ACCG2024 Impairment Testing and Asset Values Assignment Sample

Financial Accounting and Reporting

Executive Summary of Impairment Testing and Asset Values

The report summarized the key impairment issues that are faced during the financial statements calculations. AASB 136 accounting standard is used for the impairment of assets. There are various disclosure like amount recognized for losses and revalued loss are to be mentioned in the income statement of the company. AGL energy is taken under study for impairment of assets. The company follows the mandates of the standards appropriately. Also, there are certain complexities like tax rate etc. that arise during impairment. Accordingly the company directors need to review certain calculations like discount rate, disclosures etc. for the company to provide an appropriate view of the statements.

Table of contents

Introduction

Disclosure requirements as per AASB 136

Analysis of AGL for disclosures

Complexities and Key Issues in impairment

Specific issues that are to be reviewed by Directors

Conclusion

References

Introduction to AASB 136 Impairment

AASB 136 Impairment of Assets accounting standard is made by The Australian Accounting Standard board under Corporations Act 2001 section 334. This standard is formed with the objective for prescribing the procedures that an organization applies for making sure that the assets are carried at no more than the recoverable amount (Bond, Govendir and Wells 2016). When an asset is carried at an amount that is more than the recoverable amount that is the amount that will come in after selling the asset in the open market, than the asset is described as impaired (Zhuang 2016) . Accordingly this standard requires the organization to recognize the loss as impairment loss. This report aims at studying the disclosures for the impairment and analysis the complexities involved in the testing of impairment.

Disclosure Requirements as per AASB 136

The organizations are required to disclose the following for their class of assets:

• The amount that has been recognized for the losses of impairment in the profit and loss for the period. Also the line of items for the comprehensive income statement where the losses of impairment has been included (Saha, Morris and Kang 2019). These are to be disclosed.
• The amount that is being reversed for the losses of impairment and has been recognized in the profit and loss for the company’s yearly statements. Also, it is required for the line of items that are reversed shown in the comprehensive income statement. These are also required to be disclosed by the organization.
• Impairment losses that has been recognized on revalued assets mentioned in the income statement of that period are to be disclosed (Vanza, Wells and Wright 2018).
• Also, it is required that the amount that has been reversed for impairment loss on the assets that has been revalued in the income statement for the period should be disclosed.

An organization is also required to disclose the following for the assets that are individual on whom the impairment loss has been recognized or reversed for the financial year:

• The circumstances of the specific events that led to the reversal or recognition for the loss of impairment (Odo et al., 2016).
• The amount for the loss of impairment and also
• The nature of the individual asset
• A description for the unit of cash generation and the amount of reversal.

These are certain disclosure that are to be disclosed by the company under AASB 136 accounting standard.

Analysis of AGL for Disclosures

The company AGL is operational in the energy sector and follows AASB 136 accounting standard for impairment of assets. AGL at the end of each financial year reviews the carrying amount for each of its assets and determines whether there is any impairment loss. If there is any loss than the amount is determined and estimated cash flows of future are discounted at present value. Accordingly these losses are then mentioned in the income statement of the company. Also, when there is a reversal of impaired loss, the company recognizes it in the profit and loss and the reason for the reversal is depicted in the notes of the financial statements. These are the disclosures that are required by the AASB136 and are being followed by the company appropriately (AGL Annual report, 2019).

Complexities and Key Issues in Impairment

The values of the assets are under the microscopic conditions of the market and it always remains as a challenge for the organization to maintain the trust of investor in the transparency and accuracy of the values of assets (Kabir and Rahman 2016). Regulators also express their concerns regarding the recoverability of the assets in a market that is uncertain. In such an environment, testing of impairment is critical. Around 20% of the ASX 200 companies are valued at market less than the book value for the assets. Intangible assets also depict a situation that is potentially risky for the companies as the assets are vulnerable for impairment in a market that is difficult.

According to an article by PwC the very first question that creates an issues is about the level at which the testing of impairment should be done. The answer is dependent on the reliance of other assets for generating the cash flow. Many assets in the process of creating a value requires other assets than these assets should be impaired together. This depends on the product or geographical location. And if the allocation is wrong then the value of an asset that is underperforming will be supported by the cash flows from other successful parts of business. It is required that cash generating units are allocated consistently under the standards.

Another issue identified in the report includes the usage of right discount rate. Companies use WACC and CAPM model for determining the discount rates. These methods will depict a correct position only when the risk of the asset do not differ from the business as a whole.

The third issue that has been described in the report of PwC is of tax concerning the impairment test. A general issue that pops up is including the assumptions that are inconsistent about tax. There are chances that the company is discounting wrong pretax cash flows by using a discount rate that is post tax discount rate. Also at times prior year losses of tax are added in the value in use model that makes the calculations wrong. These are certain issues that arise while the impairment of assets in the company.

Specific Issues that Are to Be Reviewed by Directors

• Cash flow forecasts: Directors of AGL needs to review the rates at which the estimated future cash flows are discounted. Company uses the post-tax discount rates which are appropriate and yet director’s needs to make sure that time value of money and risks specified are adjusted.
• Assumptions made: There are certain assumptions that are made by the company for value in use model that includes forward market based transfer pricing between CGU’s, number of customers and chums, consumption values and gross margin that includes assumptions concerning regulatory outcomes too. Directors need to ensure that these assumptions are made accordingly and appropriately by doing a proper research and analysis based on trends and market conditions (ASIC n.d.).
• Fair value use: AGL measures the assets at cost. This cost is the fair value at the date of acquisition, after that the assets are carried at cost less accumulated amortization. Directors need to review that whether the valuation of the assets are done appropriately and the fair value that is been taken is according to the market price or not.
• Disclosures: AGL in the past had made disclosures regarding the assumptions made and also described the basis of cash flow forecast and the terminal value that is being taken. Directors need to make sure that this is followed appropriately in the next year too as this provides transparency to the users.

Conclusion on Impairment Testing and Asset Values

AASB 136 reports the impairment testing for the companies. AGL an ASX listed company follows the standard AASB 136. There are various disclosures that ae to be made by the company like the impairment loss and the reversal of losses. If any amount is reversed than it is to be disclosed and the reason for reversal is also to be mentioned in the report. AGLS follows all the standards. There are certain issues like right discount rates, when is impairment testing to be done etc. that arise in impairment. Directors of AGL needs to review certain issues in calculations like cash flow forecast, disclosures etc. so as to provide appropriate results.

References for Impairment Testing and Asset Values

Annual Report. 2019. AGL Energy. [Online]. Available at: https://www.agl.com.au/-/media/aglmedia/documents/about-agl/investors/annual-reports/agl_annual_report_090819.pdf?la=en&hash=2890C67A39531E9197467BBC1F87B463. [Accessed on: 8th May 2020]

ASIC. N.D. Impairment of non-financial assets. [Online]. Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/directors-and-financial-reporting/impairment-of-non-financial-assets-materials-for-directors/. [Accessed on: 8th May 2020]

Bond, D., Govendir, B. and Wells, P. 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting & Economics, 12(3), pp.290-308.

Odo, C., Ani, W., Obialor, P. and Ugwunta, D., 2016. To What Extent do United Kingdom Companies Provide Oil and Gas Reserves Information Sufficient to Satisfy Statement of Recommended Practice Requirements?. Australian Accounting Review, 26(1), pp.34-44.

Saha, A., Morris, R.D. and Kang, H., 2019. Disclosure Overload? An Empirical Analysis of International Financial Reporting Standards Disclosure Requirements. Abacus, 55(1), pp.205-236.

Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated disclosures resolve uncertainty about future returns and reduce information asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.22-40.

Zhuang, Z. 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.

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