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Assets tested for impairment

Discuss about the Determinant of systematic financial exposure.

The given report aims to throw light on the impairment component and the assumptions, which have been used by AMP Limited to prepare their financial statements and conduct the impairment tests on the given assets. The report shall also elaborate on the procedures of impairment testing which are often used by the company and describes the subjectivity that will be involved in the given procedure of conducting the given test (Amiraslani, Iatridis & Pope, 2013). The annual report of the chosen company has been taken for the year ended as on 31 December 2016. AML Limited is a bay area sales agency, which promotes various interior decoration products. It has a large variety of flooring products for end users, architects and various design clients.  It has products like rugs, flooring equipments, furniture and other interior item (, 2018). The company is established in Australia and makes use of a wide variety of experience to inculcate new ideas and experience for the given consumers.

An impaired asset of a company can be defined as an asset, which has a market value less than that of the carrying value of the given asset. The assets that are most likely to get impaired are the fixed tangible assets like property, plant and equipment. Intangible assets include accounts receivable, goodwill and others (loans, retirement & education, 2018). When the asset is impaired against its carrying value , the loss incurred is recorded in the income statement of the given company. After this procedure is followed, the asset reflects a reduced carrying cost and the given adjustments shall be recognized as a loss and this shall result in the reduction in the value of an asset. 

As per the annual report of the given company, AML Limited for the year ended as on December 2016, the company tested the given assets for impairment-

  • The Goodwill as well as the intangible assets have not been amortized and so it is tested for the impairment criteria annually or even frequently which means for more than 1 time in an year if there results any changes in a circumstance or if there occurs a particular event which may indicate that the asset may be required to be impaired. This shall result in the asset being carried on to the financial statement at a reduced cost in a method by which the accumulated losses are taken on the account of impairment (Amiraslani, Iatridis & Pope, 2013). Other assets, which are plant, property, investors and equipment, may be tested for the impairment when there is an indication from sources that the amount they have been carrying will not be recoverable.

Like stated earlier, the assets except the goodwill and the intangible assets might be tested for impairment in cases where an indication is received that the carrying amount of the given asset may not be able to be recovered. However, there may arise cases whereby the intangible assets and other goodwill that are not amortized earlier may be tested for impairment annually or may be tested for more than once in a year. This may happen when any circum stance or an event indicates so (Andrews, 2012). For the assessment of impairment, the given class of assets is grouped together at their lowest levels, which can be easily identified as a separate cash inflow and are independent of cash inflows of the other classes of assets, which are the cash generating units. The non-financial assets except the goodwill one on which the impairment has been analyzed because there are certain possibilities of the reversal o the same at each date of reporting.

Method of conducting the impairment test

The given company incurred the given impairment expenses for the year ended as on 31st December 2016:

  • Financial assets-During the given period the give company AMP Limited recorded a total impairment, which amounted to $668 million on the goodwill. The total amount was incurred on goodwill itself. 

AMP limited makes several assumptions and estimates, as they are extremely concerned regarding their future. The given outcomes of the accounts by definition need to be equal to the associated actual outcomes. Certain estimates and mistakes that carry considerable risks and can lead to material adjustments to the particular asset carrying the value to the next accounting year should be discussed and disclosed with the help of notes at the end of the accounts (Cotter, 2012).  These judgments need to be given here as per the accounting requirements. As the market goes through an adverse condition and there occurs a continuous downturn of the market in order to assess the recoverable amount for other tangible assets and the goodwill for which the cash was generated in the company. The given recoverable amount is then calculated and computed based on the value in use. Projections of cash flows are also used for these calculations, which are based on financial forecast, which is prepared based on the last five years. It is measured as the given difference between the carrying amount and the present value estimated future cash flows, which have then been discounted at the original effective rate of interest (Fitó, Moya & Orgaz, 2013).

  • EBITDA/Sales margin
  • Discount rates
  • Growth rates using the extrapolate flows of cash beyond the period of forecast

As per the accounting rule IAS 36 on the Impairment of assets it is generally perceived that it is a standard in the IFRS and demands that the subjective interpretation can be adaptable with regard to the given managerial requirements and also does not limit the creative accounting. It can be reflected from the annual report of AMP Limited that there is a lot of involvement of subjectivity in the given statement while the management was under the process of carrying out the impairment test (, 2018). This could be done because the management had the given opportunity to exploit their discretion and they carried out the goodwill impairment test in an opportunistic manner. This is further proved by the fact that the allocation of goodwill and the computation of the recoverable amount when there does not exist any availability of the active prices, as the given goodwill is a subject of discretion. 

After analysing the assessment, which was undertaken it could be, recognized that, the most difficult part of the given assessment was the indication of the impairment. As it is as a stated fact that the indication depends on a wide variety of internal as well as external factors (Carlin & Finch, 2011).  The frequency at which the impairment test may be conducted may depend on the discretion of the management (Jennings & Marques, 2013). Hence, it is believed that there are chances that the management will carry out the test by analysing the opportunity in a case where there is a value downturn.

Impairment expenditures

Impairment loss is often calculated as the difference between the carrying amount of the given asset and the recoverable amount of the given asset. The recoverable amount, which is present, is higher among the value in use and the fair value of the required asset is reduced by the given disposable cost (Carlin, Finch & Laili, 2009). The determination of the fait value is done using a sales agreement or the provided value of the asset in the given active market in which the asset is traded on the information about the availability of the asset is received (Md Khokan ,Sheikh & Mollik, 2014).  The value in use as per IAS 36 is the present value of cash glows, which can be received from the asset.

As per the IFRS 13, fair value is determined with the help of-

  • Sales agreement
  • The availability of the best information to reveal the given amount at which the company is going to sell the highlighted asset
  • The market value of the asset.

Nearly 50% of the companies who make the use of the GAAP or the IFRS have been affected by the changes in accounting rules. The status currently states that the companies who tend to follow the US GAAP or the IFRS have certain commitments and their given leased assets come up to around 3.3 trillion (Carlin & Finch, 2010). Out of these figures, there are 85% of companies who have stated that they do not report in their balance sheet as they treat these figures as operating leases. In order to compensate this, the investors in hand generally take care of the estimates, which are inconsistent and incomparable (Lee & Hooy, 2013). Hence, the statement has been given that the former accounting standards do not reflect the reality.

According to the previous accounting standards, the companies only tend to report around 85% of their lease agreements, which was classified under the operating lease segment. They do not reflect this on the balance sheet as they created actual liabilities. This resulted in a number of companies going bankrupt during the financial crises period because they were unable to adjust to the economic reality on time (Rennekamp, Rupar & Seybert, 2014). They had certain commitments to the long-term operating leases, as their balance sheets were quite lean. Hence, the given lease liabilities in the balance sheets were 66 times more when compared to the debt of the balance sheet. 

Comparability cannot be done using the former accounting systems. The airline industries tend to use the leases under operating leases and tend to not record it under the balance sheet.  Due to this reason, an airline company whose whole fleet is under rent accounts will differ from the one who purchase their fleets even though the financial obligations of the airline companies are almost the same (Ramanna & Watts, 2012).For this reason, there will be no level playing field among the given airline companies . As the new standard will be introduced, all these leases will be taken as assets and the lessees will account as a liability. With this, the problem is expected to be resolved.

Assumptions and estimates used by the company for conducting impairment test

As the new standard will be introduced, it is expected that it will almost every company will be affected by the new standard. The changes that will occur are always controversial and hence, they might not be popular among all. The given changes will be brought about in the income statement as well as the balance sheet. Hence, it is believed that these changes will have bigger impacts (Marshall, 2016). Due to these statements, all departments of a business will be affected and they need to change their process to abide by the new accounting standard.

With the given changes in the former accounting standards, the companies shall be treating the leases in a new manner. With the given change the investors shall be able to have an entire picture of the company`s financial position at once and this reflects transparency. They can even compare between different companies and invest accurately. The update of the IFRS 16 will outweigh the costs and result in better decisions. 


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

Amiraslani, H., Iatridis, G.E. & 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. (2018). Retrieved 23 January 2018, from

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

Carlin, T.M. & 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. & 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 & 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.

Fitó, M.À., Moya, S. &  Orgaz, N. (2013). Considering the effects of operating lease capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 42(159), pp.341-369. (2018). IFRS. [online] Available at: [Accessed 23  Jan. 2018].

Jennings, R. & Marques, A. (2013). Amortized cost for operating lease assets. Accounting Horizons, 27(1), pp.51-74.

Lee, C.H. & Hooy, C.W. (2013). Determinants of systematic financial risk exposures of airlines in North America, Europe and Asia. Journal of Air Transport Management, 24, pp.31-35.

loans, H., retirement, S., & education, N. (2018). Bank Accounts, Super, Insurance & Home Loans - AMP. Retrieved 23 January 2018, from

Marshall, D. (2016). Accounting: What the numbers mean. McGraw-Hill Higher Education.

Md Khokan Bepari, Sheikh F. Rahman & Abu Taher Mollik. (2014) Firms' compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics, Journal of Accounting & Organizational Change, Vol. 10 Issue: 1, pp.116149,

Ramanna, K. & Watts, R.L. (2012). Evidence on the use of unverifiable estimates in required goodwill impairment. Review of Accounting Studies, 17(4), pp.749-780.

Rennekamp, K., Rupar, K.K. & Seybert, N. (2014). Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment. The Accounting Review, 90(2), pp.739-759.

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