Assets Used for Impairment Testing
Write a report on the Financial Reporting Disclosures in the Australian Corporate Sector.
In recent times, it is necessary for the corporate entities to deliver useful financial information to their stakeholders so that they could undertake significant decisions. The current report would focus on write-downs of impairment in the corporate world of Australia. Hence, Qantas Airways is chosen as the corporate entity, as it is one of the leading airline companies operating in Australia in terms of fleet size, global flights and global destinations (Investor.qantas.com 2018). From the critical viewpoint, the various assets of the organisation, which are used for impairment testing, have been pointed out and they are assessed as well. The second portion would emphasise on explaining the various issues that are faced at the time of impairment test. The third section would ascertain the degree to which the annual report of the firm satisfies the requirements of impairment disclosure, as per AASB 136. Finally, the report would lay stress on aligning the disclosures with the objectives stated in general purpose financial reporting.
Based on the annual report of Qantas in 2017, the assets that are tested for impairment comprise of property, plant and equipment, receivables and intangible assets like goodwill, slots for airport landing, software, brand names and trademarks, customer contracts or relationships and contract intangible assets (Investor.qantas.com 2018). In case of property, plant and equipment, Qantas recognises them at cost minus accumulated depreciation and impairment. For receivables, impairment is conducted at the time evidence is collected that the debt could not be recovered (André, Dionysiou and Tsalavoutas 2018).
In case of goodwill and other intangible assets stated above, Qantas recognises them at cost in the initial stage from which amortisation and impairment losses are subtracted. All the corporate entities functioning in the market of Australia are needed to evaluate their assets in order to determine the impairment indicators after each accounting year and Qantas needs to identify them as well. The main reasons that the organisation conducts its impairment testing include technological changes, intention of shutting down any specific operation, fall in value of any asset and economic benefits associated with the assets (Baboukardos and Rimmel 2014).
Various complexities and significant issues are inherent in asset impairment tests, which are described briefly as follows:
Distinction between fair value and value-in-use:
The fair value enables an independent investor to gain an insight of the amount to be incurred for an asset. On the other hand, value-in-use denotes the generating ability of an asset for a corporate entity. This distinction is reflected in the assumptions, which is accepted under each model (Badia et al. 2017). For example, the costs, benefits and risk associated with asset improvements or restructuring are included in fair value and these are not taken into account in the statement of financial position. On the contrary, economies of scale as well as synergies are included in value-in-use that is related to the entity and the transfer is not made during the external asset sale. However, the case is not similar in relation to fair value.
Issues Faced During Impairment Test
Cash generating units (CGUs) and segments:
The foremost issue confronting the test for impairment is to ascertain the level at which the test is required to be conducted. This would depend on the asset tested and dependence on other assets so that cash inflows could be derived (Pwc.com.au 2018). There is high chance that assets like brand name, machinery and building need other assets in value chain so that carrying values could be supported. Hence, if there is incorrect allocation, the cash flows generated from effective business segments would support the underperforming values of assets.
Discount rate:
There are few using capital asset pricing model and weighted average cost of capital for deciding the discount rates in relation to value-in-use in order to carry out the impairment test (Bertomeu and Magee 2015). This is true, if the risks of any specific cash generating unit do not differ from the entire business. In reality, different cash generating units require different discount rates. The primary reasons include variations in sector risk, currency risk, country risk and product risk and the maturity of the market, in which the units function.
“Paragraph 126 (a) of AASB 136” cites that the corporate entities have to recognise impairment loss in income statement or statement of comprehensive income (Aasb.gov.au 2018). For Qantas Airways, it has been found that the organisation has made its impairment disclosures in the notes to financial statements under expenditure head, instead of disclosing them in the income statement and such disclosures could be found in “Page 65 of the Annual Report”.
Moreover, as per “Paragraph 126 (b) of AASB 136”, the amount of impairment loss reversals needs to be disclosed in the statement of comprehensive income at the end of financial year. For conducting the reversal of impairment loss, Qantas Airways ascertains whether any variation to the estimates is present utilised to determine the recoverable asset amount since the recognition of previous impairment. Due to this, the carrying value of the asset is matched with its recoverable amount (Chen, Krishnan and Sami 2014). However, Qantas has not disclosed its impairment loss reversal in the statement of comprehensive income. Instead, it is included in the form of a note under other items not taken into account in profit before tax, which could be observed from “Page 22 of the Annual Report”. This includes impairment reversal of $22 million for investing in Helloworld Travel Limited.
Degree of Satisfaction in Meeting Impairment Disclosure Requirements
According to “Paragraph 130 (g) of AASB 136”; in case, the CGU’s recoverable amount is identified as value-in-use; both existing and past estimates are taken into consideration for the discount rates. For Qantas, useful assumptions are made in order to ascertain the recoverable values of the various CGUs, as could be found in “Page 75 of the Annual Report”.
Lastly, as per “Paragraph 80 of AASB 136”, it is necessary to allocate to a segment of CGUs, which are probable to fetch benefits from the synergies of combination (Chen, Shroff and Zhang 2017). The intention is similar for Qantas Airways as well, since there is allocation of goodwill to different CGUs, which could be observed from “Page 75 of the Annual Report”.
It is clearly evident from the above assessment that Qantas Airways has fulfilled accurately the allocation of goodwill to different CGUs; however, the impairment losses and reversals of impairments are not disclosed rightly in tandem stated out in AASB 136.
In the words of Linnenluecke et al. (2015), the basic goal of general purpose financial reporting is to supply useful information to the capital investors regarding a corporate entity. It is clearly stated in “Paragraph 70 of the Conceptual Framework” that impairment loss is recognised; in case, the carrying value of an asset could not be recovered. For Qantas Airways, impairment loss is recognised as the difference between the carrying value and the present value of projected future cash flows, which is discounted at the original effective interest rate of the asset.
Moreover, it is stated in “Paragraph 130 of the Conceptual Framework” that cash flows are projected from the viewpoint of the entity, instead from the market viewpoint to perform impairment testing (Lobo et al. 2017). For Qantas, independent cash flows are not generated and it is not possible to estimate the value-in-use to the fair value.
Thus, it could be cited that Qantas Airways made relevant impairment disclosures to adhere to the objective depicted under general purpose financial reporting.
For enhancing the overall quality related to disclosures of impairment, Qantas could consider the following:
- Placing considerable stress on cash flows generated from global currencies
- Consideration of market capitalisation before the impairment values are calculated for various groups of assets
- Effective scrutiny of the discount rate
- Once asset impairment is performed, comparison could be made with the external market data (Van Rinsum, Maas and Stolker 2018)
Conclusion:
The above discussion clearly inherits that Qantas Airways has carried out impairment tests on property, plant and equipment, receivables, goodwill and other intangible assets. The problems that are encountered at the time of impairment test constitute of discount rate, distinction between value-in-use and fair value along with CGUs and segments. However, it has not complied effectively with the relevant disclosure requirements stated in AASB 136, although it has successfully met all the requirements under general purpose financial reporting, Finally, some suggestions have been provided to the management of Qantas Airways for enhancing the overall disclosure quality in future
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 23 Apr. 2018].
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.
Baboukardos, D. and Rimmel, G., 2014, March. Goodwill under IFRS: Relevance and disclosures in an unfavorable environment. In Accounting Forum (Vol. 38, No. 1, pp. 1-17). Elsevier.
Badia, M., Barth, M.E., Duro, M. and Ormazabal, G., 2017. Firm Risk and Disclosures about Dispersion in Asset Values.
Bertomeu, J. and Magee, R.P., 2015. Mandatory disclosure and asymmetry in financial reporting. Journal of Accounting and Economics, 59(2-3), pp.284-299.
Chen, L.H., Krishnan, J. and Sami, H., 2014. Goodwill impairment charges and analyst forecast properties. Accounting Horizons, 29(1), pp.141-169.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking market-driven goodwill impairment.
Investor.qantas.com., 2018. Qantas | 2017 Annual Report. [online] Available at: https://investor.qantas.com/annual-report-2017/ [Accessed 23 Apr. 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.
Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., 2017. The effect of joint auditor pair composition on audit quality: Evidence from impairment tests. Contemporary Accounting Research, 34(1), pp.118-153.
Pwc.com.au., 2018. [online] Available at: https://www.pwc.com.au/assurance/ifrs/assets/ifrsinbrief-se-15may13.pdf [Accessed 23 Apr. 2018].
Van Rinsum, M., Maas, V.S. and Stolker, D., 2018. Disclosure checklists and auditors’ judgments of aggressive accounting. European Accounting Review, 27(2), pp.383-399.
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