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(i) From your firm's annual report find out the asset/s that your firm has tested for impairment.

(ii) How did your firm conduct the impairment testing?

(iii)Has your firm recorded any impairment expenditures during the period?

(iv)Identify the key estimates and assumptions used by your firm in conducting the impairment testing.

(v) Do you find any sort of subjectivity involved in the impairment testing process? How can this subjectivity influence the outcome of the impairment testing?

(vi) What do you find interesting, confusing, surprising or difficult to understand about the impairment testing?

(vii) What new insights, if any, have you gained about how companies conduct impairment testing?

(viii) Based on your assignment, comment on the "fair value measurement". 

(i) Explain why the chairperson of the IASB believes that the former accounting standard for leases did 'not reflect economic reality'?

(ii)Explain the reason why, under the former accounting standard, reporting entities"off balance sheet lease liabilities were up to 66 times greater than the debt reported on their balance sheet'.

(iii) Why does the Chairperson of the IASB argue that under the former accounting standard for leases there was 'no level playing field' between some airlines companies?

(iv) Why do you think the Chairperson of the IASB said that the new accounting standard for leases 'will not be popular with everyone'? What would cause this unpopularity?

(v) What are some of the possible reasons why the chairperson of the IASB would say "the new visibility of all leases will lead to better informed investment decisions by investors, and to more balanced lease versus buy decisions by management? 

Part A: Impairment Testing of Decmil Group Limited

This report points out various assumptions that Decmil Group Limited has used to conduct their impairment test. The group has also used different impairment criteria to do this test. Therefore, this report will discuss the methods of impairment test and the subjectivity related to these methods. Moreover, this report has considered the annual report of the year 2017 of this company to evaluate these processes. The firm is a public listed group since 2005 (Decmil.com. 2018). Their chief focus is to give engineering project delivery and full cycle construction. The chief services provided by the organisation are construction, project delivery, engineering and design. The organisation also provides services on accommodation and telecommunications.

The meaning of impaired means the market price of an asset is larger compare to its carrying amount. Some assets can be impaired and those assets could be intangible assets and fixed assets. Intangible assets have goodwill and fixed assets are consisted of plan, property and equipment (Bräuning and Fecht 2016). The organisation’s income statement will mention the amount of loss that can occur due to an adjustment within the impaired asset due to carrying value. If impairment is written off, the carrying amount of the asset will fall (Maynard 2017). When the adjustment would be indentified as loss, the asset value will fall.    

1.The 2017 annual report of Decmil has analysed impairment test for different asset groups. The firm has done the amortisation of some intangible assets and goodwill (Decmil.com. 2018). However, the firm has done its annual impairment test. Within one year, the frequency can be more than once, as the situations are changing over time. Therefore, the firm has an indication of asset impairment and those assets are recorded at a value. This value is received by making the difference of the accumulated impairment loss from cost (Li and Sloan 2017). The plant, equipment and receivables are directed from for testing impairment. However, the carrying values of assets could not be recovered.

2.When an organisation is conducting their impairment test, it follows two steps. In the first step, the firm breaks down its fair value up to the unit of recoverable amount (Decmil.com. 2018). This step also considers goodwill. However, carrying amount of the firm can be greater than the fair value of the unit. In this situation, second step arises (Maynard 2017). This step measures that whether there is any impairment loss or not and the amount of loss. When the implied fair value is low compare to the carrying amount, the impairment exists in the form of additional amount (Israeli 2015). On the other side, for an asset, the carrying value is higher than its identified loss. For those reasons, a distinction between carrying value of a unit and its fair value is done.

Asset Impairment and Impairment Testing Process

3.The Decmil Group Limited has its impairment costs. Those costs are mentioned in the firm’s annual report of the year 2017 (Decmil.com. 2018).  These are explained below.

  • Intangible assets have lacks of physical substances. Moreover, these are very difficult to evaluate. It includes brand names, trademarks and goodwill.
  • Fixed assets include leasehold and freehold buildings. Moreover, these include plat and property.

4.Decmil can face equivalent outcomes in their related actual outcomes and the accounting estimates. Hence, it is important for the organisation to create some assumptions and measures to overcome the risk related to its future performance (Decmil.com. 2018). In future, the firm can face material misstatements of the carrying value associated with its assets. Those misstatements can be described with the help of notes to accounts. In this context, judgments are needed. During a negative market condition, the firm needs to analyse its recoverable value related to goodwill and other intangible assets. Those assets represent a part of the CGUS of Decmil. This recoverable value of the firm can be estimated with the help of value-in-use calculation (Huikku, Mouritsen and Silvola 2017). Moreover, projections related cash flows are used. These projections are based on financial estimation. The management of the organisation makes this financial estimation for the period of last five years. Hence, there are some assumptions that will help the firm to calculate their value-in-use. Those assumptions are:

  • Growth rates with the help of cash flow. This cash flow are beyond the projected timeframe
  • EBITDA divided by sales revenue
  • Discount rates

5.To complete the managerial needs, it is important to implement “IAS 36 Impairment of Assets”. Moreover, creative accounting will not be difficult. Hence, by analysing the annual report of the company, it can be seen that there is some significant subjectivity existed when the impairment test is conducted (Mazzi, Liberatore and Tsalavoutas 2016). This happens because management do not do any unbiased discretion regarding opportunistic goodwill test. This validation can be obtained if recoverable amount is estimated and goodwill is distributed among the cash-generating unit. However, this will be possible if no active prices will exist for goodwill that is subject to discretion (Hoyle, Schaefer and Doupnik 2015). Hence, the validations can do if cash generating unit distribute this goodwill. Moreover, recoverable amount is measured.

6.The identification of impairment indicates the most difficult part of the company’s annual report (Decmil.com. 2018). Management itself decides to conduct this impairment test for goodwill and for other intangible assets (Griffith, Hammersley, Kadous and Young 2015). However, signs of asset of both internal and external impairment are indicated. Hence, an uneven value will exist that can lead the opportunistic conduction of the impairment test.

7.The recoverable value and carrying value can vary with each other. This variation can happen due to impairment loss. According to Macve, one can indentify this impairment loss by differencing the recoverable value and carrying value related to an asset (Macve 2015). Between the fair assets price with higher value and less disposal cost, value-in-use the recoverable asset amount. The fair value can be determined with the help of the asset market or the sale agreement. In this asset market, valuable information can disclose the amount or where the asset is traded and where tis asset can be sold. IAS 36 states that CGU helps to generate the current value (Maglio and Rey 2017). This value can be explained in the form of value-in-use. Moreover, this value is related with the future cash flows.

Steps Involved in Impairment Testing

8.The fair value can be determined with the help of some points in compliance with IFRS 13 (Sellhorn and Stier 2017). Those points can be explained further in brief. These are:

  • The asset market. In this market, assets are traded.
  • Sales contract
  • Valuable information, which is evident to disclose the amount to sell asset.

The fair value indicates the sale price. At this sale price, both buyers and sellers want to enter into a free trade.  Hence, in most of the investments where they are traded, fair values are existed (Goh and Yong 2015). Moreover, with the help of a parent firm, the financial statement of a subsidiary is consolidated. The market players get bid for receiving an insight security prices when the company’s securities are traded on exchange. Market players can sell securities at ask price (Kunz and Martin 2015). However, market players can buy those securities at the bid price. Therefore, to determine the fair stock value, the most effective technique is exchange.  As the securities of any firm are traded on the basis of exchange, the market players get those bid for getting an insight of those security prices.

1.As the accounting norms are changed, maximum firms are affected. They use US GAAP or IFRS. From this situation it can be explained that those firms are using commitments and some standards possess leases that are valued at $ 3.3 million (Evans, Houston, Peters and Pratt 2014). As the firms are considered operating leases, huge number of information cannot be mentioned in the financial position in the form of statement.  Hence, investments grant the projections to compensate and to explain its inaccuracy. As a result, with the help of the previous accounting standard, no one could effectively represent the economics reality. Moreover, the firm could not compare the projections for consistency.

2.In the financial position statement, operating leases are not included. However, actual liabilities are made. Organisations, who are using the past accounting standard, have disclosed 85% of its lease in the form of operating lease. They could not represent those in their balance sheet statement (Collier 2015). As the updated reality of economy is not adjusted to a large extend, the chief retail companies face bankruptcy during financial crisis. On the other hand, in the financial position statement, descriptive leaning can be found. However, in the long-term operating leases, those organisations had invested significantly. As a result, in the financial statement position, those lease related liabilities have remained 66 times greater than the debt values under the arrangement of off-balance sheet. Therefore, when financial crisis has arrived, some retail companies face bankruptcy. As the modern reality of economy is not adjustable, this situation happened (Martikainen, Kinnunen, Miihkinen and Troberg 2015). On the descriptive leaning also exists in the statement relate to financial position. As a result, liabilities of lease of any organisation are high compare to the debt values, in this statement.

Impairment Expenditures and Key Assumptions

3.There are some leases that were not mentioned in the old system lease accounting and this further could make comparability issue. At present, those leases are present in the industry related to aviation (Trifts and Porter 2017). In the statement related to balance sheet, those industries are not revealed as operating leases. Therefore, an airline industry, who leases the aircraft fleet, is not similar to the competitors, who purchase those fleets (Weaver and Woods 2015). On the other side, both types of airlines face equivalent financial outcomes. This further indicates that those airlines do not possess the playing field level. The leases will be recorded as assets with the help of new standard. Moreover, liabilities would record same from the leases. Therefore, to resolving the problem, estimation is needed.

4.When accounting standard are making changes, most of the companies are mostly influenced. Moreover, they are not so well-known like other organisations. The reason behind this influence is that it may cause some effecting warning and controversies (Burke 2017). This happens due to negative economic conditions and costs. Those economic conditions are associated with the changing system. As modification happens, the effect of commercialisation will also present.

With the help of different contractual agreements and banking covenants, gearing ratio can be calculated to obtain revisions. This calculation was needed before the new standard was started. Those contractual agreements are associated with the financial report of an organisation. This organisation like profit targets may help to give extra payments to their workers (George, Siti-Nabiha, Jalaludin and Abdalla 2016). Moreover, every department of business are required the detail effect of changes. Those changes can be observed in the form of technology related to accounting information, finance department related to investor relations, and acquiring human resource and assets. Due to these changes, the new and estimated accounting standard could experience loss of reputation.  

5.Most of the organisations consider their operating leases as off-balance sheet items. This can be said with the help of the new accounting standard. As a result, it is impossible for investors and others to get an overview in the operating market, regarding the actual financial condition of the firm in the market under which it operates (Chambers, Dooley and Finger 2015). As they cannot tally two types of organisations, the ability of the users is hampered. These two types of organisations are purchase assets and lease assets. As IFRS 16 helps to decrease the expenses and information related to investment, the new standard is trying to update this (Scholten et al. 2017). This can be showed in lease against its purchasing decisions with a proper way of the management.

Subjectivity in Impairment Testing and Its Impact

References:

Bräuning, F. and Fecht, F., 2016. Relationship lending in the interbank market and the price of liquidity. Review of Finance, 21(1), pp.33-75.

Burke, W.W., 2017. Organization change: Theory and practice. Sage Publications.

Chambers, D., Dooley, J. and Finger, C.A., 2015. Preparing for the Looming Changes in Lease Accounting. The CPA Journal, 85(1), p.38.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Decmil.com., 2018.  [online] Available at: https://decmil.com/dmwp/wp-content/uploads/2017/09/ASX-569-2017-Annual-Report.pdf

Evans, M.E., Houston, R.W., Peters, M.F. and Pratt, J.H., 2014. Reporting regulatory environments and earnings management: US and non-US firms using US GAAP or IFRS. The Accounting Review, 90(5), pp.1969-1994.

George, R.A., Siti-Nabiha, A.K., Jalaludin, D. and Abdalla, Y.A., 2016. Barriers to and enablers of sustainability integration in the performance management systems of an oil and gas company. Journal of cleaner production, 136, pp.197-212.

Goh, B.W., Li, D., Ng, J. and Yong, K.O., 2015. Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and Public Policy, 34(2), pp.129-145.

Griffith, E.E., Hammersley, J.S., Kadous, K. and Young, D., 2015. Auditor mindsets and audits of complex estimates. Journal of Accounting Research, 53(1), pp.49-77.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.

Israeli, D., 2015. Recognition versus disclosure: evidence from fair value of investment property. Review of Accounting Studies, 20(4), pp.1457-1503.

Kunz, K. and Martin, J., 2015. Into the breech: The increasing gap between algorithmic trading and securities regulation. Journal of Financial Services Research, 47(1), pp.135-152.

Li, K.K. and Sloan, R.G., 2017. Has goodwill accounting gone bad?. Review of Accounting Studies, 22(2), pp.964-1003.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Maglio, R. and Rey, A., 2017. The impairment test for football players: the missing link between sports and financial performance?. Palgrave Communications, 3, p.17055.

Martikainen, M., Kinnunen, J., Miihkinen, A. and Troberg, P., 2015. Board’s financial incentives, competence, and firm risk disclosure: Evidence from Finnish index listed companies. Journal of Applied Accounting Research, 16(3), pp.333-358.

Maynard, J., 2017. Financial Accounting, Reporting, and Analysis. Oxford University Press.

Mazzi, F., Liberatore, G. and Tsalavoutas, I., 2016. Insights on CFOs’ perceptions about impairment testing under IAS 36. Accounting in Europe, 13(3), pp.353-379.

Scholten, R., Lambooy, T., Renes, R. and Bartels, W., 2017. Accounting for Future Generations. Does the IFRS Framework Sufficiently Encourage Energy Companies to Reflect on Climate Change in the Valuation of Their Production Assets, Taking into Account the New Initiative of the Task Force on Climate-Related Financial Disclosures? An Exploratory Qualitative Comparative Case Study Approach.

Sellhorn, T. and Stier, C., 2017. Fair Value Measurement for Long-Lived Operating Assets: Research Evidence.

Trifts, J. and Porter, G.E., 2017. The impact of the capitalization of operating leases: A guide for individual investors. Financial Services Review, 26(2).

Weaver, L. and Woods, M., 2015. The challenges faced by reporting entities on their transition to International Financial Reporting Standards: a qualitative study. Accounting in Europe, 12(2), pp.197-221.

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