Question

case study- answer according to the following guidelines

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, 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. Hand-write your answer to above on one lined piece of paper. You may do this in groups of 2 or individual. Keep a copy for yourself so you can compare to a sample answer later.

Answer 1

An impairment loss happens when the value of a fixed asset abruptly falls below its carrying cost. Basically, that means if the value of an asset decreases so much that the recoverable amount is less than the carrying cost, you can write off the difference.Generally, an asset impairment occurs when a company (1) pays more than book value for a set of assets and (2) later lowers the value of those assets.

An asset’s recoverable amount is the higher dollar amount of its fair value less cost to sell or its value in use. The cost to sell is exactly what it sounds like — the amount it costs you to sell the asset. This might include things such as brokerage fees, advertisement costs, and the cost to transfer ownership.

The value in use refers to the present value of future cash flows — basically, how much money you could make if you kept the asset. You need to calculate both of these things to determine the recoverable amount, because it’s the lesser of the two.

In the given case, GOL needs to determine whether the assets fair value is less than the the carrying cost and decide whether impairment loss has to be recongised.