Applying AASB 136 Impairment Of Assets For The Wentnor Dairy Company Ltd In Essay.

The Wentnor Dairy Company Ltd has run for many years dairy farms in Tasmania. In addition to the farms it has vertically integrated by purchasing factories that produce milk products. These products are then are further developed in other factories owned by the company by producing high grade yoghurts.

The chief financial officer for the company has asked your advice on how AASB 136 Impairment of Assets, should be applied to the company’s various activities. In particular she wishes to correctly identify the cash-generating units (CGUs) for the company.

Write a letter to the chief financial officer of The Wentnor Dairy Company Ltd, including the following:

1. Define a CGU.
2. Explain why impairment testing requires the use of CGUs, rather than being based on single assets.
3. Explain the factors that the chief financial officer should consider in determining the CGUs for The Wentnor Dairy Company Ltd.

Pay particular attention to referencing your advice to the relevant paragraphs of the accounting standard.

Identifying Cash-Generating Units for The Wentnor Dairy Company Ltd

The main purpose of this assignment is to analyze the case study which is provided in the question. As per the case study, Wentnor Ltd id engaged in running and operation activities which are related to dairy farms and the business has further diversified to businesses such as purchasing of factories which is engaged in the production of milk and its related products. The chief financial officer of the company wants to identify the cash generating units of the business which can be done by adhering to the provisions of AASB 136 which is related to Impairment of Assets (Guthrie and Pang 2013).

The concept of Cash generating units (CGUs) is covered in the standard which is on impairment of assets which was issued by AASB. As per the standard, a cash generating unit is the smallest group of assets which can generate cash inflows on their own and are separate from other group of assets (Devalle and Rizzato 2012). The CBUs are the basis on which impairment charges on an asset is decided.

As per the provisions of AASB 136 which is on impairment of assets, the test for impairment of assets requires effective comparisons of recoverable amount which is to be higher of the asset value or the fair value of the asset less costs of disposal which is related to the asset. The value in use principle which is stated in the standard requires an appropriate measure of the cash flows that the business will be generating in the future, the expectation about the timing of the cash flow and the price of bearing uncertainty of the asset (Amiraslani, Iatridis and Pope 2013).

Some assets are there which does not cash inflows independently for the business so they have to be taken in a group which is formed of similar assets so that the cash flows from the group can be identified. Such a group is also called Cash Generating units (CBUs) which are also similarly grouped for impairment tests. As per the case study which is given on Wentnor Dairy ltd, the machines which are generally used by the business is for extraction or purification of milk and also producing other milk related products. These machines do not generate cash flows of their own but the business can generate cash flows from selling the milk and its products which are produced by such machines. This is primary reason due to which machines are grouped in CBUs for the purpose of identifying any impairment loss on the assets (Amiraslani, Iatridis and Pope 2013). The impairment of such assets needs to be done strictly following the provisions which are provided in AASB 136.

Financial Performance Analysis of The Wentnor Dairy Company Ltd

The basic things which the CFO is to do is first identify what are the cash generating units of the business following the provisions of AASB 136. The CFO of the business also needs to ensure that the assets of the business are grouped properly.

The CFO of the business needs to ensure that the cash generating units which are identified by the business are consistent from year to year basis unless some changes has taken place (Linnenluecke et al. 2015). The recognition of the cash generating units of the business requires accurate judgements on the part of the Chief financial officer which complies with the standard issued for impairments of assets which is AASB 136.

As per the requirement of part A of question 2, significant ratios are to be calculated some of which are considered to be financial indicators of the business and a measure of the performance of the business. The performance of the business will be judged on the basis of profitability, solvency, efficiency and other significant ratios whose calculations are shown in the appendix at the end of the assignment (Delen, Kuzey and Uyar 2013).

The various ratio which are being calculated is for the purpose of analyzing the financial performance of Woolsworth Group for the year 2017. The current ratio and acid test ratio of the company which shows the solvency of the business is computed to be 0.793 and 0.33 respectively which shows that the business might be facing certain liquidity problems. As the ratio are not greater than 1, this signifies a warning for the management of the company that such results need to be improved or the business might not be able to meet the current obligations of the business. In addition to this, the current ratio and acid test ratio falls under the category of solvency which is an important business area as such determine the management capability to take loans and repay the same. Short term loans are given by any financial institution on the basis of such solvency results. The gross profit margin of the company reveals that the company has improved its profitability from previous year analysis. The gross profit margin for the year 2017 is shown to be 28.71% which suggest tremendous improvement by the business. This suggest that the management has improved the operational activities and also successfully reduce the operational costs of the business and at the same time increase the sales volume of the company so that the business is able to generate more revenues. The receivable turnover ratio represents the efficiency ratios of the business. Generally, a higher debtors turnover ratio is preferred and the company’s debtor turnover ratio has improved from previous year and the same is shown for the year 2017 as 74.79 and the estimate was 70.00 in the year 2016. The improvement in the debtor turnover ratio signifies that the company has developed its credit policy and further strengthen the same. The return on assets and return on equity measures the profits which are made by the business on the basis of the assets employed by the company and the total equity which the company employed during the period. The return on equity and return on assets of the business is considered to be financial indicators of the company’s strength and financial performance. Both return on assets and return on equity have significantly improved which shows that the business is in the right tracks when profitability is considered (Halkos and Tzeremes 2012). The dividend payout ratio of the company is also favorable which suggest that the company responsibly meet the needs of the shareholders and follows the principle of shareholder’s wealth maximization. The dividend payout ratio is closely review by the investors before they take any investments decisions.

Recommendations for Shareholders of The Wentnor Dairy Company Ltd

From the above analysis, it can be recommended that the shareholders should invest in the shares of the company as the profitability of the company is decent, the company has strong organizational structure and the company has a favorable return on assets and return on equity estimates. In addition to this, the dividend payout ratio also suggest that the company is favorable for investors and the investors should invest in the shares of the business. However, the company needs to improve the liquidity ratios of the business thereby improving the liquidity condition of the business so that the company is able to effectively meet the current obligations of the business.

The current ratio and quick ratio of the business shows that the ratio for the year 2017 is 0.793 and 0.330 respectively. The ideal current ratio and quick ratio which a business must have is 2:1 and 1.5:1 respectively. The current ratio of Woolsworth Group is much lower which suggest that the company is facing certain liquidity problems. In addition to this, it also suggests that the current assets of the business are comparatively less as compared to the current liability of the business. The increase in current liabilities is the main reason due to which the current ratio and acid test ratio of the business is less than 1. The company needs to improve the current and acid test ratio and bring the level close to the ideal standards. Current ratio is considered to to be a financial indicator of the company’s strength and therefore the company needs to improve this ratio as soon as possible.

As per the paragraph which is given in the question relates to fluctuation which are caused when the business is engaged in a foreign exchange transaction and the currency needs to be translated into domestic currency. The extract of the notes to accounts section of the financial statements of Qantas ltd is given in the question. The extract is evident enough that the company is engaged in foreign trade or foreign services from which the business has generated foreign revenues as provided in the extract. Such a foreign revenue needs to be converted into Australian dollars if the business wants to display the same in the financial statements of the company. The company follows the policy of converting foreign assets into domestic currency at the exchange rate which is available on the reporting date of the business. The income and expenses of the business from foreign is converted in Australian dollars at the rate which is applicable on the date of transaction. The technique which is used mostly for translation of currency is current rate method. The current method which is used for translation of foreign currency is based on the current translation rate which is applicable in the markets.

The basic reason for the occurrence of foreign exchange translation difference is the dynamic changes which happens in the foreign exchanges rate from time to time basis. The changes in the foreign exchanges rates is due to a variety of reasons which are government regulations, inflation, stock market price variations, foreign trade policy and other factors as well.

Figure 1: (Chart showing direct method of cash flow statement)

Source: (Created by Author)

Figure 2: (Chart showing Working notes)

Source: (Created by Author)

Figure 3: (Chart showing indirect method of cash flow statement)

Source: (Created by Author)

The above charts show the computations of closing value of cash and cash equivalents for the year using both direct and indirect methods. In addition to this, cash from operating, investing and financing activities are also shown above.

Reference

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. London, UK: Centre for Financial Analysis and Reporting Research, Cass Business School. Standards, Regulations, and Financial Reporting, pp.199-223.

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

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Devalle, A. and Rizzato, F., 2012. The quality of mandatory disclosure: the impairment of goodwill. An empirical analysis of European listed companies. Procedia Economics and Finance, 2, pp.101-108.

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.

Halkos, G.E. and Tzeremes, N.G., 2012. Industry performance evaluation with the use of financial ratios: An application of bootstrapped DEA. Expert Systems with Applications, 39(5), pp.5872-5880.

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.