Selective Critical Of Financial Accounting: Impairment Testing And Lease Accounting Standards Essay.

Impairment Testing of Financial Assets

Discuss about the Selective Critical Of Financial Accounting.

The assessment of impairment testing of assets of New hope group limited at the end of each reporting period is done when there exist any objective evidence group of financial assets or any individual financial asset requires impairment. Existence of any objective evidence resulting from occurrence of any events or circumstances results in impairment of financial assets. Whenever, there is any indication resulting in change in circumstances or events that it is difficult carrying amount of assets, then new hope group limited conducts impairment testing. Identification of impairment loss is done by the amount when recoverable amount of assets is more than their carrying amount. Amount that is recovered is higher of value in use of asset and fair value of assets by deducting disposal cost. Impairment of assets for testing value in use is done by grouping the assets at lowest levels for which cash flow can be identified separately that are not dependent upon cash inflow of cash generating units. Any indicator for reversing impairment of assets is assessed by company on annual basis. All the cash generating unit-incorporating plant, equipment and property along with goodwill are performed impairment testing annually at cash generating unit level (newhopegroup.com.au 2018). When organization identifies any indicators relating to other plant, equipment and property then should also be experienced for impairment. 

New hope group limited conduct impairment testing by incorporating judgment for assessing impairment indicators relating to plant, equipment and property. For oil production and coal mining assets, some key judgments done by organization involve external factors such as foreign exchange factors and forecasted price of commodity. Estimation of oil and coal reserves also requires judgment. Discount cash flows are analyzed when cash generating unit groups of assets recoverable amount are evaluated for impairment. Critical factors in determining recoverable amount of CGU are performance of estimates in terms of costs for completing the construction of assets and expansion of projects (newhopegroup.com.au 2018). It has been ascertained from the analysis of annual report of new hope group limited that assets recoverable amount is more than their carrying amount that is confirmed by fair value discounted model of cash flow.

New hope group have recorded expenditures relating to impairment of assets in recent financial years. In financial year 2017, impairment assets expenditure is recorded at $ 2030 million and $ 33124 in financial year 2016 respectively (newhopegroup.com.au 2018). These figures are representative of the fact that impairment expenditures of assets have declined considerably in current year.

Judgments and Assumptions Involved in Impairment Testing

Management is required to make judgment in estimating value of resources and reserves and in relation to this, assumptions is done about exchange rate, future price of commodities and production costs.  The model of discounted cash flow used by company makes assumption such as weighted average, extension of approvals timeline, foreign exchange and pricing of coals. Company concerning recoverable future amounts of assets for assessing recoverability makes appropriate assumptions. Historical results of group forms the basis of making estimates by considering types of transactions and types of customers (newhopegroup.com.au 2018).

After the evaluation of annual report of new group limited, it can be ascertained that there is few degree of subjectivity involved in the impairment testing methodology and this is because mangers would certainly act opportunistically either in the interest of company or some other interest. However, it is not appropriate if management incorporates high degree of subjectivity in the assumptions and estimates relating to impairment testing.

The main concern regarding impairment testing is presence of subjectivity in assumptions that are made for the impairment test purpose. This involves goodwill reallocation in event of occurrence of restructuring and goodwill allocation to cash generating units. Involvement of high degree of subjectivity in the methodology of impairment testing makes it difficult for users of financial report to obtain accurate information (newhopegroup.com.au 2018). This might be because of difficulties in segregation of cash flow attributed for improvement or enhancement of assets and cash flow for asset maintenance. This would also lead to organization engaging in denotes with auditors that are not productive.

Methodology of impairment testing of new hope group limited is ascertained to be interesting as there is a detailed presentation of facts in addition to estimates and assumptions made by management. Information regarding impairment tests, assessment and other assumptions are segregated so that users can get appropriate information (newhopegroup.com.au 2018).

For the impairment of one of it is available for sale financial assets, significant management of new hope group limited makes judgment. Analysis of financial report of company depicts that there has not been recognition of any impairment expense in the parent entity book and no provisions are made for impairment receivables raised to any outstanding balances. Impairment charge for exploration and oil producing assets forms the part of non-regular items (newhopegroup.com.au 2018).

Revenue received or receivable is measured at fair value and company makes use of valuation techniques for determining financial instruments fair value.  For the measurement and disclosure of financial liabilities and assets, new hope group makes the estimation of their fair value. It has adopted hierarchy of fair value measurement for making disclosure of financial liabilities and assets. Considerable amount of judgment and estimation is made by organization in determining fair value of acquired net identifiable assets (newhopegroup.com.au 2018).

Subjectivity in Impairment Testing and Its Impact on Financial Reporting

The reason why the economic reality is not reflected in the former accounting standard for lease is due to its associated criticism that does not mandate reporting entity to disclose operating leases in their statement of financial position. Reporting entity is not required to make disclosure of their operating leases assets as well as liabilities. It is due to the existence of this flaw that organization’s actual worth of leased liabilities assets and liabilities might be more than what is represented on balance sheet. The estimation made by IASB depicts that 85% of total amount of lease commitments is not disclosed on balance sheet out of US $ 3.3 million worth of lease commitments (Horton 2018). Therefore, investors requiring absolute information of commitments of organization in terms of their liabilities will not be adequately represented on balance sheet. Existing standard do not depicts actual because it is not incorporated in the financial statement. In light of these flaws of existing standard, investors are required to make rough calculations of the actual liabilities of reporting entity and hence, it does not reflect true economic reality.

There is virtual presentation of lease accounting on the balance sheet and there is not any disclosure of operating and financing leases. Nonappearance of actual lease liabilities and assets from balance sheets makes it difficult to represent the actual value of several financial metrics such as EBIT, outstanding liabilities, flows concerning operating cash. Total amount of leased liabilities and assets off balance sheet might be more than the amount of total liabilities that is represented on the balance sheet of reporting entity. Existing lease standard does not have any focus on rewards and risk of ownerships and there is no control based approach incorporated in the organization (James 2016). Hence, balance sheet profiles of such company’s do not reflect true leases leased liabilities and assets. Therefore, total amount of debt attributable to company and as depicted in the balance sheet might be less that actual leased liabilities and assets. Existing standard does not mandate disclosure of all the less attributable to companies (McCarron and Burstein 2017). This is the reason why the debt amount reported on the organization’s balance sheet was up to 66 times less than liabilities off balance sheet.

The complications of creating distinction between financing and operating leases are one of the controversies that are associated with former lease standard. Reason why there was no level playing flied between the airline companies is that existing lease standard does not mandate to disclose operating lease on their financial statement. This is so because financial position of airline companies purchasing most of its aircraft fleet looks considerably different from airline companies leasing their fleets. Each airline companies have particular method of leasing their assets structure and financing (Hoskin et al. 2017). However, in actual scenario, the financial position of all such companies might not be significantly different. It is the reason why airlines companies did not have level playing field.

Deficiencies of Existing Lease Accounting Standards

Introduction of new lease standard will give rise to right to use liability and assets for all the transactions relating to lease. Consequently, balance sheet profiles of affected companies will offset and make changes to key financial ratios. New standard is likely to heavily affect the companies with considerable amount of operating leases in terms of financial ratios and balance sheets. A cross-functional approach to implementation of the new lease standard is required to be done by management of reporting entity. The pre requisite for the employment of this standard is to have adequate knowledge and make the updating of their system. The reason for the unpopularity is increased cost for updating of their accounting system. Moreover, the balance sheet profile of lessee will appear to look more leveraged than they actually are with the implementation of this standard. Rules governing accounting is fundamentally changed for substantially all leases under new accounting standard and this will also include real estate and new equipment leases (Hoyle et al. 2015). It has been perceived that there will be far reaching implications on finance, reporting, accounting, technology, tax and real estate. This might be one reason why the organizations will be reluctant to adapt to this new standard. There will be converged key impacts of the adoption of new standard and this will bring different practice under the two frameworks. Organizations are required to develop new process for tracking and controlling accounting for lease and are considered as lengthy process (Lin and Graham 2017). Method for assessing the liabilities concerning lease and accounting treatment for lease would fundamentally change. Increased costing and complexities associated with reporting is another reason for this new standard to become unpopular. Leasing activities should be reviewed by organizations for the implementation of the new standard of lease. Therefore, there will be lengthiness and complexities involved in the adoption of the new model. Covenant testing will not be able to pass by many reporting entities if the new leasing standard would become effective (Wong and Yeung 2014).

Rough estimates and guesswork made by investors in bringing lease amount back to the balance sheet for evaluating the financial solution of business in relation to their lease obligations due to the requirement of the implementation new accounting standard. Lease liabilities and leased assets would be disclosed properly, this will help in brining much needed transparency relating to lease obligations attributable to business, and eventually lease financing on balance sheet will not be lurking off. Implementation of new standard will lead to enhanced and clear comparison between organizations leasing assets and those buying assets (Barone et al. 2014). There will be relative parallel income statement for making transition to new rules. Furthermore, organizations are likely to experience more flexibility in the expenditures and source of capital related to finance in light of disclosing actual amount of leased assets and liabilities (Callen 2015). Under the new standard, there will be availability of most of the leases on balance sheets for lessees under the single model. It will help in elimination of distinction between operating and financing leases. Companies employing this standard will be able to make better decisions, allocation of capital in a better way and creating a new acquaintance relating to leasing methods done by company.

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