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Testing Procedure for Impairment of Assets

Discuss About The Recognition Of Accounting Disclosure Market?

Cardino Limited Company has been given for the purpose of the study. The company is listed in the Australian Stock Exchange and deals in the information system, remote sensing and other related areas. For the purpose of the detailed discussion and the analysis the annual report of the company for the financial year ending 30th of June of the year 2017 has been selected.

The company has tested the following assets for the impairment in accordance with the Australian accounting standard 136 on the impairment of assets:

  • Goodwill and other intangibles. It does not include the goodwill which has been acquired on the acquisition of business or in any other business combination.
  • Property plant and equipment which forms the major part of the noncurrent assets of the company. This major head comprises of the three major assets – land and Building, Office Furniture and Equipment and lastly motor vehicles.
  • The major current assets through which the working capital and the liquidation of the company are maintained and is normally known as Trade debtors.       

Although the firm conducts the impairment test in accordance with the terms and the provisions of the Australian accounting standard 136 but following are the procedures that the company has adopted for the purpose of the testing of the impairment of the assets including some procedures for internal purpose and accordingly the impairment has been made:

For Goodwill and other intangibles - Note to the financial statements bearing the number fourteen consists of the five intangibles. These are goodwill, works contracts, patents and trademarks, software intangibles and customer relationships. At first the goodwill is tested for impairment and the carrying amount of the goodwill as the date is allocated to the cash generating units as defined for impairment testing. Four cash generating units have been detailed and these are Americas, Asia Pacific (APAC), Construction Sciences and International Development. Goodwill has never been amortized but is always tested for the purpose of the impairment. According to the annual report of the company, the company performs the impairment tests on annual basis and also on frequent basis depending upon the needs of the business and the circumstances which follows in the business. The goodwill is allocated on the basis of relative fair value. The company has then used the value in used mode of determining the recoverable amount. The value in use has been calculated on the basis of the projections that the company has made for the future years and that too specifically for five years with the figure of the terminal or residual at the end of the year five. The projections that have been used in the value in use method have been obtained from the budget plan of the company for the future years of 2018 and 2019. The further three years figures have been estimated using the growth rates depending upon the forecasted market conditions and the economic growth of the company. These cash flows are discounted at the rate equivalent to the weighted average cost of capital to the company and this value in use is identified and thus the recoverable amount is measured. In case the carrying amount falls short of the recoverable amount then there will be no impairment otherwise the impairment is required to be booked. Thereafter the results of the impairment testing are detailed and accordingly the impairment is booked (AASB, 2016).

Key Assumptions and Estimates in Impairment Testing

For Property Plant and Equipment – For the purpose of the calculation of the impairment, then value in use method is used and the figures stated in the budget is utilized and accordingly present value of cash flows are determined and recoverable amount is calculated and then the recoverable amount is compared with the carrying amount and accordingly the impairment loss is accounted for in the books of accounts.

For Trade Debtors – In the impairment testing of the trade debtors, the risk of receiving payment is checked and the debtors ageing schedule has been made. Where the payment is due for more than ninety days then the impairment will be charged.

Thus, the impairment testing has been conducted by the company in this mode only.           

In accordance with the financial report to the company, the impairment charges have been accounted for by the company and have charged to the statement of the profit and loss account. Nil amount of impairment has been charged in case of the goodwill and other intangibles and the property plant and equipment but in case of the trade debtors, the company has charged the impairment of $38626 thousand. The same has been charged only because of the fact that the trade debtors have been pending or outstanding for the past ninety days and more and therefore, the loss for the irrecoverable has been made irrespective of the amount of bad debts written off by the company. Thus, the company has recorded the impairment in the annual report of the company.

The company has given the separate note number of twenty which lays down the critical accounting estimates and judgments. Although the company has made many key assumptions and the estimates, but in relation to the impairment following key assumptions and estimates have been made. These are:

  • The future cash flows have been estimated on the basis of the budget plan for the financial year ending 2018 and 2019.
  • For further three years the company has considered the growth rate. This growth rate is adjusted to the market conditions and the standing of the company in the market and the country.
  • The discounting rate that has been use for discounting of the cash flows for arriving at the net present value is pre tax and that too equals to the cost of capital of the company.
  • Inflationary conditions have been taken for valuing the discounting rate for the cash flows.
  • There will be only three cash generating unit as the individual asset will not be able to generate the revenue on its own.

Sort of subjectivity is involved in the process of the impairment testing as taken up by the company. The major reason behind the said statement is that the company has recorded any impairment on account of the property plant and equipment. It seems that the company’s property plant and equipment has recorded the assets at a value lower than recoverable amount and when the asset if disposed of the company will have profit on sale. But the same does not happen in the real world. There might be some debt covenant imposed by the financial institutions from which the company has obtained the loan from the bank or due to the maintenance of the net worth of the company as stipulated by the top management of the company. Thus, in this sense subjectivity is present.

Insights from Impairment Testing

The impairment testing as listed by the company and as mentioned in the annual report of the company is very exhaustive. Through this nature, the testing process has really become interesting as at each stage of the testing new concepts and ways have been developed and have helped in understanding the topic of the entertainment in very good manner. The interesting part is the ageing of the debtors so as to find out the amount which is not receivable at the yearend other than the bad debts. This ageing under different slabs has paved the way of making proper judgment for the impairment if any. Thus, the process has been the interesting one.

The insights that have been provided by the impairment process as listed in the annual report of the company is that the weighted average cost of capital can be used as discounting rate for the calculation of the net present value and thereby value in use. It will help the company in correctly measuring the deviation if any made in the calculation of the value in use. Second insight is the allocation of goodwill can be used by the company for the internal purpose of the monitoring of the figures. Thus, these are the two new insights that have been gained.

Fair value measurement has been made in accordance with the accounting standard. The company has defined the three levels through which the fair value has been measured. First level measures the listed prices, second level measures other than the listed price and third level measures the normal price in market.

Economic realty here referred as metaphor by the speech presentation which means determination of the particular business transaction and its accounting treatment in the financial accounts by having the examination of the commercial circumstances in totality (Ely, 2015). In the case of the accounting standard on Leases, it can be considered in terms of the determination of actual liability of the company in lease contracts situation. Economic reality is lacking in the previous accounting treatment as it under estimates the actual liability which is shown in balance sheet of the company and over estimated the net assets and net worth of the company. New changes help in correct estimation of the liabilities of the company by the understanding the nature of the transaction or contracts which is lease. Thus, it has been truly said by the chairperson that the economics reality will show to different stakeholders who uses the financial accounts for their decisions making process (Day and Stuart, 2013).

Fair Value Measurement

The leases as per accounting standard have been divided into two parts. First is financial lease and other one is operating lease. The financial lease and their obligations are treated as actual liability in the balance sheet and shown under the head liabilities as the risk and reward has been transferred to lease (Ma, 2011). But in operating lease, the accounting treatment is different as the lease payments and obligations are treated as contingent liability and shown apart from balance sheet in financial accounts. The company mainly airlines sector companies are taking undue advantage of this fact and entered into huge number of operating lease contracts which in turn increases the contingent debts of the company in comparison to the actual liability. This creates as situation that in some of the major companies’ contingent liabilities become 66 times higher than actual liabilities and hence proved the statement thought by the chairperson (Singh, 2011).

No playing fields in respect of the Accounting standard on leases having the wrong decisions making with loopholes in it instead of helping different stakeholders in their correct decisions making about the company following standard. The leader in his statement talks about the same in very decisively manner due the reason of the advantage taken by the company as available in standard which with changes have to foregone by them (Gross, 2014). The standard before changes encourages the companies to enter into operating lease  contracts in place of buy the assets or entering into rental contracts as the lease obligations will not find place in the financial position statement which helps them to attract the investor by manipulating the net asset position of the company. With the introduction of the changes in accounting treatment companies will not have upper hand on the financial position which helps them to have more investment previously. And some of the new entrants into market does not have chance to play in lease field to fool the investors (Singer, 2017).

The leader has informed in his speech that new changes made the IASB in Lease standard will not help in increasing its usage in the financial market by different companies rather it will creates disinterest among the companies to enter into lease contracts. The major change which leads to this situation is that operating lease obligations now has to be considered as actual liability even though the risk and rewards related to asset under lease is not yet transferred to lessee. This discourage the company to enter to lease contracts in place of rental, buy contracts leading to non applicability of lease standard on companies (Knubley, 2010; Moore and Nagy, 2013). Another fruitful reason of becoming un popular of this standard that the accounting treatment suggested by board required high level special professional knowledge and skills to implement the same into financial accounts which ultimately increases the cost and effort to the company and its management. Through these situations the companies will try in future that they will not entered into operating lease contracts so that they can avoid unnecessary financial and non-financial burden (Lim, 2014).

Economic Reality in Accounting Disclosure

Investor or different stakeholders uses the financial data of the company for making decision about the company like whether funds need to be put in or whether the funds needs to taken back from company, whether the company is providing desired return from their projects and other related matters. The new accounting standard requires to change the accounting treatment done by the different parties to lease contracts like lessor and lessee while recording the operating lease transactions in their financial accounts so that economic reality can be depicted from their financial position data and true net worth can be calculated by different investors before putting funds into the company. Similarly, management of the company has to take different decisions regarding having or owning assets or projects for the company. They also uses financial data for assessing the return generated by the asset or project in case of having lease contact or buy contract. Lease standard now helps in recording the true financial capital employed in the business and which as result helps in proper decision making by management. This proves the fact mentioned by the chairperson in his speech about facilitating the different users in the best and improved manner,


AASB, (2016), “Impairment of Assets” available at  accessed on {23-01-2018}.

AASB, (2016), “Financial Instruments: Recognition and Measurement” avai lable at accessed on {23-01-2018}.

Company Official Website, (2017), “Annual Report 2016”, available on  accessed on {24/01/2018}.

Day, R. and Stuart, R., (2013), “New lease accounting proposal: what it means and what companies can do to prepare.” Financial Executive, 29(6), pp.11-13.

FASB, (2016), “New Guidance on Lease Accounting” available at  accessed on {23/01/2018}.

Ely, K.M., (2015), “Operating lease accounting and the market's assessment of equity risk”. Journal of Accounting Research, pp.397-415

Gross, A.D, (2014). “The path of lease resistance: How changes to lease accounting treatment may impact your business”. Business Horizons, 57(6), pp.759-765.

Knubley, R., (2010). “Proposed changes to lease accounting”. Journal of Property Investment & Finance, 28(5), pp.322-327

Lim, S.C., (2014), “Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings”.

Ma W, (2011), “Impact on Financial Statements of New Accounting model for leases” available at accessed on {23/01/2018}

Moore, S. and Nagy, A., (2013), “CONTRACT STRUCTURING UNDER THE NEW LEASE ACCOUNTING RULES: THE CASE OF CUSTOM DESIGN RETAIL, INC.” Global Perspectives on Accounting Education, 10, p.81

Singer, R, ( 2017), “Accountinq for Leases Under the New Standard, Part 1: Definition and Classification of Leases and Lessee Accounting”. CPA Journal, 87(8).

Singh, A.,( 2011). “A restaurant case study of lease accounting impacts of proposed changes in lease accounting rules”. International Journal of Contemporary Hospitality Management, 23(6), pp.820-839.

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