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You are required to prepare a report for the CFO considering whether impairment of assets is an issue requiring address for the firm. The report should, with reference to AASB 136:

a) With reference to Myer outline what evidence is there that impairment testing of assets is necessary;


b) With reference to Myer outline the processes required to be addressed in determining any asset impairments that might be necessary


c) With reference to Myer outline the information needed in determining asset impairments


d) Evaluate the flexibility management has available in the determination of asset impairments .

What is Impairment of Asset?

Impairment of asset is a major accounting adjustment. As per the AASB 136, Impairment of Assets, impairment refers to the permanent or the irreversible brought down of the value of the fixed or the tangible assets and intangible assets. Impairment happens when the carrying value of the asset is maintained at a higher level in relation to its recoverable value. This means that the asset of sold shall fetch a value which shall be below the carrying amount reflected in the books. The report that is prepared here is having the main intention to relate the media release that ASIC had done in ending May 2018. The media release is all about a declaration that has been given on the preparers of the financial statements to promote more focus on the quality with which the reports are presented. But the focus in this report is related to accounting estimates that is concerned with impairment testing related to assets. All this has been tried to be presented in context of Myer Holdings ltd. However, due to the changes in time, this company may have

The declaration brought upfront by the ASIC has extended high focus on the asset impairment adjustment which deals in accounting estimates. At the end of the report reading it would get clear that how important it is for any business corporation to periodically test assets for impairment. The steps that are required to be followed in any impairment of asset process are briefly discussed. An idea about the requisite information for impairment and the management flexibility for impairment shall be gathered. 

As per the announcement the directors and the auditors are responsible to ensure that:

  • The assumptions that have been laid by the company regarding its projections about the cash flows from the assets are adequate or not.
  • The fair value and the value in use have been calculated using appropriate and proper calculations along with appropriate cash flows.
  • No hypothetical cash flows are used and only the real and relevant cash flows that are consistent with the asset that is tested for the impairment are used in making the impairment calculations.
  • The impairment testing is based on the carrying value and revised value of the assets and liabilities base on the internal and external factors which might impact its overall outcomes.
  • The discount rates used do vary in accordance with the differentiated risk that is associated with the different cash generating units. The risk level and the geographical locations are considered before deciding on the discount rates.
  • The allocation of costs to the related assets has been made on a reasonable and appropriate basis.
  • Cost drivers are used to bifurcation the costing of the process and determine the true value of the assets and liabilities recorded in the books of account of company. 

Evidences of impairment basically refer to the indicators that make the company think about the asset impairment in a serious manner. These include both internal as well as the external indicators. The evidences that have been observed in case of the company include:

Internal Evidences

the recent physical harm observed in the assets of the company

The business combination ideas that are discussed in the annual report of the company. The business combination plan shall make certain assets go obsolete to use for the company.

The bad operating performance that the assets are showing in the recent time.

The high range that is being touched by the operating costs of the organisation.

The unrealised budget performance regarding the estimated revenues.

External Evidences

The rising interest rates in the market that is directly impacting the discount rates which shall eventually fall as a load on the value in use of the concerned assets.

Significance of Impairment Testing for Businesses

The new advancements introduced in the market relating to technology, laws and economy.The relative presentation of carrying value of the assets in the balance sheet on the higher side as compared to the market capitalisation valuation of Myer Holdings Ltd.

With the ramified changes, the value of the assets decreases and by using the impairment testing company determine the true value of its recorded assets in the books of account. Only the identification of evidences is not necessary, but a complete process is to be followed by the company to reach a conclusion whether the impairment is required or not. The process includes the following steps

  • At the first level, it is important to look whether the evidences are appropriate enough to check for the further requirement of impairment in relation to nay cash generating unit.
  • Secondly the company needs to make calculations regarding the several requisite elements. These include, recoverable amount of the tangible and intangible assets by comparing the fair value deducted by the costs to sell and the value in use.
  • The third most important part is to check whether the carrying value of the assets is actually lesser than the recoverable amount that has been estimated.
  • After the assets have been certain that they are to be impaired, the company needs to make an account for the loss that has been recognised on the impairment of the assets in the account of profit and loss. 

The information that is must to have to determine the impairment of assets includes:

  • The evidences that Myer Holdings is showing that demand an impairment process to run.
  • The market conditions that suggest the actual recoverable amount.
  • To calculate the recoverable amount of the assets, the information value in use and the fair value are required.
  • The details about earlier impairment done and the calculations made for the same are to be checked.
  • It also assists in keeping the clients more informed for the recorded assets and liabilities.

The management has the flexibility to determine the methodology in which they are going to gather the information which is required for the impairment of the assets. However, the evidences that the management obtains and the information they find about the impairment suggests that impairment is necessary, then the management gets no flexibility to make a decision. If impairment is required that it is must to be conducted by the organisation. The management cannot deny when the situations demand an impairment to be made as per the AASB 36, Impairment of Assets. This will assist in keeping the recorded assets and liabilities more transparent towards the stakeholders.

However, when the earnings management is followed by the organisation, the management falls in a stiff situation. The recoverable amount is calculated on market data and the manipulations that have been made are easily visible after that. Hence, ultimately if the case is requiring impairment, nothing can be done which can resolve the requirement. 

Conclusion

Impairment is done to provide the users with the true performance and position of the company. If the organisation carries the assets at a value which is not even recoverable, then false results are obtained. It is analysed that finding the carrying value of the assets could be done when it is compared with the the values shown in the balance sheet and compare it with the market capitalisation valuation of Myer Holdings Ltd. The financial performance gets impacted due to wrong depreciation charges, and the financial position is impacted because of the wrong carrying value used. This calls for a change in the real image that was required to be presented in front of the company’s users of financial information. However, the best way is to follow a complete approach that lest the management to understand the need and requirement to adhere to the impairment policies. After assessing the details, it could be inferred that impairment testing is required tool which is used by the company to determine the true and fair value of the assets and liabilities recorded in its financial statement. 

References

Bojana K, , Mateja J, and Polona T. ‘The impairment test of goodwill: an empirical analysis of incentives for earnings management in Italian publicly traded companies. 29(1) (2016):’ Economic research-Ekonomska istraživanja 162-176.

HAO, Y, ZHAO, Kand HAO, K. "Research on Fair Value, Fluctuation of Assets' Value and Audit Fees: Based on the Empirical Evidences of Listed Companies in ShangHai and ShenZhen Stock Markets from 2009 to 2012 [J]." Journal of Nanjing Audit University 1 (2014): 012.

Iroham, C. "Pedagogy (IPSAS), OFRS) & International Valuation Standards.’ (2016): 108-125.

Jing,W and Hooper, K, Recognition and disclosure of impairment in China (Pearson, 2014).

Mishi. S. Dynamic interactions between stock markets and banks in South Africa: testing for market disciplining of banks. 2nd ed, Australia: Diss. (University of Fort Hare, 2015).

Paolo P, B,. "IFRS:’ Italian Experience on Impairment Test of Goodwill’ International 2(1) (2014).  Journal of Advances in Management Science , 162-176.

Rodiel F, .and. Ferrer. G ‘Earnings management indicators and their impact on inventory turnover under food, beverage and tobacco sector: a thorough study using simultaneous equations model. (2016): 20 (2) Academy of Accounting and Financial Studies Journal 93-95

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My Assignment Help (2019) Impairment Of Assets: Procedures And Significance - ASIC Media Release Essay. (70 Characters) [Online]. Available from: https://myassignmenthelp.com/free-samples/mp212-accounting-needs-for-the-asset-impairment
[Accessed 18 July 2024].

My Assignment Help. 'Impairment Of Assets: Procedures And Significance - ASIC Media Release Essay. (70 Characters)' (My Assignment Help, 2019) <https://myassignmenthelp.com/free-samples/mp212-accounting-needs-for-the-asset-impairment> accessed 18 July 2024.

My Assignment Help. Impairment Of Assets: Procedures And Significance - ASIC Media Release Essay. (70 Characters) [Internet]. My Assignment Help. 2019 [cited 18 July 2024]. Available from: https://myassignmenthelp.com/free-samples/mp212-accounting-needs-for-the-asset-impairment.

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