Background Information on Qantas Airways
1. Provide a detailed explanation of the impairment write-down(s) made by your company in the year ended 30 June 2017. Your explanation should include a discussion of the asset/s that were impaired, the amount of the impairment write-down, the indicators of impairment and relevant disclosures in the 30 June 2017 financial report in relation to impairment testing.
2. A critical analysis of some of the complexities and key issues involved in impairment testing. In your analysis, you can refer to one or more publications issued by the ‘Big 4’ firms, accounting professional bodies or academic journals
3. Critically analyse to what extent the latest annual report of your company meets the disclosure requirements for Impairment as per AASB 136
4. Based on your findings in part c, critically discuss to what extent the disclosures on impairment align with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement.
The current report would intend to concentrate on the impairment write-downs inherent in the aviation industry of Australia. For meeting the purpose of this report. the airline selected is Qantas Airways, since it is the leader in the aviation industry of Australia when it comes to global flights and destinations along with the sizes of fleets (Investor.qantas.com 2018). The paper contains critical dissection of the different issues encountered during impairment testing. In addition, the disclosures mandatory under AASB 136 are evaluated in relation to the disclosures in the annual report of Qantas Airways. Finally, the report would shed light on comparing the impairment-related disclosures of Qantas Airways with general purpose financial reporting.
The latest annual report of Qantas helps in identifying those assets that are impaired and they constitute of the following:
- Brand names and trademarks
- Plant, property and equipment
- Airport landing slots
- Goodwill
- Trademarks and brand names
- Contract intangible assets
Plant, property and equipment is realised at cost from which impairment and accumulated depreciation are subtracted. Receivables are considered for impairment test when evidences are gathered that debt recovery is not possible (Cheung and Lau 2016). The intangible assets such as goodwill and others stated above are eligible for realising impairment test by deducting impairment losses and amortisation from cost. There are certain reasons for which Qantas carries out impairment testing, which include technological advancements in the Australian aviation industry, planning to shut down operation, minimisation in the values of certain classes of assets and benefits derived from the assets (Bond, Govendir and Wells 2016).
Whenever an organisation conducts impairment testing, certain issues are bound to be inherent, some of which are elaborated as follows:
Impairment Write-Downs in Qantas Airways
Some corporate entities utilise WACC and CAPM in order to determine the rate of discount for value-in-use, as it is needed for impairment testing (Bugeja and Loyeung 2015). This concept holds good; in case, the risks associated with any particular cash generating unit (CGU) are not different from the entire business. However, the discount rates are not similar for all CGUs. The dissimilarities are due to changes in different kinds of risks related to industry, currency, product and country and the market maturity.
Value-in-use signifies the amount that an asset could generate for an organisation. On the contrary, independent investors could be able to know the investing amount for specific assets. The assumptions imply this difference that is acknowledged in all the models (Jin, Shan and Taylor 2015). For instance, benefits, costs and risks are related to restructuring or improvement of assets and these are considered under fair value approach; however, disclosures are not made in balance sheet statement. Value-in-use constitutes of synergies and economies of scale having association with the firm and when the asset is sold externally, they are not transferred. However, fair value differs from value-in-use in this aspect.
A significant complexity of impairment test is the determination of the test level. Such determination is based on asset type and reliance on other assets for ensuring inflows of cash (Pwc.com.au 2018). High probability is inherent in case of machinery, brand name and building about the need for other assets to be included in value chain, as support could be provided to the carrying amounts. Thus, erroneous apportionment would enable the cash flows derived from operating segments to support the underperforming asset values.
Tax is considered as an added complexity for the impairment testing. A common mistake that every organisation makes is to incorporate inconsistent assumptions regarding tax in the model. An organisation might be discounting its pre-tax cash flows inaccurately through utilising a post-tax rate of discount.
Every income statement of a corporate firm needs to contain impairment loss as an item for complying with the requirement stated in “Paragraph 126 (a) of AASB 136” (Aasb.gov.au 2018). In case of Qantas, the impairment loss is depicted in the financial notes under expenditure section rather than recording it in the income statement, as evident from “Page 65 of the Annual Report”.
At the end of accounting year, the impairment loss reversals are to be revealed in the income statement, as laid out in “Paragraph 126 (b) of AASB 136”. In order to carry out such reversal, it is necessary to carry out the estimated variations for ascertaining the recoverable value of the asset before the last impairment is recognised (Kabir and Rahman 2016). Such type of disclosure in the comprehensive income statement could not be identified in case of Qantas; however, it could be seen as a note under other items excluded from income before tax inherent in “Page 22 of the Annual Report”. The impairment reversal loss of $22 million is realised in order to invest in Helloworld Travel Limited.
Critical Analysis of Impairment Testing
As pointed out in “Paragraph 130 (g) of AASB 136”; if value-in-use is equal to the recoverable amount of the CGU, present as well as previous estimates are considered for the rate of discount. Qantas makes valuable assumptions for deciding the CGUs’ recoverable amounts, which are evident from “Page 75 of the Annual Report”.
Finally, allocation of a group of CGUs needs to be made that are likely to bring benefits arising due to the combination synergies (AASB 2015). Qantas has adhered to this principle effectively, since goodwill is distributed to groups of CGUs that could be found in “Page 75 of the Annual Report”.
The above evaluation clearly states that goodwill allocation is made in accordance with the guidelines laid down in AASB 136; however, guidelines of the standard are not followed properly while disclosing impairment losses and any reversals of the same.
As commented by Sinclair and Keller (2014), investors could obtain all the necessary information regarding an organisation with the help of “general purpose financial reporting”. If it is not possible to recover the carrying amount of an asset, impairment loss could be recognised. The situation is similar for Qantas, as such loss is realised in the form of difference between the current value of estimated cash flows and carrying amount of the asset. The real effective asset interest rate is used for discounting the former.
It is crucial to estimate cash flows based on the nature of the firm rather than the market nature for conducting impairment test of an asset (Tran and Zhu 2017). In case of Qantas Airways, the value-in-use could not be projected to the fair value due to the non-generation of independent cash flows.
Based on the above assessment, it is inherent that Qantas Airways has made all the mandatory disclosures depicted under “general purpose financial reporting”; the only exception could be observed in relation to the projection of value-in-use.
Therefore, the above discussion has helped in identifying certain loopholes associated with the impairment disclosures of Qantas Airways, which are summarised as follows:
- The cash flows that are derived from cross-border currencies need special attention.
- Before calculating the impairment values for different asset classes, Qantas is required to take into account its current market capitalisation.
- The rate of discount is required to be scrutinised further (Vanza, Wells and Wright 2018).
- The impairment expenses are to be recorded either in the income statement or in the statement of comprehensive income.
Conclusion:
From the above discussion, evidences could be gathered that Qantas Airways has performed impairment testing on both tangible assets and intangible assets. However, various complexities could arise in impairment testing like dissimilarity between fair value and value-in-use, rate of discount and segments and CGUs. However, it has not followed some guidelines, which are necessary in order to conform to AASB 136 and “general purpose financial reporting”. Due to such non-adherence, suggestions are provided to the management of Qantas Airways so that they could enhance the quality of impairment-related information to the potential users of financial statements of the organisation.
References:
AASB, C.A.S., 2015. Investments in Associates and Joint Ventures.
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 23 Apr. 2018].
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Bugeja, M. and Loyeung, A., 2015. What drives the allocation of the purchase price to goodwill?. Journal of Contemporary Accounting & Economics, 11(3), pp.245-261.
Cheung, E. and Lau, J., 2016. Readability of Notes to the Financial Statements and the Adoption of IFRS. Australian Accounting Review, 26(2), pp.162-176.
Investor.qantas.com., 2018. Qantas | 2017 Annual Report. [online] Available at: https://investor.qantas.com/annual-report-2017/ [Accessed 23 Apr. 2018].
Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35, pp.90-107.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting & Economics, 12(3), pp.290-308.
Pwc.com.au., 2018. [online] Available at: https://www.pwc.com.au/assurance/ifrs/assets/ifrsinbrief-se-15may13.pdf [Accessed 23 Apr. 2018].
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.
Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax income gap. In Australian Tax Forum (Vol. 32, No. 4, p. 757). Tax Institute.
Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated disclosures resolve uncertainty about future returns and reduce information asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.22-40.
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