ADVANCE four major divisions, which range from the Minerals,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADVANCE
FINANCE IMPAIRMENT

NAME:
LOVERPREET SINGH

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STUDENT
ID: PCC3055

 

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. 7
(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  10
(v)        Possibilities
that the new visibility with regard to all the leases will result into better
informed decision for investment 11
References. 12
 

Assessment task Part A

The primary objective of the given report is to concentrate on the
impairment criteria and the assumptions that have been used by the given
company Campbell Brothers Limited. The Campbell Brothers Limited is a testing
services provider. It was formerly under the name Campbell Brothers that was
later on changed to ALS Limited. Based in Australia the company is soap and
chemical manufacturer company, which is listed under the Australian Stock
exchange (Alsglobal.com 2018). The company has its primary operations in four
major divisions, which range from the Minerals, Industrials, Energy and Life
Sciences. The company is of the biggest testing and analytical groups around
the globe.

            While accounting for a company, the
financial asset of a company is assessed at a given reporting period in order
to give evidence in case the asset is impaired. In accounting terms, an asset
is considered impaired when the evidence which has been earlier collected
states that certain events which have occurred in the course of business have
has a negative impact on the cash flow values of the future. In such cases,
certain impairment charges need to be taken and the loss needs to be calculated
(AmirALSani, Iatridis and Pope 2013). An impairment
loss is with respect to the financial or non-financial asset, which is measured
at an amortized cost. The amortized cost is the difference between the present
value of the asset, which is estimated, and the carrying cost. There are
certain assets, which are impaired individually, and certain assets are
impaired in groups. 

(i)                
Assets tested for impairment

As witnessed from the annual reports of the company for the year ended
as on 31 March 2016.

Goodwill the goodwill as well
as other non-financial assets is tested for impairment cases and this kind of
test can take place for more than a year in case of occurrence of certain
events that indicate certain circumstances for which the impairment may have to
be taken place (AmirALSani, Iatridis  and Pope 2013).Other tangible assets-Other tangible
assets like the Trade receivables were also taken into consideration for the
impairment testPlant and equipment- Plant  and equipment were also tested for the same
test.

(ii)              
Method of conducting impairment
test

As stated earlier the intangible assets and goodwill are generally undertaken
for an impairment test when an event takes place in an organization, which may
indicate that the carrying amount of the asset is not recoverable. In other circumstances,
there are certain assets that are tested for impairment case more than once in a
year if there exists a circumstance, which may suggest so. After this, the
goodwill and other assets are allocated to the unit that is cash generating for
the test (Andrews 2012). The method that
is followed is extremely simple. The assets belonging to the lower class are
grouped together for which cash flows can be recognized separately and for the assets,
which are not dependent on these, are grouped different. All other assets
except that of goodwill who have undergone impairment have the chance of
reversal as per the date at which the reporting is done.

(iii)            
Impairment expenditures

The company recorded impairment expenses for the year ended 31 March
2016 as follows –

 

 

Intensive assets and goodwill-
According to the given report during the annual period the total costa and
charges on goodwill came up to 265 million $.Plant property and equipment-
For plant and equipment 11.1million $ were the impairment charges (Carlin and
Finch 2010).Other intangible assets- For
other intangible assets the cost was 41.5 million $.

Hence, the total cost was 317.9 million $.

(iv)            
Assumptions and estimates used
by the company for conducting impairment test

ALS Global makes several assumptions and estimates, as they are
concerned about their financial statements and regarding their future. This
outcome which may be received by the estimates need to be equivalent will the
actual outcomes of the firm`s results.  The taken estimates and assumptions have considerable
number of risks that can affect the profitability  of the firm and lead to problems in the
material adjustments. The given estimates need to be discloses through notes in
the accounts.  Due to the sensitivity of
the market, the recoverable amount for the assets like goodwill needs to be
taken into account for the calculation of the future cash flows as well
(Carlin, Finch and Laili 2009). The recoverable amount is calculated for the asset’s
value in use. The estimates need to be made depending upon the various
policies. These estimates are revised regularly.

The key assumptions made for the calculation are :

Pre-tax discount rateCompound average growth rate

(v)              
Subjectivity involved in the
process of impairment testing

As per the IAS 36 rule on the Impairment of assets , it is believed
that it is a typical standard in the IFRS. However, it is subject to interpretation,
may vary as per the managerial requirement, and can give rise to creativity (Rennekamp, Rupar and Seybert 2014). In the
annual report of Campbell brothers, there exists certain amount of relativity
and subjectivity in the manner in which the impairment test is conducted (Cotter 2012). The management had the
opportunity to exploit their discretion and carried the test for impairment for
various assets based on their opportunity. 
This fact can be proved with the help of the factor that the particular
allocation of goodwill and other assets .

(vi)            
Interesting, surprising,
difficult or confusing part to understand impairment testing

After analyzing the annual reports of ALS Global, it could be
witnessed that the confusing part is the initiation and the induction of the
impairment. As stated previously the induction of impairment depends both on
internal as well as external events, the frequency of the test is depending
totally on the discretion of the management (Fitó,
Moya and  Orgaz 2013). As it
depends totally on the discretion of the management. There might be chances
that the impairment, which is generally undertaken, is under subjective and may
depend on the choice of the management. Hence, as stated earlier there exists
chances that the management might carry out the test based on the opportunities
available and utilize the impairment option when there is a downturn in the
value of the given asset.

(vii)          
New insights regarding
conducting the impairment

The impairment loss can be described as the difference between the
carrying amount of the given asset and the recoverable amount of the asset.
When the recoverable amount of the asset in cases where the value in use comes
into picture, is higher than it may be a case where the value of the asset is
reduced b the disposable cost (Lee and Hooy
2013). The fair value of an asset is determined through the sales agreement
or the value of the asset, which has been taken from the market where the
particular asset is usual, traded. In other cases, the value as per the IAS 36,
can be described as the present value of the cash flows that might occur in
future from the asset.

(viii)        
Fair value measurement

According to the new IFRS 13, the fair value of an asset is
determined through-

The sales agreement.The value of the asset in the
market where it is traded (Ifrs.org. 2018).The availability of the best
information at which the company can sell the asset.

 

Assessment task Part B

(i)                
Reason why the former
accounting standards does not reflect the economic reality

It is believed
that nearly 1 out of two companies who make the use of US GAAP or IFRS have
been affected by the several changes and alterations that have taken place in
the given year. According to the current scenario, the companies who are
registered under US GAAP or the IFRS have nearly $3.3 trillion worth leased
assets and other commitments. Out of these, nearly 2/3rd of the data
is not reported in the balance sheet. This is because, they are often treated
as operating leases (Jennings and Marques 2013).
In order to compensate this kind of a loss the investors generally include
those estimates, which are just a prediction. These are inaccurate and
incomparable computations. Hence,  it is
often reflected that the accounting standards, which were used earlier, did not
reflect the economic reality.

(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 

As stated
earlier, when the previous accounting standard was in use nearly 85% of the companies
, put their leases amount under operating leases and not under the balance
sheet. Although these operating leases were not recorded under the given
balance sheet, they were able to create liabilities, which were real (loans, retirement
and education 2018). Hence, when financial crises will occur,  certain companies were not able to adapt to
the new systems and they went bankrupt. Their balance sheets were quite lean
whereas they had a large amount of commitments with respect to the long term
operating leases. For this reason, the lease liabilities of the reporting
entities in the balance sheet were 66 times more than the reported debts under
the balance sheet 

 

(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

 

The primary
problem with the earlier accounting systems is that they had problems with
respect to comparability. For an airline industry, a majority of the leases is
treated as operating leases and thus they are not recorded in the balance
sheet. In cases where the airline company 
they have an operation strategy which suggests them to lease their whole
fleet, their statements will not be comparable to the companies of the airline
industry who do not lend their fleet and instead purchase  their fleet (Marshall
2016). Hence, due to this reason, it is often said that there exists no
level playing field among the given airline companies. When the new given
standards will be introduced, it is believed that these kinds of problems will
not be there as all the given eases will be taken as assets and the given
lessees ill account as liabilities. The problem is proposed to be resolved.

(iv)            
Reasons why the Chairperson is
in the view that the new standard will not be popular with everyone

Any new change
that takes place in the organization, necessarily has an impact on many of the
listed companies and is believed not to be popular among everyone. The main
reason is that change is difficult to accept and that it might also lead to
severe affects with respect to the economic circumstances and even the costs
associated to implement the given changes may not be acceptable. The given
companies need to be prepared to make the given accounting changes in their
given income statement and even the balance sheets. Apart from the visible
impacts, it is also believed that there will be certain contractual
arrangements as well as banking policies, which are associated with the
statements of the country (Md Khokan , 
Rahman and Mollik 2014).  These
are generally related with the human resource aspects and may change the
structure of the bonus payment and relevant ratios.

(v)              
Possibilities that the new
visibility with regard to all the leases will result into better informed
decision for investment

The boon in
disguise with respect to the new accounting standard is that the companies will
provide more transparency in their accounting statements. This transparency
shall result in better information for the investors who plan to invest their
savings in the various shares of the company (Ramanna
and Watts 2012). With the former accounting standard in use, the
companies used to keep their operating leases  under the income statement and this made it
impossible for the investors to compare. Therefore, when the new standard will
upgrade to IFRS 16, then the investors will be able to take better decisions
for their company.

 

References

Alsglobal.com ,2018. ALS. online
Alsglobal.com. Available at: https://www.alsglobal.com/-/media/als/resources/myals/…/2016-annual-report.pdf
Accessed 25 Jan. 2018.

AmirALSani, H.,
Iatridis, G.E. and Pope, P.F. ,2013. Accounting for asset impairment. London:
Cass Business School.

AmirALSani, H.,
Iatridis, G.E. and Pope, P.F. ,2013. Accounting for asset impairment: a
test for IFRS compliance across Europe. Centre for Financial Analysis and
Reporting Research (CeFARR).

Andrews, R. ,2012.
Fair Value, earnings management and asset impairment: The impact of a change in
the regulatory environment. Procedia Economics and Finance, 2,
pp.16-25.

Carlin, T.M. and Finch, N. ,2010. Resisting compliance with IFRS goodwill
accounting and reporting disclosures evidence from Australia, Journal of
Accounting and Organizational Change, Vol. 6 No. 2, pp. 260-280. Google Scholar
Link Infotrieve

Carlin, T.M. and Finch, N. ,2011. Goodwill impairment testing under IFRS: a
false impossible shore?, Pacific Accounting Review, Vol. 23 No. 3, pp.
368-392. Google Scholar Link Infotrieve

 Carlin, T.M., Finch, N. and Laili, N.H. ,2009.
Goodwill accounting in Malaysia and the
transition to IFRS – a compliance assessment of large first year adopters,
Journal of Financial Reporting and Accounting, Vol. 7 No. 1, pp. 75-104.
Google Scholar Link Infotrieve

Cotter, D. ,2012. Advanced
financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall.