Discuss about the Financial Reporting Surveillance Program.
The main aim of his report is to analyze and evaluate major aspects related to the impairment testing of one of the Australian Securities Exchange (ASX) listed companies. For this report, Woodside Petroleum Limited is taken into consideration (woodside.com.au 2018). The first part of this report focuses on the role of Australian Securities & Exchange Commission (ASIC). The second part of the report aims in the explanation of impairment testing in the selected company. The last two parts of the report focuses on the qualitative characteristics and objective of general purpose financial reporting respectively.
ASIC is an independent commonwealth governing body of Australia with the vision to fund the economy for economic growth. ASIC has three major roles for ensuring the financial wellbeing of Australia. The first role of ASIC is to promote the trust and confidence of investors and consumers (asic.gov.au 2018). The second role is to ensure fair and efficient market management. The third role is to provide efficient registration services. In addition, in case of the financial reporting surveillance program, the main aim of ASIC is to bring improvement in the quality of financial reporting (asic.gov.au 2018).
ASIC’s findings from the review of financial reports includes issues related to asset valuation and impairment testing, revenue recognition, tax accounting and estimation and judgment of accounting policies (asic.gov.au 2018). The main issue related to the asset valuation and impairment is that the companies are identifying cash generating units at high level in spite of the presence of large independence cash inflow. Moreover, as per the findings, companies are using discounted cash flow method for the estimation of fair value (asic.gov.au 2018). In addition, some of the business entities are not disclosing information related to sensitivity analysis, key accounting assumptions and techniques for fair value method (asic.gov.au 2018). In case of revenue recognition, two major issues are recognition of commission on property development contracts and time to bring the revenue to account. In case of taxation, the main issue is related to the tax accounting techniques and sufficiency of future taxable income for the recovery of deferred tax assets. Lastly, as per the findings from ASIC, business entities are required to bring improvement in the quality and completeness of the disclosures of estimation uncertainties (asic.gov.au 2018). These are the major findings.
In the accounting operations of Woodside Petroleum Limited, the accounting for impairment is considered as one of the major aspects. From the 2017 Annual Report of Woodside Petroleum Limited, it can be observed that the Oil and Gas Property of the company is subject to impairment and impairment testing and the company follows certain procedures for the testing of impairment along with the impairment calculation. These aspects are discussed below:
Impairment testing in Woodside Petroleum Limited
Woodside Petroleum Limited assesses the carrying amounts of oil and gas properties on half-yearly basis for the determination of the impairment or impairment reversal indication for the ashes that were impaired previously (woodsideannouncements.app.woodside 2018). For this purpose, three major indicators of impairment and impairment reversal are the change in the future selling price, change in future cost and change in reserve. The company uses possible future price commodities at the time of the assessment of potential indicators of impairment and impairment reversal. Thus, the recoverable amount is estimated based on these indicators. In Woodside Petroleum Limited, the assessment of oil and gas properties is done for impairment indicators and their impairment is done based on cash generating unit (CGU) (Amiraslani, Iatridis and Pope 2013).
For the calculation of impairment in Woodside Petroleum Limited, the company determines the recoverable amount of an asset or CGU based on higher of its value and fair value after deducting the costs of disposal (Nobes 2013). Estimation of future cash flow is used for the determination of value in use after considering the risks of the assets. After that, they are discounted by using the appropriate discount rate. Most impotently, it needs to be mentioned that Woodside Petroleum Limited writes down an asset or CGU and recognizes the impairment loss in the income statement in case the carrying amount of the assets or CGU exceed their recoverable amount (woodsideannouncements.app.woodside 2018).
From the 2017 Annual Report of Woodside Petroleum Limited, it can be observed that the company has $19,398 million and $19,376 million as net carrying value of the oil and gas properties in the year 201 and 2016 respectively. At the same time, the recoverable amounts of these assets in 2017 and 2016 are $33,292 million and $32,164 million respectively. By applying the above-discussed formula of impairment calculation, it can be observed that the company does not have the carrying value of oil and gas properties more than their recoverable amount. For this reason, Woodside Petroleum Limited does not have any impairment and write down of assets in the financial year 2016 and 2017 (woodsideannouncements.app.woodside 2018).
Relevance and Faithful Representation are the fundamental qualitative characteristics of financial information (aasb.gov.au 2018). As per the 2017 Annual Report of Woodside Petroleum Limited, the company discloses all the information about the assets subject to impairment that is oil and gas properties. Although the company does not have any impairment loss in 2016 and 2017, they have the obligation to show the amount of impairment losses in the income statement. In addition, the company provides the necessary description about the impaired assets and CGU of the business (Nobes 2014). It implies that Woodside Petroleum Limited uses to faithfully represent all the relevant information about impairment that satisfies the fundamental qualitative characteristics of financial information. In addition, Woodside Petroleum Limited releases all this information through their financial statements in the annual report at a particular time of the year and this aspect satisfies the enhancing qualitative characteristic of financial information that is timeliness management.
Qualitative characteristics of financial reporting
As per AASB conceptual framework, the main objective of general purpose financial reporting is to provide financial information about the business entities to different users like investors, lenders and other creditors (aasb.gov.au 2018). This information helps the users in determining the financial position and financial performance of the business entities. From the above discussion, it can be seen that Woodside Petroleum Limited has faithfully represented all the relevant information about the impairment of their oil and gas properties. It implies that the different users can obtain all the relevant information about asset impairment from the financial statements of Woodside Petroleum Limited (Henderson et al. 2015). It will help them in determining the financial position of Woodside Petroleum Limited by determining the asset position in the entity. Thus, based on the above discussion, it can be said that the impairment related disclosure of Woodside Petroleum Limited fully complies with the objectives of general purpose financial reporting.
From the above discussion, it can be observed that the main role of ASIC is to ensure the financial wellbeing of Australian by ensuring the trust and confidence of the Australians. In addition, ASIC has discovered many issues related to the impairment accounting, revenue recognition, tax accounting and others in the business entities. The above discussion also states that Woodside Petroleum Limited carries on their impairment related accounting treatment in a systematic manner by disclosing all the relevant information about oil and gas asset impairment in a faithful manner. It can be found from the above discussion that the company does not have any asset impairment in 2016 and 2017. It is recommended to Woodside Petroleum Limited that they should show the detailed calculation showing the fact that the carrying value of oil and gas properties is not more than the recoverable value of the assets. It will make their impairment calculation more effective and transparent.
Aasb.gov.au. (2018). Conceptual Framework for Financial Reporting management. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 22 Apr. 2018].
Aasb.gov.au. (2018). Impairment of Assets. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf [Accessed 22 Apr. 2018].
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.
Asic.gov.au. (2018). 16-205MR ASIC review of 31 December 2015 financial reports | ASIC - Australian Securities and Investments Commission . [online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-205mr-asic-review-of-31-december-2015-financial-reports/ [Accessed 22 Apr. 2018].
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Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Nobes, C., 2013. The continued survival of international differences under IFRS. Accounting and Business Research, 43(2), pp.83-111.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Woodsideannouncements.app.woodside. (2018). Annual Report 2017. [online] Available at: https://woodsideannouncements.app.woodside/14.02.2018+Annual+Report+2017.pdf [Accessed 22 Apr. 2018].
Woodside.com.au. (2018). About Us | Woodside Energy. [online] Available at: https://www.woodside.com.au/About-Us/Pages/about-us.aspx [Accessed 22 Apr. 2018].