Background You are a recent accounting graduate and have been employed in the Financial Reporting Unit of Myer Holdings Ltd, an ASX listed firm. Preparations are underway for the completion of the general purpose financial report for the year ended 29 July 2018 and you have been asked by the Chief Financial Officer to identify any major accounting issues which will need to be considered. Your attention is drawn to a media release by ASIC on 31 May 2018 (ASIC Media Release 17?162) and this identifies areas of concern where attention will be directed in the ASIC surveillance program. Not surprisingly given a recent academic paper1 ‘impairment of assets’ receives specific mention.
You are required to prepare a report for the CFO considering whether impairment of assets is an issue requiring address for the firm. The report should, with reference to AASB 136:
a) With reference to Myer outline what evidence is there that impairment testing of assets is necessary;
b) With reference to Myer outline the processes required to be addressed in determining any asset impairments that might be necessary
c) With reference to Myer outline the information needed in determining asset impairments
d) Evaluate the flexibility management has available in the determination of asset impairments .
The current paper has been prepared for the purpose of recognising any noteworthy accounting problems that requires to be examined with regards to Myer Holdings Limited. The company is a high-end chain store in Australia trading with varied commodities such as- outfit, accessories, footwear, home ware, fragrance, books, stationery, food and other grocery products (Myer 2018). The study would focus on discovering the proofs that impairment examination is vital for Myer. The second portion of the study would highlight the methodologies that are required to be discussed in order to determine any asset impairment for Myer Holding Limited. The next part of the study would focus on the data that is needed for determining any asset impairment related to Myer. Lastly, the paper would assess the flexibility management for the determination of impairment of the assets.
It is crucial for any business corporation to examine at each date of balance sheet whether any sort of asset impairment has been detected or not. This points out that the carrying cost could be greater than the sum of recovery (Beyer et al. 2015). When the corporation discovers any such proof, it is required to evaluate the recoverable value of the asset. As stated in AASB 136, there are few definite detections of impairments, that involves internal as well as external data. According to “Sub-sections a-d of Paragraph 12 of AASB 136”, four external causes involve proof of impairment, they are mentioned below:
However, “Sub-sections e-g of Paragraph 12 of AASB 136” points out that there are a few internal sources which are responsible for asset impairment, they are mentioned below:
As stated in the annual report of Myer 2017, it accomplishes the needs cited in AASB 136. It has been detected that Myer has recognised $65,615,000 impairment due to adjustments and store exit prices, which is in line with “Paragraph 12(f) of AASB 136”. In this regard Cataldo and Anthony (2017), has cited that the price related to the store exit and asset impairments take into consideration net prices of stores and dispersal centre space full utilisation during or after the end of the financial year.
The business corporation examines its assets, plant and equipments, by following the impairment policy of non-financial assets (Investor.myer.com.au 2018). Myer identified an impairment of $4,542,000 in 2017 on assets, plant and equipments concerned with noteworthy commodities both from current and restrained functionalities. The assets concerned with the restrained functionalities are moved to assets being held for sale. Furthermore, Myer calculates goodwill by deducting impairment loss following actual identification. Other intangible assets are computed at cost from this accumulated depreciation and impairment loss is subtracted. In 2017, the business corporation has identified impairment loss $38,811,000 on intangible assets valued at $985,657,000.
Myer Holding Limited examines at the end of each financial year, whether there is any impartial proof that its receivables are impaired. The recoverable sum of the business corporation is being computed at the current value of the evaluated futuristic cash flows, which is rebated at the beginning effective rate of interest (Engel 2016). The short-term receivables are not rebated and it does not identify impairment provision for receivables unless proofs are being found.
Myer Holding Limited analyses the carrying values of the non-financial assets, goodwill and intangible assets for impairment. At the time of examining impairment, the sum of the recoverable asset is evaluated to recognise the margin of impairment loss. The recoverable sum is considered to be the higher between the value-in-use and fair value subtracted from selling price (Wu et al. 2015). An asset which is not producing any sort of uncontrolled cash flows, The recoverable sum is examined at the level of CGU. Therefore, the business corporation accepts impairment loss whenever the carrying cost of the asset or CGU goes beyond the recoverable sum. These accounting policies of Myer are parallel to the external impairment indicators stated in AASB 136.
Few methods are required to be addressed for determining asset impairments for Myer Holding Limited, which are shortly discussed below:
Reasonable and supportable cash flows:
The evaluations constructed previously need revisions (Frecknall-Hughes 2016). Myer Holding Limited requires constructing evaluations based on the current management-acknowledged budgets or evaluations. Moreover, these require to be carried out depending on acceptable and feasible hypothesis presenting the best evaluation of the economic consequences from the end of the management over the leftover useful life of the CGU or asset. Myer gives greater weight to external proof. For example, the cash predictions or flows are contrasted with the predictions of the experts for the retail sector along with the opinions of economic estimators and external analysts.
Compliance of value-in-use with AASB 136:
As stated by Gruber (2015), for calculating value-in-use, it is important to evaluate cash flows for assets in their present situation. With regards to Myer Holding Limited, the main limitations addressing the expectations to be made in value-in-use evaluations of cash flows are incorporated with future reshaping or adjustments along with capital investment. However, it does not identify the advantages and prices of future adjustments in the cash flow evaluations unless the business corporation is dedicated to adjustments and incorporated provisions.
Scrutiny of discount rate:
The risk-free rates of interest, which the Australian Central Bank has set are decreasing in many territories; furthermore, the rates of rebate are affected by other elements in impairment calculations (Islam, Miah and Fakir 2015). These elements involve price of capital, cash flow risks and corporate borrowing rates that could increase the overall rate of discount. Myer uses the “Capital Asset Pricing Model (CAPM)” for determining the rebate rate. This helps the management of Myer to vary many inputs under existing market conditions. Even though there is decrease in national base rates, there are rises in risk premiums, which have offset the decrease for Myer. However, the business corporation requires to consider currency risk, country risk and cash flow risk by using varied rates for different periods based on risk levels.
If market capitalisation is lesser than total value of assets, it activates an impairment examination (Maas, Schaltegger and Crutzen 2016). When any situation like this appears, Myer encounters a feasible problem to accurateness of expectations, which is justified. This is because the market capitalisation of Myer has declined from $696.03 million in 2016 to $693 million in 2017 and as cited in “Paragraph 12(d) of AASB 136”, Myer requires to carry out an impairment assessment.
Reconciliation of conclusion to existing environment:
After completion of the financial computations, it is important for any business corporation to cross-check the ultimate answer by comparing with the external market information (Macve 2015). The management of Myer revises estimations regarding to cash flow increase and then they are compared with the present evaluations of economic growth by gaining expert reports.
Assets are said to be impaired when their carrying costs go beyond the recoverable values. This shows that a business corporation earned money on an asset; moreover, the varying conditions made the purchase to be net loss. Various kinds of data could help in determining asset impairments for Myer and they are discussed below:
Testing and identification:
The administrative variances, substantial variances in company viewpoint or consumer choices and alteration in the usage rate of an asset could result in impairment of tangible assets. Furthermore, it is not always feasible to examine all the assets for profitability in all accounting years. Rather, Myer requires to wait until indirect changes or event exemplifies that any particular carrying value could not be recovered.
Forms of triggering events:
There are certain incident activating verges that could be explained and identified easily. Suppose, Myer requires to examine for impairment at the time gathered prices are higher than values actually assumed of preparing or purchasing an asset. More specifically, it is more expensive than the assumptions prepared for acquiring any business asset (Martin, and Roychowdhury 2015). The other activating incidents are incorporated with each other; an asset could be related with the history of existing period losses or losses related to operating cash flows. For Myer, the assets could portray a movement of decline in market amount. Moreover, few activating incidents exist owing to indistinct explanations. If Myer faces negative variances in legal influential dynamics or normal economic conditions, the management could carry out impairment examinations except a wide group of probable interpretations for adversity.
Determination of asset impairment:
Myer is needed to rate assets correctly at fair value, in accordance with AASB 136 so that the financial reporting quality could be improved (Asic.gov.au 2018). The categories of similar assets require to be examined collectively having the set of examination at the lower level of recognisable cash flows, which are considered to perform separately of other assets. With the help of such examinations, Myer would be able to determine fairly, if the carrying amount is higher than recoverable amount incorporated with the asset usage and removal. In case, this could be exhibited, Myer could carry out for impairment examinations.
As cited in AASB and IFRS, it is important for any business corporation to assess the requirement of conducting impairment examinations with regards to non-current assets other than goodwill and the examination is mostly conducted at the end of a financial period (Schaltegger, Etxeberria and Ortas 2017). As Myer has huge numbers of reporting units and their size is large relative to goodwill acquisition, the managers could gain higher compliance in goodwill allocation. Such basic compliance in goodwill allocation provides the chance of later avoiding or overestimating losses from impairment. The goodwill could be dispersed to units, in which consequent impairment could be concealed by the internally produced profits or losses that are not identified. The managers could allocate goodwill either to units of low growth so that impairment could be increased or to units of greater growth for slowing impairment (Stanley 2017). Hence, it could be stated that the management of Myer has enough value of flexibility in determining future losses from impairment. Moreover, the business corporation could rearrange its reporting framework in future periods adequately resulting to redistribution in the accession of goodwill.
On the basis of the above assessment, it is essential that Myer identified an impairment of $4,542,000 in 2017 on property, plant and equipment related to noteworthy commodities from both current and restrained functionalities. The assets related to restrained functionalities are moved to assets being held for sale. Furthermore, Myer calculates goodwill by deducting impairment loss following proper identification. In case of Myer, the main limitations inscribing the estimations to be prepared in value-in-use assumptions of cash flows are incorporated with future rearrangements or adjustments along with capital investment. However, it does not identify the advantages and prices of future adjustments in the cash flow assumptions unless the business corporation is dedicated to adjusting and incorporated provisions.
After completion of the financial computations, it is important for any business corporation to cross-check the ultimate answer by comparing with the external market information. The management of Myer revises the estimations regarding the cash flow growth and then they are compared with the current assumptions of economic growth by gaining expert reports. The categories of similar assets require to be examined collectively having the set of examinations at the lower level of similar cash flows, which are considered to operate autonomously of other assets. With the help of such examinations, Myer would be able to determine fairly, if the carrying amount is more than recoverable amount incorporated with the asset usage and removal. In case, this could be exhibited, Myer could carry out for impairment examination. Lastly, it has been detected that the management of Myer has sufficient value of flexibility in determining future losses from impairment. Furthermore, the business corporation could identify its reporting framework in future periods adequately resulting to reapportion in the accession of goodwill.
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 12 Oct. 2018].
Abernathy, J.L., Beyer, B., Masli, A. and Stefaniak, C.M., 2015. How the source of audit committee accounting expertise influences financial reporting timeliness. Current Issues in Auditing, 9(1), pp.P1-P9.
Asic.gov.au., 2018. 17-162MR ASIC calls on preparers to focus on the quality of financial report information | ASIC - Australian Securities and Investments Commission . [online] Available at: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2017-releases/17-162mr-asic-calls-on-preparers-to-focus-on-the-quality-of-financial-report-information/ [Accessed 12 Oct. 2018].
Cataldo, I.I. and Anthony, J., 2017. CPA Yaeger Review-Financial Accounting and Reporting. Oxford Press.
Engel, C.J., 2016. A Primer on the Accounting and Reporting Requirements for Not-for-Profit Organizations. Journal of Public Management Research, 2(1), p.14.
Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting decision making: Evidence from accounting conservatism. Contemporary Accounting Research, 32(3), pp.1285-1318.
Frecknall-Hughes, J., 2016. Financial Accounting and Reporting. Cengage Learning.
Gruber, S., 2015. Intangible values in financial accounting and reporting: An analysis from the perspective of financial analysts. Gabler Verlag.
Investor.myer.com.au., 2018. Myer Investor Relations. [online] Available at: https://investor.myer.com.au/Reports/?page=Annual-Reports [Accessed 12 Oct. 2018].
Islam, M.S., Miah, M.S. and Fakir, A.A., 2015. Environmental Accounting and Reporting-An Analysis of Bangladeshi Corporate Sector. Journal of Business Studies, 2(1/2).
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-248.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Martin, X. and Roychowdhury, S., 2015. Do financial market developments influence accounting practices? Credit default swaps and borrowers? reporting conservatism. Journal of Accounting and Economics, 59(1), pp.80-104.
Myer., 2018. About Us. [online] Available at: https://www.myer.com.au/c/about-myer/the-company/about-us/content-about-us.html [Accessed 12 Oct. 2018].
Schaltegger, S., Etxeberria, I.Á. and Ortas, E., 2017. Innovating corporate accounting and reporting for sustainability–attributes and challenges. Sustainable Development, 25(2), pp.113-122.
Stanley, R., 2017. Influence of Classification of Accounting Entities for Reporting in the Context of Legislative Changes1. STRATEGIC MANAGEMENT, 22(1), pp.7-11.
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