'In company reporting, the measurement of the amount of impairment of Essay - 1

'In company reporting, the measurement of the amount of impairment of many types of assets is so subjective as to be meaningless - Essay Example Some assets can't be reported simply, so the subjectivity arises from the choice of impairment modeling and accounting presentation: Like trying to map a 3-dimensional sphere on a 2-dimensional plane, inevitable distortions crop up no matter what approach one takes to presenting the data. Yet other assets, while objectively declining in value, do so at a rate that is impossible to determine, so any presentation is subjective because it is a choice as to what data to include and what not to, what prediction to make. Yet even this incomplete, subjective picture is far from meaningless for investors, auditors and stakeholders. Asset impairment is defined as, â€Å"An unexpected or sudden decline in the service utility of a capital asset, such as a factory, property or vehicle. This could be the result of physical damage to the asset, obsolescence due to technological innovation, or changes to the legal code. Impairments can be written off† (InvestorWords, 2011). Assets can declin e for a variety of reasons. Simple wear and tear can make an asset less than its expected new or even used value: For example, a vehicle that operated in difficult conditions such as snow or sand could be below the expected market value for a vehicle of that age. In this sense, asset depreciation is a subset of asset impairment. But this determination can be subjective: It requires guessing the cost of the additional damage which could vary from potential buyer to potential buyer. Technological innovation can make some objects obsolete: Certainly, computers have obsolescence and an incredibly high rate of turnover. But anticipating that requires expecting Moore's Law to continue operating, as well as treating the computer as a unified asset, yet different parts of the computer depreciate at different rates and accounting standards are always changing to reflect that for different electronics (Ward, 2011). A legal change could make a piece of machinery become illegal in a particular country, but then the asset could be sold elsewhere, which could require a degree of subjective currency anticipation and assessment of liquidation risk and benefit. This is why goodwill is recognized as the standard for impairment of many assets, and it is commonly accepted that there is a great degree of subjectivity in making this determination. â€Å"We are facing a new era of economic development with a growing significance of intangible assets. Goodwill constitutes a significant asset for numerous companies, especially those which are operating in high technology industries. According to the growing importance of intangibles there has also been a significant change in standards associated with accounting for goodwill† (Jerman and Manzin, 2006). In particular, using fair value accounting for goodwill and for determining the need for disclosures leads to inherent subjectivity: â€Å"The fair value may be determined by using different approaches such as using available ma rket prices, present value techniques, prices for similar assets and other valuation techniques. Users of financial information should consider that market values are not always on disposal. Consequently fair value estimates are based on subjective judgment† (Jerman and Manzin, 2006, 222-223). One of the reasons why there is so much subjectivity is because investors rightly demand disclosures of