Intermediate Accounting I: Valuation and Impairment of Assets
Chapter 4. Intermediate Accounting I: Valuation and Impairment of Assets
We have now entered the ‘Intermediate’ realm. While basis accounting focuses on ‘recording,’ intermediate accounting focuses on how to measure the Value of those numbers.
1. Classification and Measurement of Financial Assets
Financial assets are classified into three types based on the characteristics of contractual cash flows and the firm’s business model. This is the most fundamental classification system in IFRS.
| Classification | Holding Purpose | Period-End Valuation | Treatment of Gains/Losses |
|---|---|---|---|
| FVPL (Profit/Loss) | Short-term Trading / Speculation | Fair Value | Profit or Loss (I/S) |
| FVOCI (OCI) | Long-term Investment / Strategic | Fair Value | Other Comprehensive Income (Equity) |
| AC (Amortized Cost) | Maturity (Principal+Interest) | Amortized Cost | None recognized |
2. Inventory and Lower of Cost or Market (LCM)
Inventory is measured at the lower of ‘cost’ or ‘net realizable value.’ This is the core of Conservatism, where losses are recognized early and gains are wait until realized.
📦 Comparison of Inventory Costing Methods
| Method | Profit when prices rise | Ending Inventory Value | Characteristics |
|---|---|---|---|
| FIFO | Highest | Closest to current value | Matches physical flow |
| Weighted Average | Middle | Average value | Simple to calculate |
| LIFO | Lowest | Old value (Understated) | Good matching (Not allowed under IFRS) |
3. Revaluation and Impairment of Fixed Assets
Tangible assets like real estate or equipment have significant value fluctuations. Accounting manages this in two ways:
| Category | Revaluation Model | Impairment Loss |
|---|---|---|
| Choice | Company's Choice (Policy) | Mandatory (when signs exist) |
| Purpose | Reflecting Fair Value (mainly upward) | Reflecting irrecoverable value decline |
| Treatment | Revaluation Surplus (Equity ↑) | Impairment Loss (Expense) |
Impairment Loss is one of the items that current accountants look at most rigorously. Impairment of Goodwill or obsolescence of machinery suggests a fatal flaw in the firm’s future earning capacity.
Next time, we will explore the other side of assets: Liabilities, specifically the complex world of financial liabilities.
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