FINANCIAL IMPAIRMENTName: Muhammad ZahidFazalSTUDENT ID: Kem3067 Table of Contents Assessment task Part A: 3 (i) Assets tested for impairment 3 (ii) Method of conducting impairment test: 4 (iii) Impairment expenditures. 5 (iv) Assumptions and estimates used by the company for conducting impairment test 6 (v) Subjectivity involved in the process of impairment testing. 7 (vi) Interesting, surprising, difficult or confusing part to understand impairment testing. 8 (vii) New insights regarding conducting the impairment 8 (viii) Fair value measurement 8 Assessment task Part B: 9 (i) Reason why the former accounting standards does not reflect the economic reality. 9 (ii) Reasons why under the previous accounting standards the lease liabilities of the reporting entities in the balance sheet were 66 times more than the reported debts under the balance sheet 9 (iii) Reasons why the Chairperson of IASB is in the view that under the previous accounting standard no level playing field was there among some airline entities. 10 (iv) Reasons why the Chairperson is in the view that the new standard will not be popular with everyone 11 (v) Possibilities that the new visibility with regard to all the leases will result into better informed decision for investment 11 References: 13 Assessment task Part A:The focus of the report is to layemphasis on the impairment elements and its assumption that is applied by CodanLimited to prepare its annual report, financial statements and conductingimpairment tests on the company’s assets. The given report also focuses on themethods or procedures related to impairment testing practiced by theorganization. Furthermore, the subjectivity aligned with procedures forconducting the test is elaborated.
Codan Limited is a leading supplier andmanufacturer of communication, mining technology and metal detection. It isheadquartered in South Australia with high revenue of $132.3 million (Codan.com.au2018). The annual report of Codan Ltd. has been included for the yearended 2016.
The company uses technology to overcome communications, security,productivity and safety problems existing all around the globe. In the currentscenario, the products are sold in over 150 nations and approx 85% of revenueis generated from export.Impairment of asset is generallythe existing assets of the organization having a lower market value than thecarrying value of the specified asset (Amiraslani, Iatridisand Pope 2013). Tangible fixed assets of the company like property,plant and equipment is more likely to get impaired.
Whereas, the intangibleassets of the company includes goodwill and accounts receivable. In thecompany’s income statement, loss is recorded subsequent to adjusting the carryingvalue for impaired asset. After following the procedure for writing offimpairment, the company assets will display a reduced carrying cost. The value of the assets get reduced due tothe adjustments made in the assets and will be further recognized as loss.(i) Assets tested for impairmentAs per the financial or annualreport of Codan Ltd.
for the year ended 30th June 2016, followingassets for impairment were tested by the company are as The intangible assets and goodwillof the company are not amortized, as they are generally tested for impairmentfrequently, more than once in a year or annually. If there is any changeoccurred in an event or particular circumstances, it indicates that the assetimpairment is required (Andrews 2012). This isfurther recorded in the financial statement at cost lower by accumulated lossesdue to impairment.
Codan Ltd. other assets that includes equipment,inventories, property and plants are further tested for asset impairment, whenit shows an indication about the assets carrying amount, which may beirrecoverable. (ii) Method of conducting impairment test:When there is an indication thatthe carrying amount of assets could not be recovered then the assets are testedfor impairment except the goodwill and intangible assets. however, goodwill andintangible assets of the company thatare unamortized previously can be annually tested for impairment or can betested for more than once in a year. This could be resulted due to an event orcircumstance indicates so (Jennings and Marques 2013).For impairment assessment, the specified set of assets is combined together atits reduced levels that can be identified easily as cash inflow separately.
They are further independent of cash inflows from group of assets or otherassets that are considered to be as cash generating units. Furthermore, thenon-financial assets excluding goodwill that are responsible for impairment areanalyzed (Filip, Jeanjean and Paugam 2015). As there arepossibilities for reversal at each reporting date of impairment in theorganization.(iii) Impairment expenditures Codan Ltd. recorded impairmentexpenditure for the year ended 30th June 2016 as follow:· Tangibleassets- during the specified period, the given company Codan Ltd. hasrecorded a total impairment on building, which amounted to $ 1,379. The impairmentamount on Minetec equipment, property and plant includes $524 for the year2016.Intangible assets: the impairment amount for the inventoryand intellectual property are $1,287 and $592 respectively(iv) Assumptions and estimates used by the company forconducting impairment testCodan ltd.
has made severalestimates and assumptions as the company is highly concerned about its future.The accounting estimates outcome should be equal to the organization relatedactual outcomes. Certain mistakes andestimates include considerable risks and could further lead adjustment ofmaterials to the specified assets.
The particular asset of the company carryingthe value to the next financial year should further be disclosed and discussedat the end of accounts with the help of notes (Rennekamp,Rupar and Seybert 2014). The judgmentsare made according to the accountingrequired. As the business market of Codan ltd. goes through negative or adversecondition and there is continuous downturn in the market. In order to ascertainthe recoverable amount for the company’s tangible and other intangible assets, cash generatingunits was conducted. Cash generating units (CGU) recoverable amount is computedaccording to the calculation of value-in-use.
Moreover, this calculationutilizes the projection of cash flows that are based on the financial forecast,which is generally prepared by the management of the company since last 5years. Impairment is generally measured by the difference between present valueand carrying amount at estimated future cash flows (Cotter 2014).This has been discounted at a previous rate of interest. For assessing thevalue-in-use, following assumptions are used:Ø Discounts ratesØ Sales marginØ Growth rates using the extrapolate cash flowsbeyond forecast period.(v) Subjectivity involved in the process ofimpairment testingAccording to the accountingregulations IAS 36 upon Impairment of assets, it is usually perceived to beincluded in IFRS standards and demands subjective interpretation. It couldfurther be adaptable as per the managerial requirements. The impairment ofassets further does not limit creativeaccounting (Ramanna and Watts, 2012). From the annual report ofCodan ltd, it can easily be reflected that huge amount of subjectivityinvolvement is present in the given statement.
While the organization carryingout the impairment test procedures had opportunity for exploiting itsdiscretion and carrying out the impairment test for goodwill opportunistically.This could further be proved from the fact that allocation of goodwill to thecash generating units. Computation of amount that is recoverable with nopossibility of active prices due to the given goodwill, which is a subject ofdiscretion (Bertomeu and Cheynel 2015).(vi) Interesting, surprising, difficult orconfusing part to understand impairment testingFrom the analysis of the aboveassessment that was undertaken, it can be ascertained that the most confusingor difficult part related to the impairment testing is the indication ofimpairment. The indication mostly depends on the internal and external signalfor the impairment of assets. The frequency related to conducting the impairmenttest for goodwill and intangible assets mostly depends on the discretion ofmanagement (Bertomeu and Cheynel 2015). Furthermore, there arechances that the management will practice the impairment test opportunisticallywhen there is any value downturn. (vii) New insightsregarding conducting the impairment Impairment loss within themanagement is usually the difference in value between assets carrying amountand recoverable amount for the particular asset.
The recoverable amount of the asset that ishigher among the fair value and value-in –use is further decreased by the deposalcost (Costantini and Zanin 2015). The fair value in theorganization is determined only through the value of assets or sales agreementpresent in the active market, where trade of assets is taken place. Moreover,the determination of fair value is made through availability of adequateinformation that reveals the true or exact amount at which the business cansell its asset (Bepari, Rahman and Mollik 2014).
According to IAS 36, the value in use of the business is the present valuerelated to future cash flows, which is expected to be gained from the assets orcash generating units. (viii) Fair value measurementAccording to the IFRS 13 standards, fair value is ascertained or determines d through thefollowing:Ø Sales agreementØ The value of asset in present active market inwhich it is traded.Ø The availability of true and fair informationthat reveals the amount in which the company’s assets can be sold. Assessment task Part B:(i) Reason why theformer accounting standards does not reflect the economic realityIn 1 out of 3 companies using IFRSor US GAAP are generally affected by the various changes in accountingtechniques. According to the current status, organizations under IFRS or USGAAP have leased assets and commitmentsthat amount to more than 3.3 trillion (Ifrs.org. 2018).
Majority amount that is 85% are generally not reported in the company’s financialstatement or balance sheet as they are regarded as operating leases. The investorsusually include all the estimates, which are inconsistent, incomparable andinaccurate computation for compensating this. Therefore, the statement isprovided that the former accounting standards fail to reflect the trueeconomics reality.
(ii) Reasons why underthe previous accounting standards the lease liabilities of the reportingentities in the balance sheet were 66 times more than the reported debts underthe balance sheet According to the earlier accountingstandards, majority of the organizations reported 85% of its league identifiedthe true and fair amount related to operating lease and moreover, did notpresented it within their balance sheet. The operating leases of the companyalthough were not recorded within the company’s balance sheet but actuallycreated real liabilities. Henceforth, during the time of financial crisis, majorcompanies get bankrupt as they are unable to adjust to the latest economicreality as fast as possible (Fitó, Moya and Orgaz 2013).Furthermore, the companies had adequateamount of commitment related to the long-term operating leases whereas, thecompany balance sheet were identified as quiet lean. Therefore, the reportingentities lease liabilities within the balance sheet proved to be 66 times morethan compared to the debts under balance sheet.
(iii) Reasons why the Chairperson of IASB is in theview that under the previous accounting standard no level playing field wasthere among some airline entities The former techniques of accountingfor lease resulted into absence or lack of compatibility. Airlines industrygenerally accounts almost all of their organizational leases as operatingleases. The company also does not record this operating lease under theirfinancial statements and balance sheets.
Henceforth, an airline firm, whichleases mostly all of its aircraft fleets is known to be very dissimilar from itscompetitors that purchase all of its overall fleet (Lee and Hooy2012). Although in reality, in both the airline companies the financial obligationsare almost very similar. Hence, there are no or negligible level playing fieldpresent among these airline industry.
After the new standard introduction inthe companies all the existing leases would be accounted as assets . Moreoverthe lessees will be regarded as liability. Henceforth, it is expected that theproblems would be resolved.(iv) Reasons why the Chairperson is in the view thatthe new standard will not be popular with everyoneThe recent changes made in thestandard will is not possible to be popular with all the companies but isexpected to have a long lasting impact in majority of the listed company. The main reason regarding this are that thechanges made are always controversial in nature (Banker, Basuand Byzalov 2016). This can further leads to warning effects related toadverse or negative economic circumstances and fair costs associated due to thesystem changes. Moreover, the organization should readily accept the requiredchanges in the balance sheet as well as the income statement because of thechanges made in new standards. Furthermore, the changes made in theorganization may have huge commercial impacts.
For example, various banking covenantsand contractual arrangements tied with the company’s financial statementsshould be needed to get revised before implementation of the new changedstandards. This also includes debt to equity ratio and profit targets requiredfor arranging employees bonus payments (Gordon and Hsu 2017).Hence, the overall department within the business has to clearly understand theconsequences or impact of changes.
This includes the departments such as humanresource, treasury, IT, finance, investor relation and asset procurementdepartment. All these above mentioned valid reason would further lead to newaccounting standard unpopularity. (v) Possibilities that the new visibility withregard to all the leases will result into better informed decision forinvestmentAccording to the former accountingstandard, majority of the company used to treat its operating leases as offbalance sheet element . The investors or financial statement user does not havecomplete picture of the business financial position (Nawaiseh, 2016).Hence, it was impossible to compare the organization that leases assets withthe one that buy assets. The advanced update of IFRS 16 would outweigh the costand provide better decisions. References:Amiraslani, H., Iatridis,G.
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