Scope of AASB 136 for Impairment of Assets
Discuss about the issue of impairment of assets of any Australian Company through the set guideline of Australian Accounting Standard136.
This report is to be made for Dawson Ltd, a public company for the board of directors to ensure proper guidance regarding asset valuation and fund raising issues. The basic guidance will be provided by the accounting standard set by Australian Accounting Standard Board through its different standards for different purposes of financial accounting. Basic objective is to ensure prudence and transparency to the stakeholders of the company for assuring proper maintenance of books of accounts of the company as per guideline set by Corporation Act, 2001 of Australia. This article will cover the scope of AASB 136 regarding impairment of assets, which will follow the purpose of impairment test. This report will also emphasize on the role of impairing test of assets in respect of the use of Cash Generating Units or CGU instead of insisting on single assets. The scope of impairment test for the intangible assets like goodwill is to be discussed, too. The role of disclosure in the annual report for impairment of assets under AASB 136 along with its requirement for each class of assets is to be discussed. The penultimate part of this report will suggest the fund raising process for the company to finance its two new projects from two options of IPO and private placement. This report will end with necessary recommendation in order to make the report complete and informative in all aspect.
Scope of AASB 136
This standard is applicable to all assets except the following assets for financial accounting of any company for the purpose of impairment process of assets:
Inventories of any business which is covered under AASB 112- Inventories;
Assets which are arising from construction contracts and is covered by AASB 111- Construction Contracts;
Assets arising from deferred tax and are covered by AASB 112- Income tax;
Assets which are arising from employees’ benefits and are covered by AASB 119- Employee Benefits;
Assets which are falling under the head of financial assets and are covered by AASB 139 – Financial Instruments- Recognition and Measurement;
Assets arising from investment property, which are measured at fair value concept- AASB 140 investment property;
Assets classified as biological assets connected to agricultural activity, which are measured at fair value less cost of sell- AASB 141- Agriculture;
Assets classified as deferred acquisition costs and intangible assets which are generated from the contractual rights of an insurer falling under insurance contracts and covered within the scope of AASB 4 –Insurance Contracts’ AASB 1023- General Insurance Contracts and AASB 1038 –Life Insurance Contracts;
Purpose of Impairment Test
Assets falling under the segment of non-current assets alias disposal groups which are classified as held for sale as per and in accordance with AASB 5- Non Current Assets Held for sale and Discontinued operations.
The above narration clearly indicates the type of assets for which AASB 136 is not applicable. Hence all assets other than these above assets will fall under AASB 136 for impairment process. Now we have to identify the type of assets for which this standard is applicable. The applicability of this standard for the financial assets is as follows:
Subsidiaries as per definition in AASB 10 Consolidated Financial Statement;
Associates, as per definition specified in AASB 128- Investments in Associates and Joint Ventures;
Assets of joint ventures as per definition of AASB 11- Joint Arrangements;
The above directive makes it clear for the scope and applicability of AASB 136 for different type of assets with the eligibility criteria for those assets. (AASB, 2014)
Purpose of impairment test is endorsed by AASB 136 standard. The purpose of this practice for financial accounting is to ensure that the asset of any business entity should not be carried at their recoverable amount in the specified statement named as Consolidated Financial Position. Any asset is considered to be treated with impairment in case of the inability of the entity to recover the carrying amount of the asset in the operation process of the business or for disposing it through sales. Basic reason for carrying out impairment process by testing of assets is to identify the carrying amount which may not be able to reflect its recoverable amount. The reasons for this activity are:
The determination of carrying amounts of any asset of any business entity is the result of estimation done by the accountant as per his judgement;
Depreciation plays a vital role for the purpose of allocation of cost of any asset and does not endorse the concept of recoverability of the asset into account.
To identify any asset for impairment as per AASB 136, the business entity has to assess the impairment scope of that asset at the end of any specified financial reporting period. To encourage the practice of impairment test, this indication must be considered with proper care. The entity, in that case, must do the exercise to identify the recoverable amount of that asset. The list of assets to be passed through impairment test each financial period, even if, there is no indication of requirement to impair those assets:
Use of Cash Generating Unit for Impairment Testing
Intangible assets with the feature of indefinite useful lives;
Intangible assets which are not yet available for use;
Goodwill acquired through the process of combination of business.
The basis of impairment testing needs a logical comparison between the recoverable amount of any asset with the higher of the value of that asset in use and respective fair value of that asset less costs of disposal. Considered value in use demands:
An estimate of the probable cash flows expected by the entity to be derived from the asset
Expectation about the variety in respect of time factor of cash flow
The estimated price to bear the uncertainty inbuilt to the specific asset
This specified cash flow is based upon such data which are maintained in the form of financial budgets and respective forecasts.
It is observed that there is no cash flow for some assets, which are generated in independent nature. We can consider the example of a dairy farm where there are milking machines or the machines to extract cream from milk. These machines do not generate any type of independent cash flow, as the eventual type of cash flow is generated from the sale of milk products. While those machines are thought to be sold, they may be sold in separate way considering fair value less costs of disposal. If the management of the company decides to use those respective machines instead of selling them, the management should consider the impact of value in use of that machine is greater than the value of that machine through sales process. (coursehero, 2018)
This discussion will evolve about the judgment of cash generating unit to be practiced for impairment process of any asset. It is not always be possible to ensure assessment of any individual asset to identify for impairment. This is because that asset may not be able to generate cash flow to the operation process of the entity with independent status like other assets. Hence, the determination of asset value in use cannot be done with proper or close estimation so far fair value less costs of disposal is concerned. This situation leads to the need of practicing CGU exercise. CGU must be comprised of assets, which can be identified with consistency for the period except a justified change occurs. The determination of carrying amount of a CGU is to be done on the basis of consistency considering the determined recoverable amount of that CGU. Hence, the judgment of CGU determination is depending upon the urge of determination of the entity for their asset, which cannot be identified with their cash flow input to the operation.
Cash Generating Unit- Judgment and Factors for Determination
Cash flow of any asset should always be independent of other cash flows of assets. The determined CGU should always be the lowest aggregation of assets who generate independent cash flows. The factors for CGU determination is specified in AASB 136 Para 69 to 71; where main emphasis had been donned upon the style of monitoring by the management of operation of the entity: like business, product lines, specific locations or regions; and the thought of management in respect of asset management decisions of continuing with the asset or disposing the asset of the entity. If the management has the thought of selling off part of any business with the thought of keeping the viability of the business, the decision remains vital of how the business can be broken down and sold out at the same time. (Hero, 2017)
Goodwill, being an intangible asset, does not exist in air. Instead it has the existence in the group accounts, as it is not separable in nature from the net assets of the subsidiary, which had been acquired lately.
While doing impairment review of goodwill, the same can be practiced with the consideration of cash generating unit, which is determined by the collection of assets, which create together and independent flow of cash. CGU is normally being considered as subsidiary. So, during the process of impairment conducting, the carrying value will be determined as that of the net assets and respective goodwill of the subsidiary with comparison to the recoverable amount of the subsidiary.
When the question of assigning impairment loss arises to any specific assets within the CGU, if the asset is not particularly impaired, the axe comes upon goodwill first by way of writing it off and then balance amount is being allocated on pro-rata basis.
In case of acquisition of any subsidiary, treatment of goodwill has to pass through annual impairment review. This need ensures that the asset named goodwill is not being overvalued in the financial report. Goodwill is an asset with peculiarity in nature as it cannot be revalued and any occurrence of impairment loss will be automatically treated against charge of income. Goodwill is not considered as such asset, which is consumed in a systematic way or damaged and this situation does not endorse the concept of systematic amortization. (Glendon & Baker, 2018)
In the annual report of Woodside petroleum of 2017, it is mentioned that the recoverable amount of any asset or CGU of that asset is found as the higher of its value while in use and fair value of that asset less costs of disposal. Value, while in use, is determined through estimation of future cash flow with taking into consideration the specified risk to this asset followed by subsequent discounting it to its present value through use of any logical and appropriate rate of discount. If the carrying amount of any asset is exceeding its recoverable value, then that asset or its CGU is brought down by recognizing the impairment loss in the financial statement of profit or loss and other comprehensive income statement. For previously impaired assets, in case the recoverable amount of the asset is exceeding the carrying amount, the quantity of impairment loss is reversed. Precondition of this treatment is that the carrying amount of the asset or respective CGU is getting increased to the amount of revised estimate of the recoverable amount; but only to the extent of carrying amount of that asset would not exceed the determined carrying amount with the net effect of depreciation and amortization, in case there is no identification of impairment loss. As per the audited financial report of the company of 2017, the quantity of depreciation and amortization to total assets are calculated as 12,788 US Million dollars which is recognized through measurement of set guideline. (woodside, 2017)
Disclosures required under AASB 136 for each class of assets are given below:
The amount of derived impairment losses to be recognised in income statement for a certain financial period with specific notification in other comprehensive income statement where these impairment losses are shown;
The amount of reversal of impairment losses are to be recognised in income statement with specific insertion in the statement of other comprehensive income in which these specific loses are reversed;
The amount of impairment losses identified on re-valued assets is to be recognised in other comprehensive income for the specific financial period;
The amount reversal of impairment losses on reassessed assets are to be identified in other comprehensive income statement during the specific financial period.
As Dawson Ltd is in the process of initiating new projects, the need of fund is earnestly desired. There are two sources of fund raising processes- Initial Public offering and private placement out of which the discussion will b made related to IPO only.
Basic criteria for launching a successful IPO in Australia demands the following steps to be ensured by the public limited company:
Strong business plan;
Group and capital structuring;
Assurance of working capital status;
The board and corporate governance;
Status of public limited company;
Structure of the offering;
Due diligence process;
IPO regulatory bodies- ASIC and ASX;
Regulators-requirement and role;
Compliance of post IPO obligations (asx, 2013)
The recommendations are that the company should follow AASB 136 for determination of fair value of assets including tangible and intangible segments; derivation of asset value should be done on the principle of impairment process; and for fund raising to finance new projects, the company should comply with necessary requirements related to IPO to ensure interest of stakeholders.
Dawson Ltd is planning to start their accounting system upgraded as per the guideline of AASB. As this company is engaged in projects, they have to deal with huge assets including tangible and intangible types. To ensure proper evaluation of those assets, AASB has framed AASB 136 guideline with impairment process of asset evaluation. The company is also looking for fund raising for their new projects. In the above report, different aspects of these two domains are highlighted
AASB. (2014, July 1). Impairment of Assets- AASB 136. (AASB, Producer) Retrieved May 24, 2018, from AASB.gov.au: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPdec13_01-14.pdf
asx. (2013, August). A GUIDE TO LISTING IN Australia. (ASX, Producer) Retrieved May 24, 2018, from asx.com.au: https://www.asx.com.au/documents/professionals/DLA1284_-_A_Guide_to_Listing_in_Australia.pdf
coursehero. (2018). Explain why impairment testing requires the use of CGUs. Retrieved May 24, 2018, from CourseHero.com: https://www.coursehero.com/file/p791v9o/2-Explain-why-impairment-testing-requires-the-use-of-CGUs-The-impairment-test/
Glendon, T., & Baker, S. (2018, February 1). Impairment of Goodwill. Retrieved May 24, 2018, from ACCAGLOBAL: https://woodsideannouncements.app.woodside/14.02.2018+Annual+Report+2017.pdf
Hero, C. (2017). Explain the factors used in selecting a CGUs for an entity. Retrieved May 24, 2018, from CourseHero.com: https://www.coursehero.com/file/p75odl6/iii-Explain-the-factors-used-in-selecting-a-CGUs-for-an-entity-25-Cash-flows/
woodside. (2017). Annual Reprot 2017. (Woodside, Producer) Retrieved May 24, 2018, from Woodside Petroleum: https://woodsideannouncements.app.woodside/14.02.2018+Annual+Report+2017.pd