Question

case study: answer according to the format provided in the second photo

General Oil Limited (GOL) is in the oil and gas business and operates internationally. The company is public and is listed on the Toronto Stock Exchange (TSX). In the past two years, oil prices have been declining significantly. The company's Canadian operations are primarily located in Western Canada and consist of holdings in what are known as the "tar sands." Costs to extract the oil from these types of geological formations are fairly high. In some months in the past year, the cost to extract the oil has been higher than the market price. GOL is worried that oil prices will continue to decline and has therefore decided to write down its productive asset. To this end, the company needs to calculate the value in use and fair value less costs to sell. The higher value will be used to measure the impairment loss and to revalue the oil reserve. Security analysts that follow oil and gas companies understand that the lower oil and gas prices are negatively affecting share prices. The land otherwise has little market value. Adopt the role of GOL's Chief Accountant and discuss the options available for valuation, includig how to measure for purposes of recording an impairment loss and the write down (W/D) of the Canadian Operations. Make sure to give reasons for your eventual choice of measurement.

Answer 1

Issue Identification - General oil Limited (GOI) facing problem to its future profitability on oil extraction as there is a considerable decline in price of oil in the market. On the other hand there is increase in extraction price of oil due to geographical disadvantage. So decided to impairment its productive assets to show proper value in books of accounts

Enviroment - Need to find out the way to measure the impairment of the assets in such a situation.

Analysis of issue - To justify that impairment of loss is reasonable or not - GOI should view its future cash flow from its productive assets to its book value. Issue is certain as GOI views the price decline of oil in the market over increase in extraction of the oil.

Recommendation - To measure the Impairment Loss - GOI need to do the recoverability test to determine the future undiscounted cash flow to its book value and if it is less then the impairment need to be recorded in GOI books of account