2.Critically analyse to what extent the latest annual report of your Company meets the disclosure requirements for Impairment as per AASB 136
3.A Critical analysis of some of the Complexities and key Issues involved in Impairment testing.
The term impairment means the fact that the value of the asset that has long lived has reduced to below the market value. In order to illustrate, a company had spent a huge amount of money on its plant but due to the market conditions, its value fell drastically. Hence, that plant would be considered to be impaired (Accounting coach, 2017).
1.AASB 136 disclosure requirements:
In respect of impairment of assets, any entity is duty bound to disclose the following in respect of each one class of the asset:
The amount of the impairment loss that has occurred during the period and the same must be stated in the statement of profit and loss during the same year along with the various line items of the statement of comprehensive income in which those losses have taken place
The amounts of the reversals of the losses of impairment and the same have been stated in the statement of profit and loss during the period and also in the line items of the statement of the comprehensive income in which those losses of impairment have been reversed
The amounts of the losses of impairment on the assets that have been revalued and the same have been disclosed in the statement of comprehensive income during the period
The amounts of the reversals of the losses of impairment on the assets that have been revalued and also have been recognised in the statement of comprehensive income during the stated period.
The information as required above could also be presented with other information as has been disclosed for the other class of the assets. In order to illustrate, this is the information that could be brought in the reconciliation of the carrying amounts of the property, plant and the equipment in the end and in the beginning of the year.
An entity that has to report the segment information as per the requirements that have been laid down in AASB 8 would disclose the following for each one of the reportable segment:
The loss of impairment that has occurred during the period and the same must be recognised in the profit and loss account during the same year along with the line items of the statement of comprehensive income win which those losses have taken place
The amounts of the reversals of the losses of impairment and the same have been recognised in the statement of profit and loss during the period and also in the line items of the statement of the comprehensive income in which those losses of impairment have been reversed
An entity is duty bound to disclose the following for each one of the material impairment losses that have been recognised or has been reversed during the period of any individual assets. This includes the goodwill or the cash generating unit.
All of the events and the circumstance that have led to the recognition or to the reversal of the loss of impairment
The amount of the impairment loss that has been recognised or reversed
In respect of an individual asset, the nature of that asset, the reportable segment to which that asset belongs in case, the entity has to report the segment information as per the requirements laid down under AASB 8
escription of the cash generating unit, the amount of the loss of impairment that has been recognised or that has been reversed by the class of the assets and in case, the entity reports the segment information, then by the reportable segment
In case if the aggregation of the different assets, then for the purposes of identifying the cash generating unit, it has to be seen whether the same has undergone a change when compared with the previous estimate of the amount that is recoverable in respect of the cash generating unit
Whether the amount that is recoverable in respect of the asset is less or more than the fair value of the asset less the cost of sell or its value in use
In case the recoverable value is the fair value costs less sell, then the basis on which the same has been calculated
In case the recoverable amount is the same as the value in use, then the discount rate that has been used in the current estimate along with the previous estimate of the value that is in use (Legislation, 2017).
The entity shall disclose the information for the purposes of aggregating the losses of impairment along with the aggregate reversals of the losses of impairment that have been recognised during the period for which on above stated information is available. The information that would be disclosed includes the main classes of the assets that are affected by the losses of impairment along with the main classes of the assets that are affected by the reversals of the losses of impairment, the main events along with the circumstances that have led to the recognition of those losses of impairment and its reversals.
When the recoverable amount is determined, then the various assumptions used shall be disclosed along with the various estimates that have been used for the purposes of disclosing the information.
Any portion of the goodwill that has been acquired in the business combination that has not been allocated to the cash generating units, then the amount that has not been allocated along with the reason as to why the same has not been disclosed would be stated (AASB, 2015).
2.Disclosure in Ansell Limited:
The company chosen is Ansell Limited. The annual report of the company states that the goodwill and the brands are tested on an annual for impairments and also when there are events or change in the circumstances that indicate that the carrying values may be less than the book values of these assets. This is as per the accounting policies on the intangible assets. The policy of the group requires the undertaking of the assumptions when assessing the carrying values of the cash generating units (Annual report, 2017).
3.Issues in impairment:
The following are the issues that arise when impairment calculations are done:
- The cash flows that are used to ascertain the fair value less the costs of the disposal are based on the forecasts along with the different assumptions that may not be reliable.
- The cash flows used and the assumptions undertaken are not reliable. This is in respect of the matters like the economic and the market conditions etc.
- The calculations pertaining to the value in use
- The reliability of the estimates pertaining to cash flows cannot be trusted
- The use of the increasing cash flows after the period of 5 years that is more than the long term average growth rates is done which is not good and that too not taking into account the offsetting impact on the discount rates
- The cash flows are never matched up with the carrying amounts of all of the assets that are used for the generation of the cash flows
- There are similar discount rates that are used for the different cash generating units even there are many of the risks and the cash generating units are located somewhat in the different countries
- Different discount rates are used even when the risks are somewhat similar in nature
- The values are determined by following the same method, no alternative method is chosen
- This standard does not apply to the exploration and to the evaluation of the assets after the technical feasibility and the commercial viability of the same has been indicated
- It fails to make adequate disclosures to the investors and the others
- The cash generating units are identified at a higher level and this includes the inflow of cash for the individual assets which is largely independent or when the cash generating units are higher than the operating segments (ASIC, 2017).
Considerations in impairment:
The following are the considerations that have to be made:
In respect of the cash flows forecast, whether the forecast of the cash flow reasonable and whether they are capable of being supported. Is there is a strong ground on the basis of which it is determined that the cash flows would increase majorly after the end of the year. Are risks adequately considered? Is the growth in line with the past growth that has been achieved and whether the same is sustainable? Have the prediction been met in the past months? Are the cash flows based on the internal budget? (EY, 2017).
In respect of the assumptions undertaken, whether the discount rates and the growth rate used supported by evidence? Is the discount rate apt and is in line with the funding’s cost and weighs the average cost of capital or any other apt rate? Is there enough evidence when different discount rate is sued for the similar cash generating units?
In respect of the use of the fair values less the costs of the disposal, whether the fair values less the costs of disposals based upon the market prices that are available. In case, not then the value that is sued to determine the amount that is recoverable. Have the amounts of the valuations been checked by the alternative valuation methods? Is there a range of the possible fair values wide enough so that it can determine a reliable estimate?
In respect of the value in use, whether it includes reliable estimates? Whether the increasing flow of cash after the period of 5 years would be more than the average growth rates and that too without considering the account offsetting the impacts or the discount rates? Whether there are cash flows from the restructuring and the improving or enhancing of the performance of the asset (FASB, 2017).
AccountingCoach.com. (2017). What is an impairment? | AccountingCoach. [online] Available at: https://www.accountingcoach.com/blog/what-is-an-impairment [Accessed 2 May 2017].
Ansell.com. (2017). Cite a Website - Cite This For Me. [online] Available at: https://www.ansell.com/-/media/Corporate/MainWebsite/About/Investor-Center/Annual-Report-2016/Annual-Report-to-Shareholders-2016.ashx?la=en [Accessed 2 May 2017].
Asic.gov.au. (2017). Impairment of non-financial assets: Materials for directors | ASIC - Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/directors-and-financial-reporting/impairment-of-non-financial-assets-materials-for-directors/#common-issues [Accessed 2 May 2017].
Fasb.org. (2017). Accounting for Goodwill Impairment. [online] Available at: https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176163679475 [Accessed 2 May 2017].
Legislation.gov.au. (2017). AASB 136 - Impairment of Assets - August 2015. [online] Available at: https://www.legislation.gov.au/Details/F2015L01622/Explanatory%20Statement/Text [Accessed 2 May 2017].
www.aasb.gov.au. (2017). Impairment of Assets. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 2 May 2017].
www.ey.com. (2017). ITG discusses IFRS 9 impairment implementation issues. [online] Available at: https://www.ey.com/Publication/vwLUAssets/IFRS_Developments_Issue_112:_ITG_discusses_IFRS_9_impairment_implementation_issues/$FILE/Devel112-FI-Impairment-Sept2015.pdf [Accessed 2 May 2017].