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Impairment of Assets: Policies Adopted and Challenges Faced by Reliance Worldwide Corporation Limited

Discuss about the Disclosures Required In Financial Reporting- Impairment Disclosure And Analysis As Per AASB 136.

As the title suggest the report revolves around the impairment of assets. Each company operating across the globe is involved in increment of its Assets base. Higher asset base of any company shows its strong nature of working in the economy. For high asset base, correct valuation of asset is required to be done after considering the necessary depreciation and impairment. This report helps to understand impairment of asset in detail.  The report has been framed using proper structure and is divided into major five parts. First part helps to understand impairment policies adopted by the company and their disclosure in annual report of the company. Second part describes the major challenges faced by the board while checking the asset for impairment. Third part describes that the chosen company discoursers are as per the required principles laid in AASB 136. The forth part helps in understanding the need of proper impairment disclosures which ultimately helps in achieving the objective of general purpose financial reporting. The report has been ended with proper conclusion and recommendations. Reliance Worldwide Corporation Limited has been chosen for the analysis. The report has been prepared using the information present in annual report of the company for the year ending 30th June 2017 along with secondary data available on reliable internet sources.

Reliance Worldwide Corporation Limited is the company having head quarters in Australia and is doing business across the Globe. The company's annual report for the year ending 30th June 2017 reported the following impairment which has been done by company:-

  1. As per Note no 10, Property plant and equipment the company has a policy of recognizing the asset after having accumulated depreciation and accumulated impairment deducted from carrying amount of asset. Any impairment recognized in property plant and equipment has been charged to statement of profit and loss for that particular year.
  1. As per Note No 11 of the Annual report, Goodwill and other unidentified intangibles consists of goodwill and other intangibles acquired in business combination which has been tested for impairment annually or more regularly as the event for its impairment comes. The goodwill of the company of $ 44.6 million belongs to Asia Specific region Goodwill which has been impaired and determined that the goodwill is recoverable. There are the cases where the goodwill has not been impaired and not even tested. It is because of the fact that the business combination from where the goodwill has been accounted for has completed in the month of June 2017.
  1. As per Note No 12, Other intangibles such as License fee has been valued at carrying amount less accumulated impairment which has been tested on Cash Generating unit basis. On the hand development costs are recognized at initial level which was valued at cost less accumulated impairment.
  1. As per Note No 17, the impairment provision has been made by the company in respect of the receivables. The company is assuming future receivables as bad and creating the provision on estimated basis to find out actual cash flows operations from cash generating units.

Many challenges have been engaged in doing testing of an asset for impairment. Some of the issues have been listed below:

  1. The first and major issue of identification of correct of correct discount rate after considering all the situations and elements according to nature and working of the company. Most of the companies consider the Weighted Average Cost of Capital as discount rate which in turn is without considering the effect of risk available in the market or industry in which company operating. For example, in the impairment of Asia region Goodwill, the discount rate has been calculated using 5 different assumptions which not based on actual market conditions (Dolson, 2015).
  2. The second issue deals with the regularity of the impairment testing. The selected company checks for the impairment at reporting date. It is difficult to include all the impairment of the asset which has been done during the year. This difficulty can be removed by having the system of continuous impairment testing of asset.
  3. The third major issue involved is extent to which the impairment has to done for particular asset. Similar asset shall be combined in cash generating unit as a result impairment testing cannot done to the full extent otherwise. The cash generating units should be identified according to geographical locations, nature and size so that the testing level of impairment can be determined (Chow and Marchev,2012).
  4. The next issue involved is the estimation of tax rate. The impairment testing should done using similar cash flows with similar discount rate. The rate so utilized shall be after tax. (Riedl, 2014).
  5. The other major issue which has been faced in the chosen company is identification of  difference in fair value or value in use. Fair value is external and value in use in internal generated value. Confusion among the two values makes the impairment testing a difficult task for the management of the company.

The following are the disclosures made by Reliance Worldwide Corporation Limited in its annual report for the period ending 30th June, 2017 with are required to be disclosed as per the requirements of AASB 136 :-

  • The first requirement that impairment loss shall recognized and disclosed separately for individual asset, goodwill or cash generating unit. The company in Note 11 disclosed the impairment for goodwill and in Note No 17 disclosed the impairment for Trade receivables separately.
  • As per AASB 136, the assumptions used in determination of discount rate which has been utilized to calculate value in use for impairment should be mentioned. The company in Note no 11 has mentioned the four assumptions which has been used for the calculation of the discount rate which ultimately help in determination of value in use (Reliance Worldwide Corporation, 2017).
  • The company has disclosed the each class of asset or cash generating unit separately as per AASB 136 requirements. For example, the company has disclosed in Note no 10 the carrying amount of different components of the property, plant and equipment for beginning of the reporting period.
  • The company has disclosed in Note no 17 the amount of impairment loss as separate line item to comply with the requirements of the Para 126 of AASB 136 (AASB 136, 2010).

The objective of General purpose financial reporting is to provide full and accurate information to its different stakeholders along with future stakeholders so that they can take decisions regarding the investments in the company. The full information to users can be communicated through annual report which contains the financial information along with policies adopted by company in generation of financial information.

The disclosures in annual report regarding impairment of asset has been consistent with requirements of the general purpose financial reporting in the following manner:-

  • The major reason of alignment can be shown from the disclosures made regarding the each and every aspect of the impairment process like disclosure of carrying amount, value in use fair value which helps the users to calculate the impairment amount by themselves showing the simplicity of presentation of information.
  • The disclosure of assumptions used in determination of discount rate and its calculation shows the transparency feature which is required as per financial reporting disclosures. This helps the investors to analyze the situations which has been assumed and not actual in determination of the value in use.

The above points shows that the disclosures as per AASB 136 in annual report of the company is ultimately follow the objective of financial reporting disclosures (Lohrke, 2012; Colson, 2015).

Conclusion And Recommendation

Disclosures in annual report of any company are mandatory requirements as per the corporation act, 2001 and are main objectives of preparation of annual report by the company which facilitate its investors in decision making. Asset and asset valuation is major concern of the investors because their hard core money has involved in generation of the asset. In valuation of assets, impairment is the major factor which can manipulate the value in such a way that the company can enhance its performance in one transaction. So, impairment testing along impairment disclosures is the main issue for consideration by different users of accounting information. To conclude the report, it has said the impairment disclosures in Reliance Worldwide Corporation Limited has been done as per the rules laid in AASB 136 and all the relevant disclosures have been made in annual report of the company despite of some pendency in respect of assumptions made by company.

It is recommended to have the test for impairment of assets on regular basis or as and when the need arises. Secondly, the company shall identify the cash generating units properly which shall be adequate to the needs of the company.

References

AASB 136, (2010), “Impairment of Assets”, available at https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf   accessed on 26-04-2018.

Chow E and Marchev M, (2012), “Impairment Issues to watch” available at https://www.pwc.com.au/assurance/ifrs/assets/ifrsinbrief-se-15may13.pdf   accessed on 26-04-2018

Colson, R.H., (2015), “General purpose financial statements”, The CPA Journal, 134(3), p.78 - 82.

Reliance Worldwide Corporation, (2017) available at https://www.rwc.com/accessed on 26-04-2018.

Dolson M, (2015), “A Look at Current Financial Measures” available at https://www.pwc.com/hu/hu/services/assets/ifrs_kiadvanyok/in_depth/testing_for_impairment_in_the_upstream_industries.pdf    accessed on 26-04-2018

Lohrke, C., (2012), “The effects of differing information presentations of general purpose financial statements on users' decisions” Journal of Information Systems, 12(2), pp.99-107

Renshall, M, (2012), “Added Value in External Financial Reporting: A Study of Its Aims and Uses in the Context of General Purpose Financial Reports” Institute of Chartered Accountants in England and Wales.

Riedl, E.J., (2014), “ An examination of long-lived asset impairments” The Accounting Review, 85(9), pp.936-945

Zucca, L.J., (2012), “A closer look at discretionary write-down’s of impaired assets”,   Accounting horizons, 58(5), pp. 52-71.

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