Chapter 4 - Accounting Analysis

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Accountants define assets as resources that a firm owns or controls as a result of past business transactions, and which are expected to produce future economic benefits that can be measured with a reasonable degree of certainty.

Distortions in asset values generally arise because there is ambiguity about whether: * The firm owns or controls the economic resources in question: * Are the ventures controlled? * Are the leased assets owned by the lessee or the lessor? * Have the revenues resulting in the receivables been earned? * The economic resources are likely to provide future economic benefits that can be measured with reasonable certainty. * the economic benefits from research and development are generally considered highly uncertain * If all firms expense R&D, financial statements will reflect differences in R&D success only when new products are commercialized rather than during the development process (less timely). The analyst may attempt to correct for this distortion by capitalizing key R&D outlays and adjusting the value of the intangible asset based on R&D updates. * The fair values of assets fall below their book values. * An asset is impaired when its fair value falls below its book value. An impairment loss is recognized when book value exceeds the greater of its net selling price and the discounted cash flows expected to be generated from future use. * Markets for many non-current operating assets are illiquid and incomplete, making it highly subjective to infer their fair values. * If the cash flows of an individual asset cannot be identified, IAS 36 requires that the impairment test be carried out for the smallest possible group of assets that has identifiable cash flows, called the cash generating unit. Consequently, considerable…...

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