AASB 136 for the Impairment of assets states the requirement for accounting and reporting the impairment for most of the non-financial assets. It specifies when the organization requires performing the impairment test, in what manner it is to be performed and the related disclosure requirement. The application of the AASB 136 is broad and the requirement for this may be open for the interpretation. AASB 136 deals with the impairment test for all the intangible and tangible assets, except for those assets that are covered under other IFRS. To attain these objectives the standard needs the organizations to test all the assets for impairment when there exist an indication for impairment or at least annually for the intangible asset and goodwill with the indefinite period of useful lives (Bond, Govendir and Wells 2016).
AASB 136 on impairment requires the extensive disclosures with regard to the test for impairment performed and the recognition of impairment. The disclosure requirement for goodwill is more extensive as compared to the impairment for the other assets. The major requirements for the disclosures are as follows:
The sensitivity analysis when the possible reason for the change change in a major assumption would result for the impairment that will include the ‘headroom’ for the calculation of impairment and the amount for which the assumption will be required to alter the results of the impairment (Kabir and Rahman 2016).
Wesfarmers tests the goodwill, intangibles, equipment, plant and property for the purpose of impairment:
If the assets do not create independent earnings and the VIU cannot be forecasted to the close of the assets fair value, the asset then goes for impairment test. Further, the asset is impaired if the carrying amount is greater than the recoverable amount. Moreover, where the indication is there that the impairment losses that are recognised previously is reduced or does not exist anymore, the asset is tested again and if found suitable, then the impairment is reversed. From all these discussions, it is analysed that Wesfarmers Limited meets the requirement for disclosures of impairment as per AAB 136 (Wesfarmers.com.au, 2017).
The main issues with the impairment are that the values of the assets are always under microscope as the conditions of the market are always under alteration. Maintaining the investor’s trust regarding the transparency and the accuracy of the assets value is crucial and the regulators and the investors are concerned regarding the recoverability of the assets in the vulnerable market. In this circumstance, strong impairment testing is crucial. Other issues with the impairment are –
Difference between value in use and fair value: it is crucial to have the clear idea about the difference between the value in use and fair value methods. The fair value method measures in terms of which the independent investors will pay for the asset, whereas, the value-in-use reveals the value that will be internally created by the asset for the business. This variance is revealed in the supposition that is accepted under each model (Bepari and Mollik 2015).
Using of the suitable rate of discount: various nations use the capital asset pricing model and weighted average cost of capital to assess the rate of discounting for the testing of value in use. This is suitable only when the risks associated with any CGU do not vary with the whole business. In actual, the various CGU may implement various rates of discounts owing to the difference in currency risk, country risk, product and industry risk and the maturity of market in which the CGU operates. Further, the risk associated with the assumptions of cash flow shall be considered to assure that the discount rate is suitable. Finally, the rate of discount must reflect the incremental rate for borrowing and gearing in the current scenario of the market that may differs with the actual interest rates and gearing of the organization in the current market scenario (Malone, Tarca and Wee 2015).
Tax: tax is another complexity associated with the test for impairment. A general mistake is the inclusion of conflicting assumptions regarding the tax of the model. There is likelihood that the organization is wrongly discounting the pre-tax cash flows by utilising the post-tax rate of discount. If the post-tax rate of discount is being used then the post-tax cash flows also shall be predicted- or 30% will be effectively added to the cash flows. Another frequent mistake is including the benefits from the tax losses of previous years under the VIU approach.
Therefore, the models for impairment testing must be updated and must be able to reveal the business’s current status as there may be substantial alteration in the economic environment over the year. Further, the data from the market is hard to collect, especially in the absence of latest public transactions.Four specific issues that must be considered while calculating impairment
Discount rates – the rate of discount for impairment calculation is not mentioned in the annual report. Further, the assumptions of long-run growth rate under the model of discounted cash flow for both the FV as well as VIU less the selling cost and the key assumptions like rate of discount, profit margin and growth rate of revenue that are made in the calculation must be stated.
Goodwill allocation – as the goodwill independently does not create any cash flows, therefore, the recoverable amount for goodwill cannot be measured as an individual asset. However, most of the times the goodwill contributes to the cash flow of the CGUs. Therefore, the goodwill is distributed to the CGUs. The report must state the details regarding the allocation amount of goodwill to each CGU (Zhuang 2016)
Cash flow from foreign currency – cash flows from foreign currencies are very common and it shall be treated as per the specific requirement of AASB 136. Generally, the future cash flows are forecasted in the currency in which they are expected to be received. The rate of discount for this cash flow is not simple and easy as the rate differs based on the country and risk profile of the country. Therefore, in the report, these details must be included (Linnenluecke et al. 2015).
Compare the like with the like – the cash flows that are tested mist be aligned with the assets that are tested for impairment. Further, the projected cash flows must make the allowance for working capital investment and must be clearly mentioned in the report.
Bepari, M.K. and Mollik, A.T., 2015. Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing. Journal of Applied Accounting Research, 16(2), pp.196-220.
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.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting & Economics, 12(3), pp.290-308.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Malone, L., Tarca, A. and Wee, M., 2015. Non-GAAP earnings disclosures and IFRS. Accounting and Finance.
Wesfarmers.com.au. (2017). Home. [online] Available at: https://www.wesfarmers.com.au/ [Accessed 1 May 2017].
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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