- The Journal Entry
- Posts
- Under Pressure: Navigating Financial Seas Amidst Damaged Cables
Under Pressure: Navigating Financial Seas Amidst Damaged Cables
Take a look at how the damaged underwater network cables are affecting businesses in South Africa
Xavier Prospero
March 19, 2024
Welcome to the latest edition of "The Journal Entry”! In this issue, we explore the intricacies of financial accounting, focusing on International Accounting Standard 36 (IAS 36) and its implications for asset impairment. We'll decipher key definitions, delve into value determination methodologies, and provide a practical example for clarity.
Additionally, we'll delve into audit assertions, discussing their vital role in ensuring financial statement accuracy.
Furthermore, we'll address the recent disruptions caused by damaged underwater network cables in Africa, emphasizing the importance of business continuity planning and infrastructure resilience.
Table of Contents
Financial Accounting
IAS 36: Impairment Of Assets
Key Definitions/Principles:
An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
Determining Value In Use
When determining value in use the entity is expected to use budgets, forecasts and other management accounts in order to determine how much value can be derived from an asset, which needs to be impaired.
Once the forecasts have been consulted the following calculation should be done:
Determine future cash inflows and outflows attributable to the asset, over the remaining useful life, to determine net cash flows.
Determine a discount rate.
Calculate the present value using the cash flows and discount rate.
Example:
Machine A:
Remaining useful life = 3 years
Fair value = R20 000
Carrying amount = R30 000
Year | Cash Flow | Discount Rate | Present Value |
|---|---|---|---|
1 | 10 000 | 10% | 9 090.91 |
2 | 10 000 | 10% | 9 090.91 |
3 | 10 000 | 10% | 9 090.91 |
- | - | - | 27 272,73 |
In this case, value in use is the higher than fair value and is thus the recoverable amount. We would then recognise an impairment of R2 727,27(R30 000 - R27 272,73). This is recognised in profit and loss.
Extra Resources
Below is a pretty comprehensive yet quick summary of IAS 36 in video form, that I would recommend checking out for some more in depth analysis of impairments.
Audit
Assertions
An assertion is management’s claim to the stakeholders that the financial statements compiled are accurate, valid and complete. However due to ulterior motives and self-interests it is important for these assertions to be audited to ensure reliability.
The assertions relating to account balances and a relevant example of where they are breached are as follows:
Assertion | Definition | Example |
|---|---|---|
Existence | Assets, liabilities and equity interest exist. | The warehouse of the entity lacks proper security and items of inventory are often stolen. *The inventories would therefore be recorded but do not actually exist. |
Rights and obligations | The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. | Items to be sold on consignment are recorded as inventories. *The items are recorded as part of the inventories of the entity however the entity does not actually own the items. |
Completeness | All assets, liabilities and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included. | Liabilities owed to creditors are omitted from the financial statements in order to present the financial position more favourably to the shareholders. *The liabilities owed have not been recorded. |
Accuracy, valuation and allocation | Assets, liabilities and equity interest have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described. | The entity imports inventories, and when recording a journal entry for these inventories, the clerk guesses the exchange rate and records the inventories at this amount. *The amount used will not be correct and thus inventories will be over/under valued. |
Classification | Assets, liabilities and equity interest have been recorded in the proper accounts. | A company improperly classifies a long-term loan as a short-term liability in its financial statements. *The misclassification can impact the accuracy of liquidity ratios, such as the current ratio, and mislead users of the financial statements about the company's short-term obligations and financial health. |
Presentation | Assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework. | The entity’s managers have started a independent business, which they ensure is the entities sole supplier. The managers also include no disclosure of related party transactions. |
Current Affairs
African Underwater Network Cables Damaged
Following the recent damage to the underwater network cables causing massive network delays and outages in many African regions, Ghana's communications regulator has announced that repairs to damaged subsea cables causing internet outages across West and Central Africa are expected to take a minimum of five weeks for full service restoration.
The disruption has affected various sectors, including banks, mobile networks, money transfer agencies, and stock exchange markets. The cables affected include Africa Coast to Europe (Ace), MainOne, South Atlantic 3 (Sat-3), and the West Africa Cable System (Wacs). MainOne, one of the affected cable operators, suspects seismic activity as the cause, ruling out human interference due to the cables' depth of approximately 3km underwater.
Impacts on the Business/Accounting World:
Disrupted Operations: The prolonged outage directly impacts businesses reliant on internet and telecommunications services for operations. Banks, mobile networks, and stock exchanges face operational challenges, potentially leading to financial losses.
Financial Transactions: Money transfer agencies experiencing disruptions can face delays in processing transactions, impacting individuals and businesses relying on remittances and payments.
Market Volatility: Stock exchange markets may experience increased volatility due to limited access to trading platforms and delayed information dissemination, affecting investor confidence and decision-making.
Business Continuity Planning: The incident underscores the importance of robust business continuity plans for enterprises, emphasizing the need for redundancy measures and alternative communication channels to mitigate future disruptions.
Infrastructure Vulnerability Awareness: It highlights the vulnerability of critical internet infrastructure, prompting stakeholders to reassess risk management strategies and invest in resilience measures to address potential threats such as natural disasters or human activities.
The ongoing repairs signify a critical period for businesses and emphasize the necessity for proactive measures to navigate and minimize the impact of such disruptions on operations and financial stability.
Extra Tip/Suggestion
If you’ve been following my newsletter, you'll know that I don’t believe anyone, even accounting students, should be fully devoted to their studies and that I have a firm belief that being an effective student, employee, professional, etc. stems from being an all round person. Humans are not machines and operate to their best ability when they’re socially, mentally and physically in touch.
The video below by Ali Abdaal touches briefly on this in his discussion regarding how perfectionism is ruining people’s lives.
We Want To Hear You
Your feedback is invaluable to us, so we’d love to hear what you like and don’t like about “The Journal Entry”.
If you enjoy our content we’d love it if you showed your friends and peers!
Or copy and paste this link to others:
Reply