Evidence that impairment testing of assets is necessary for Myer:
The current report is prepared with the motive of identifying any significant accounting issues that need to be taken into consideration in the context of Myer Holdings Limited. It is an upmarket department store chain in Australia dealing with diversified products like clothing, accessories, footwear, home ware, fragrance, books, stationery, food and other grocery items (Myer 2018). The report would deal with finding out evidences that impairment testing is crucial for Myer. The second section would emphasise on the processes that need to be addressed to ascertain any asset impairments for Myer. The next section would highlight the information required to ascertain asset impairments in the context of Myer. Finally, the report would shed light on evaluating flexibility management for the ascertainment of asset impairments.
It is necessary for any business organisation to analyse at each date of balance sheet whether there is indication of asset impairment. This implies that the carrying amount might be higher than the recoverable amount (Alayemi 2018). When the organisation finds any such evidence, it needs to estimate the recoverable asset value. According to AASB 136, there are certain indications for impairment, which include external as well as internal information. As mentioned in “Sub-sections a-d of Paragraph 12 of AASB 136”, four external sources include evidence for impairment and they are stated as follows:
- Significant decline in market value
- Adverse changes in market, technology, laws or economy
- Rise in rates of market interest
- Market capitalisation lower than the net assets of the organisation (Aasb.gov.au 2018)
On the other hand, “Sub-sections e-g of Paragraph 12 of AASB 136” state that there are certain internal sources providing evidence for asset impairment and they are enumerated as follows:
- Physical damage or obsolescence
- Asset is idle, held for disposal or portion of restructuring
- Worse economic performance compared to the estimated performance
As per the annual report of Myer in 2017, it fulfils the disclosure requirements mentioned in AASB 136. It has been identified that Myer has recognised $65,615,000 as impairment owing to restructuring and store exit costs, which is in line in “Paragraph 12(f) of AASB 136”. In this context, André, Dionysiou and Tsalavoutas (2018) stated that the costs related to store exits and asset impairments take into account net costs of store and distribution centre space optimisation during or after the end of the year.
The organisation tests its property, plant and equipment, in accordance with the impairment policy of non-financial assets (Investor.myer.com.au 2018). Myer recognised an impairment of $4,542,000 in 2017 on property, plant and equipment pertaining to significant items from both ongoing and withdrawn operations. The assets related to withdrawn operations are shifted to assets being held for sale. Moreover, Myer computes goodwill by deducting impairment loss following actual recognition. The other intangible assets are calculated at cost from which accumulated depreciation and impairment loss is subtracted. In 2017, the organisation has recognised impairment loss of $38,811,000 on intangible assets worth $985,657,000.
Processes to be addressed in determining any asset impairments for Myer
Myer analyses at the end of each accounting year whether there is any unbiased evidence that its receivables are impaired. The recoverable amount of the organisation is calculated at the present value of estimated future cash flows, which is discounted at the beginning effective interest rate (Banker, Basu and Byzalov 2016). The short-term receivables are not discounted and it does not recognise impairment provision for receivables unless evidences are found.
Myer evaluates the carrying values of the non-financial assets, goodwill and intangible assets for impairment. At the time of analysing impairment, the recoverable asset amount is estimated to identify the extent of impairment loss. The recoverable amount is deemed to be the greater between value-in-use and fair value less selling cost (Detzen, Wersborg and Zülch 2015). Any asset that is not generating autonomous cash flows, the recoverable amount is analysed at the level of CGU. Thus, the organisation acknowledges impairment loss whenever the carrying amount of the asset or CGU exceeds the recoverable amount. These accounting policies of Myer are in line with the external impairment indicators mentioned in AASB 136.
Certain processes need to be addressed for ascertaining asset impairments for Myer, which are described briefly as follows:
The estimations prepared in the past require revisions (Glaum, Landsman and Wyrwa 2018). Myer needs to prepare estimations depending on the recent management-approved budgets or estimations. However, these need to be conducted based on supportable and reasonable assumptions representing the best estimate of the economic consequences from the end of the management over the leftover useful life of the CGU or asset. Myer provides higher weight to external evidence. For instance, the cash forecasts or flows are contrasted with the forecasts of the analysts for the retail sector along with the opinions of economic estimators and external experts.
As commented by Huang, Ting and Chen (2018), for computing value-in-use, it is necessary to estimate cash flows for assets in their current situation. In case of Myer, the major constraints addressing the assumptions to be made in value-in-use estimations of cash flows are associated with future reorganisations or restructuring along with capital investment. Moreover, it does not recognise the benefits and costs of future restructuring in the cash flow estimations unless the organisation is devoted to restructuring and associated provisions.
The risk-free interest rates that the Australian Central Bank has set are declining in many territories; however, the discount rates are affected by other factors in impairment computations (Linnenluecke et al. 2015). Such factors include cost of capital, cash flow risks and corporate lending rates that might raise the overall discount rate. Myer uses the “Capital Asset Pricing Model (CAPM)” for ascertaining the discount rate. This assists the management of Myer to change many inputs under existing market conditions. Even though there is reduction in national base rates, there are increases in risk premiums, which have offset the decline for Myer. Moreover, the organisation needs to consider currency risk, country risk and cash flow risk by using varied rates for different periods based on risk levels.
Reasonable and supportable cash flows
If market capitalisation is lower than net asset value, it triggers an impairment test (Nawaiseh 2016). When any situation like this arises, Myer faces a reasonable issue to appropriateness of assumptions, which is justified. This is because the market capitalisation of Myer has fallen from $696.03 million in 2016 to $693 million in 2017 and according to “Paragraph 12(d) of AASB 136”, Myer needs to conduct impairment test.
After completing the financial calculations, it is necessary for any organisation to cross-check the final answer by contrasting with the external market data (Picker et al. 2016). The management of Myer reviews assumptions related to cash flow growth and then they are contrasted with the current estimations of economic growth by obtaining analyst reports.
Assets are said to be impaired when their carrying values exceed the recoverable values. This implies that an organisation incurred money on an asset; however, the changing conditions compelled the purchase to be net loss. Different types of information could assist in ascertaining asset impairments for Myer and they are demonstrated briefly as follows:
The regulatory changes, considerable changes in community outlook or consumer preferences and modification in the usage rate of an asset could result in impairment of tangible assets. However, it is not always possible to test all the assets for profitability in all accounting years. Instead, Myer needs to wait until circumstantial variation or event symbolises that any specific carrying amount could not be recovered.
There are few event-triggering thresholds that could be described and recognised easily. For example, Myer needs to test for impairment at the time accumulated costs are more than amounts actually expected of constructing or acquiring an asset. More precisely, it is more costly than the estimations made for acquiring any business asset (Sellhorn and Stier 2018). The other triggering events are associated with each other; an asset might be related with the history of existing period losses or losses related to operating cash flows. For Myer, the assets might depict a movement of fall in market value. Moreover, certain triggering events are present due to vague descriptions. If Myer encounters negative changes in legal influential dynamics or normal economic conditions, the management could conduct impairment testing except a wide group of probable interpretations for adversity.
Myer is required to value assets properly at fair value, in accordance with AASB 136 so that the financial reporting quality could be enhanced (Asic.gov.au 2018). The classes of identical assets need to be tested together having the testing set at the lower level of identifiable cash flows, which are deemed to function independently of other assets. With the help of such testing, Myer would be able to ascertain fairly, if the carrying value is more than recoverable amount associated with the asset usage and disposal. In case, this could be demonstrated, Myer could conduct for impairment testing.
Compliance of value-in-use with AASB 136
In accordance with AASB and IFRS, it is necessary for any business organisation to analyse the need of carrying out impairment test in relation to non-current assets other than goodwill and the test is primarily carried out at the end of a financial period (Sinclair and Keller 2014). As Myer has large numbers of reporting units and their size is large relative to goodwill acquisition, the managers might have greater flexibility in goodwill allocation. Such initial flexibility in goodwill apportionment gives the opportunity of later avoiding or overstating losses from impairment. The goodwill could be distributed to units, in which subsequent impairment could be covered by the internally generated gains or losses that are not recognised. The managers could apportion goodwill either to units of low growth so that impairment could be accelerated or to units of high growth for delaying impairment (Tan and Trotman 2018). Therefore, it could be said that the management of Myer has adequate amount of flexibility in ascertaining future losses from impairment. However, the organisation could reorganise its reporting structure in future periods effectively resulting to reallocation in the acquisition of goodwill.
Conclusion:
Based on the above evaluation, it is inherent that Myer recognised an impairment of $4,542,000 in 2017 on property, plant and equipment pertaining to significant items from both ongoing and withdrawn operations. The assets related to withdrawn operations are shifted to assets being held for sale. Moreover, Myer computes goodwill by deducting impairment loss following actual recognition. In case of Myer, the major constraints addressing the assumptions to be made in value-in-use estimations of cash flows are associated with future reorganisations or restructuring along with capital investment. Moreover, it does not recognise the benefits and costs of future restructuring in the cash flow estimations unless the organisation is devoted to restructuring and associated provisions.
After completing the financial calculations, it is necessary for any organisation to cross-check the final answer by contrasting with the external market data. The management of Myer reviews assumptions related to cash flow growth and then they are contrasted with the current estimations of economic growth by obtaining analyst reports. The classes of identical assets need to be tested together having the testing set at the lower level of identifiable cash flows, which are deemed to function independently of other assets. With the help of such testing, Myer would be able to ascertain fairly, if the carrying value is more than recoverable amount associated with the asset usage and disposal. In case, this could be demonstrated, Myer could conduct for impairment testing. Finally, it has been found that that the management of Myer has adequate amount of flexibility in ascertaining future losses from impairment. However, the organisation could reorganise its reporting structure in future periods effectively resulting to reallocation in the acquisition of goodwill.
References:
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 10 Oct. 2018].
Alayemi, S.A., 2018. Review of International Accounting Standard 36 (impairment of assets) in relation to property, plant and equipment. SOCIALSCI JOURNAL, 1(2), pp.116-119.
André, P., Dionysiou, D. and Tsalavoutas, I., 2018. Mandated disclosures under IAS 36 Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on analysts’ forecasts. Applied Economics, 50(7), pp.707-725.
Asic.gov.au., 2018. 17-162MR ASIC calls on preparers to focus on the quality of financial report information | ASIC – Australian Securities and Investments Commission . [online] Available at: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2017-releases/17-162mr-asic-calls-on-preparers-to-focus-on-the-quality-of-financial-report-information/ [Accessed 10 Oct. 2018].
Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2), pp.41-67.
Detzen, D., Wersborg, T.S.G. and Zülch, H., 2015. Bleak Weather for Sun-Shine AG: A Case Study of Impairment of Assets. Issues in Accounting Education, 30(2), pp.18-39.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2018. Goodwill Impairment: The Effects of Public Enforcement and Monitoring by Institutional Investors. The Accounting Review, 32(7), pp.102-121.
Huang, M.C., Ting, C.C. and Chen, Y.J., 2018. An Empirical Study on the Relationship between Accounting Conservatism and Asset Impairment Recognition: Evidence from Companies in Taiwan. Management and Economics Review, 3(1), pp.58-74.
Investor.myer.com.au., 2018. Myer Investor Relations. [online] Available at: https://investor.myer.com.au/Reports/?page=Annual-Reports [Accessed 10 Oct. 2018].
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Myer., 2018. About Us. [online] Available at: https://www.myer.com.au/c/about-myer/the-company/about-us/content-about-us.html [Accessed 10 Oct. 2018].
Nawaiseh, M.E., 2016. Can Impairment Recognition under IAS 36 Be Improved by Financial Performance?. International Journal of Economics and Finance, 8(12), p.163.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van Der Tas, L., 2016. Applying IFRS Standards. John Wiley & Sons.
Sellhorn, T. and Stier, C., 2018. Fair value measurement for long-lived operating assets: Research evidence. European Accounting Review, 15(6), pp.1-31.
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.
Tan, H.C. and Trotman, K.T., 2018. Information Processing Biases in Impairment Decisions: Effect of Reversibility of Impairment Losses and Disclosure Transparency. Behavioral Research in Accounting, 17(8), pp.135-153.
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