The Concept of Impairment
1.Provide a detailed explanation of the impairment write-down(s) made by your company in the year ended 30 June 2017.
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 mechanism of Impairment refers to principle of accounting gives a vivid description of a perpetual decrease in the value of an asset of the company, the asset considered is generally fixed asset. During the impairmenttesting, the net profit, cash flow, or other values that are expected to be generated by a specific asset is periodically compared with that same asset’s book value (Detzen, Wersborgand Zülch2015). In case it is found that the assets book value is more than the added benefit of the asset or the cash flow, the difference between the two is written off and the value of the asset falls on the balance sheet of the company.Impairment is precisely used to describe a reduction in the recoverable amount of a fixed asset below book value of the asset.
1.The chosen company is Wesframers which is listed under the ASX 300 index, the company deals with retail, chemicals, fertilisers, coal mining and industrial and safety products. With AU$65.98 billion in the 2016 financial year, it is the largest Australian company by revenue, overtaking Woolworths and BHP Billiton. Wesfarmers is the largest private employer in Australia, with approximately 220,000 employees.
During the determination of the amount assets that are recoverable in the absence of the market price that is quoted, the estimates are made for the present value of the cash flow of tax in the future. Considerable management judgement are needed for estimates that are subject to risk and uncertainty that are beyond the control of the company (Kuter, GurskayaBagdasarian, and Andreenkova2016). Hence, there is a possibility that the circumstances changes will materially modify the projections that may affectthe recoverable amount of the asset at the reporting date. Moreover, the projections are made from the judgement of market participant that includes volumes for future production, prices, tax attributes, discount rates and operating costs.
Recoverable Amount Calculation
Wesframers charged US$ 49 million under impairment for the year ended 30th June 2017. Out of total US$ 49 million, charges for impairment for various assets are as follows –
- Impairment of plantequipment and other assets -US$ 27 million
- Impairment of freehold property-US$ 22 million
- Impairment of goodwill-NIL
Recoverable amount calculation
The amount that is recoverable of any asset is more among the fair value of the assets that is reduced bur h disposal cost and the value in use (Logeswaryand Velnampy2014). For evaluating the impairment, the assets are grouped at the lowest level for which cash flows are shown separately.
Recognition and management
The impairment test are carried oyer on a yearly basis. Other than this the test for impairment for all the assets are carried out while any indication is there for impairment. In case the amount carrying of an asset is more than the recoverable amount then the asset is impaired (Wang2016). Moreover, the assets that are previously impaired other than the goodwill are reviewed. If there is a chance for reversal of impairment at all the date of reporting. But the amount of reversal of impairment cannot be greater than the carrying amount that would have been calculated if there is no impairment loss that was recognised for the assets under cash generating unit (Lubbe, Modackand Watson2014). For the year ending 30th June 2017, there was no reversal for impairment.
2.The issues for test of impairment testing:
It is a crucial task to gin thetrust of the investors with regard to the accuracy and transparency of the value of the asset. At the same time the investors and the regulators focuses on the recoverability of the assets under diverse market condition.in such a case, the process of testing for impairment is a essential step. Most of the companies who are listed in the ASX 300 are valued by reduced book value of theassets. In this context the issues of impairment testing are asfollows:
- Discount rate: As per AASB 136, the companies uses the Capital Asset pricing model and the weighted average cost of capital method for the determination of the rate of discount while computing the company value. But in reality the different CGU uses various different rates of discount that owes to different currency risk, product risk, market maturity and market maturity.
- Difference in the fair value and value in use: The understanding of the variance in the value in use and the fair value is important. The value in use refers to the sale oif economies and the syringes that area specific to the business. Whereas, the fair value of the asset includes risk, cost and benefit of improvements or restructure of assets which are not includedin the balance sheet (Zhuang, 2016). Buttheissue is that theforecast ofthecost and the advantages are notalways reasonable. Moreover, theassumptions of restructuring and the syringes are not always accurate.
- Tax rate: Anotherissue that is pointed out is the rate of tax which is the added complexity in the resting process of impairment. The mistake that is common is the inclusion of inconsistent assumption in the tax model(Chang and Yen2015). The firm may discount the cash flow by mistake through using the post-tax rate of discount.in case where the post-taxcash flows arerequired to beassumed, 30% will be added up to thecash flow effectively. In addition to it there is another mistakethat is identified that included previous years losses on account of tax under the method of value on use.
- Segments and CGU: This is one of the most important complexity is the selection of impairment testing procedure at which the test shall be carried out. The only solution to this problem depends on the assetstesting and dependency on other assets for cash flow generation(Picker et al. 2016) If the asset needs other assets under the chain for supporting their carrying amount thenit will be testedwith other small group of impairment of assets. Moreover, the allocation method is inappropriate if the non-performing assets are recognised along with the assets those are successful in business.
3.According to AASB 136 the chosen entity shall disclose the following:
- The amount of the loss of the assets that are revalued needed to be recognised in that period. The company in Note 11 disclosed the impairment for goodwill and in Note No 17 disclosed the impairment for Trade receivables separately.
- The reversal impaired loss amount that is recognized in the profit and loss account under the income statement where there is the reversal of impaired losses. The company in Note no 11 has mentioned the four assumptions which have been used for the calculation of the discount rate which ultimately help in determination of value in use.
- The amount of reversal impairment loss that are recognised as other comprehensive income. The company has disclosed in Note no 17 the amount of impairment loss as separate line item to comply with the requirements of the Para 126 of AASB 136 (AASB 136, 2010)
- The amount impairment losses that is identified under the profit and loss accountand the line items in the income statement where the impaired losses are identified. the company has disclosed in Note no 10 the carrying amount of different components of the property, plant and equipment for beginning of the reporting period.
4.The disclosures in the yearly report of any organization are obligatory necessities according to the Companies Act, 2001 and are primary purpose for preparation of Annual report by the organization which encourages its financial investors in decision making. According to the general purpose requirements of the financial reporting Wesfarmers has disclosed the several sections where there is recognition of the impaired loss (Bond, Govendirand Wells2016). Moreover the company have stated that there was no impairment reversal for the accounting year that had ended on 30th June 2017. The assets and its valuation is significant need of the investors in valuation of assets, impairment is the central point which can control the value such that the organization can improve its execution of its transaction. To close the report, it has said the hindrance divulgences in Wesframers has been done according to the tenets laid in AASB 136 and all the important revelations have been made in yearly report of the organization in spite of some pendency in regard of presumptions made by organization. The Wes farmers have also disclosed the goodwill in which there was recognition of the impaired loss. But there was no mention of the events or the circumstances that led to various impaired loss recognition and reversal. Wesfarmers should have mentioned the reason for impairment for better transparency of the company. It can be recommended from the answer to compute the discount rate while considering about the circumstances of current market and less subject to presumptions to have more practical incentive being used for resource. Additionally money creating units should bifurcated utilizing more factors separated from geological areas.
References
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.
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.
Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter? Evidence from China. International Research Journal of Applied Finance, 6(4), pp.197-222.
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.
Kuter, M., Gurskaya, M., Bagdasarian, R. and Andreenkova, A., 2016. Depreciation Accounting in Francesco Datini’s Companies. In 5th International Conference on Accounting, Auditing, and Taxation.
Logeswary, S. and Velnampy, T., 2014. Impact of Impairment Loss on Profitability and Capital Structure of Listed Manufacturing Companies in Sri Lanka.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial accounting GAAP principles. OUP Catalogue.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van Der Tas, L., 2016. Applying IFRS Standards. John Wiley & Sons.
Wang, S., 2016. Discussion of ‘Unrealised earnings, dividends and reporting aggressiveness: an examination of firms’ behavior in the era of fair value accounting’. Accounting & Finance, 56(1), pp.251-257.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.
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