Question

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. GOLis 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, including 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

Answer:

Issue Identification - General oil Limited (GOI) confronting issue to its future benefit on oil extraction as there is a significant decrease in cost of oil in the market. Then again there is increment in extraction cost of oil because of geological disadvantage. So chose to impairment its gainful assets for show appropriate an proper value in books of accounts.

Environment - Need to discover the best approach to measure the impairment of the benefits in such a situation.

Analysis of issue - To  justify that impairment of loss is sensible or not - General oil Limited (GOI) should see its future income from its profitable advantages for its book esteem. Issue is sure as General oil Limited (GOI) sees the cost decay of oil in the market over increment in extraction of the oil.

Recommendations- To gauge the Impairment Loss - General oil Limited (GOI) need to do the recoverability test to decide the future undiscounted cash flow to its book value and in the event that it is less, at that point the impairment should be recorded in General oil Limited (GOI) books of account.