable value of inventory. The lower (floor) is the net realizable value less a normal profit margin??? (Kieso, Weygandt, & Warfield, 2007, p. 434). The minimum qualification of lower (floor) is to be less than the net realizable value by reducing the allowance given a normal profit margin. How the lower-of-cost or market works is using the assigned market value compared to cost. Always use the middle number of the three: replacement cost, net realizable value, and net realizable value minus profit margin. The methods of applying the lower-of-cost or market is directly to each item, by category, or the total of inventory. If your company follows this, rule it will increase in market prices (category) and offset decrease in market prices (inventory).
The Statement of Financial Accounting Standards (SFAS) No. 34 ???Capitalization of Interest Cost, states the amount capitalized is to be an allocation of the interest cost incurred during the period required to complete the asset??? (Financial Accounting Standards Board). Statement of Financial Accounting Standards No. 34 is recognizing interest cost as important parts of the historical cost of acquire assets. Determining if the asset is qualified for interest capitalization, the asset cannot be ready for intended purpose and must undergo necessary activities to be ready for intended use. ???Qualified assets are defined as (1) assets that are constructed or otherwise produced for an enterprise??™s own use and (2) assets intended for sale or lease that are constructed or otherwise produced as discrete projects??? (Schroeder, Clark, & Cathey, 2005, p. 276). Manufactured or large quantities items are excluded from capitalized interest and any assets not undergoing necessary activity preparing them for use. The interest amount to be capitalized is avoidable because the asset had not been constructed. The avoidable interest amount is determined by using the appropriate rate of interest to the average amount accumulated during the construction period.
Disposal of Assets
Long-lived asset are recorded as a gain or loss at the end of its useful life. ???An asset can be disposed of by abandonment, exchanged for a similar productive long-lived asset, distribution to owners in a spin-off, are to be considered held and used until disposed of??? (Schroeder, Clark, & Cathey, 2005, p. 287). Depreciation expense for the disposal of the long-lived assets would be recognized at the end of the useful life of the asset. ???SFAS 144 establishes the recording and accounting for the impairment of or disposal of long-term assets, regardless of whether assets are: (a) held and used, (b) disposed of other than by sale or (c) disposed of by sale??? (Schroeder, Clark, & Cathey, 2005, p. 286). To determine the gain or loss on disposal asset the company must first determine the book value of the asset at the time of disposal. The book value is determined by the cost of the asset and the accumulated depreciation to date. If disposals occur prior to year-end, the company recognizes depreciation for the fraction of the year until the date of disposal. A gain on a disposal by sale is determined if the proceeds from the sale is greater than the book value of the asset. A loss is recognized if the proceeds from the sale are less than the book value of the asset sold. ???If the carrying amount of a long-lived assets or asset group is not recoverable and exceeds its fair value this would be considered an impairment loss??? (Soroosh & Ciesielski, 2002, p. 2). Long-term assets held and used are disposed of as impairment losses, recorded under the income from continuing operations. In the disclosure notes on the income statement, a description of the impairment must be listed explaining the method used for determining the fair value of the asset.
Goodwill is the value of all favorable attributes that relate to a business enterprise. When recording goodwill, it is recognized as an intangible asset. ???Under, APB Opinion No. 17 goodwill was amortized over its useful life or forty years, whichever came first??? (Schroeder, Clark, & Cathey, 2005, p. 322). SFAS No. 142 ???Goodwill and Other Intangible Assets,??? requires an annual test for goodwill impairment. The goodwill impairment test includes two-steps: ???(1) a comparison of the fair value of the reporting unit to its carrying value. In the event fair value exceeds carrying value, no further testing is required. (2) a calculation of the implied fair value of goodwill by measuring the fir value of the net assets of other than goodwill and subtracting this amount from the fair value of the reporting unit??? (Schroeder, Clark, & Cathey, 2005, p. 324). This testing requires companies to evaluate the cash flows units their company is expected to generate and support the values of those units. Assets with carrying values are determined to be unrecoverable, an estimate fair value must be determine by the company for reporting units and the company must record the impairment charge do not exceed the carrying value greater than the fair value. ???Since SFAS No. 142 requires the goodwill analysis to be performed at the reporting unit level, the standard provides companies with the option to offer more transparent financial information, that is, how well a company and its acquisitions have been performing, as well as which of the individual reporting units have been able to meet their own expectations. In addition, SFAS No. 142 requires companies to provide specific information on the facts and circumstances that led to the recorded impairment??? (Schroeder, Clark, & Cathey, 2005, p. 325).
Thank you for allowing me to work with you and your organization. As explained above there are many different accounting practices that have been used to record, report and adjust valuation, capitalize interest, record gain or loss on disposal assets and goodwill impairments. I believe the information that has been provided will enlighten and improve the companies understanding of these issues. If you have any questions or concerns relating back to anything that was discuss are any future questions in general, please don??™t hesitate to contact me. Once again, thank you for your time and consideration. I look forward to working with you and your organization in the near future.
Client Understanding Paper