Client Understanding Paper
January 30, 2012
Client Understanding Paper
In order to ensure that your organization is following the FASB’s generally accepted accounting principles (GAAP) it is necessary that I review the current practices being used by your organization with regards to lower of cost or market valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting for goodwill impairment. It is important for me to know that you and your organization understand the importance of understanding how these issues affect the reliability of your financial statements. I will briefly explain the impact and ...view middle of the document...
Because of this the information may be misinterpreted by external users (Schroeder, Clark, & Cathey 2011).
It is also important to understand the criteria for determining whether assets qualify for interest capitalization. In order for an asset to qualify for interest capitalization it must not yet be ready for the purpose that it is intended for and necessary activities that will get the asset ready for use must be ongoing. There are two types of qualified assets and they are assets that are constructed or produced for your organization’s own use or constructed assets intended for sale or lease or produced as discrete projects. Regularly produced inventory and assets that are in use or not being readied for use are excluded from interest capitalization (Schroeder, Clark, & Cathey 2011).
The organization must also understand how to determine the proper amount of interest to capitalize. The weighted average rate of interest charges during the period and the interest charge on a specific debt instrument issued to finance the project are the two interest rates that may be used to determine the amount of interest to be capitalized. The interest that can be capitalized is the interest that could have been avoided had the asset not been constructed. The capitalized amount of interest applied is the lesser of calculated “avoidable” interest and actual incurred interest and only actual interest costs on current obligations may be capitalized (Schroeder, Clark, & Cathey 2011).
When assets are disposed of it is necessary to record a gain or loss on the disposal and requires your organization to remove anything relating to the asset from your accounting records. Depreciable cost and accumulated depreciation on the asset must be removed or reversed and any gain, loss, or incidental costs relating to disposal must be included when recording the disposal. The calculation of a loss or gain on disposal is based upon the book value of the asset and book value is the difference between the asset cost and accumulated depreciation ("Plant Assets And Depreciation", 2010). If assets are sold for more than book value a gain will be reported in your income statement and if it is sold for less than book value your organizations net income will show a decrease. In order to avoid double counting, gains are deducted from net income and losses are added to net income in the operating activities section of the cash flow statement (“Disposal of Assets”, 2012).
Lastly, it is important to understand how to make adjustments for goodwill impairment. Goodwill is an intangible asset that encompasses everything that might contribute to the advantage of an established business...