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Accounting and Society

Executive Summary of Corporate Accounting in Australia

The report has been prepared from the perspective of an accountant employed within Qantas Limited for the audit committee of the company. The audit committe of the company has met with the external auditors for prudently reviewing the impact of the Covid-19 pandemic on the measurement and recognition elements of its financial statements. This report is addressed to the CEO of the company and has provided an explanation of the reporting decisions that the management has undertaken for ensuring compliance with the AASB 136 impairment of assets. In addition to this, it also identifies and discusses the challenges encountered by Qantas in reviewing the measurement and recognition of the relevant accounts impacted by AASB 136. It also evaluates the probability of engagement of Qantas management in big bath accounting through impairment of assets as a result of Covid-19 from the lens of agency theory. It also examines whether the management should identify an alternative profit measure for excluding the impact of Covid-19 pandemic.



Part 1: Explanation of Reporting Decisions of Qantas Management in Compliance with AASB 136 Impairment of Assets

Part 2: Discussion of Challenges faced by Qantas in Reviewing the Measurement and Recognition of Relevant Accounts Impacted by AASB 136 for the 30 June 2020 financial year.

Part 3: Evaluation from the Agency Theory Lens.

Part 4: Evaluation of an Alternative Profit Measure by Qantas Management for Excluding the Impact of Covid-19 Pandemic.



Introduction to Corporate Accounting in Australia

The present report is developed in for conducting review of the measurement and recognition elements of the financial statements of a selected company, that is, Qantas Limited. The main purpose is to identify the emerging issues and changing circumstances that have impacted the businesses during Covid-19 pandemic to be presented to the Australian Securities and Investment Commission (ASIC). The Australian and global economies have faced enormous disruption due to this pandemic and has severely impacted the Travel and Tourism Industry sector. This assessment serves as a business report for the company’s Audit Committee, suggesting the impact of COVID-19 on its business with alternative profit measures and an impact on impairment of assets as per AASB 136.

Part 1: Explanation of Reporting Decisions of Qantas Management in Compliance with AASB 136 Impairment of Assets


The objective of this standard is to prescribe the procedure that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of asset. If this is the case, the asset is described as impaired and entity is required to recognize an impairment loss. The standard also specifies when an entity should reverse an impairment loss and prescribes disclosures (PricewaterhouseCoopers, 2020).

On the basis of 2019 Annual Report of Qantas, the specific reporting decisions for the following accounts shows whether there is any impact or not to ensure compliance with AASB 136 – Impairment of Assets.

  • Impairment of Assets: Inventories

The standard AASB 136 shall not be applied in case of inventories, in accounting for the impairment of assets. Hence, there is no impact of impairment of assets on Inventories (Bloom, 2013).

  • Impairment of Assets: Receivables

The Annual Report of the company for F.Y.2019 shows Impairment losses on Receivables as compared to its financials from F.Y. 2018. The provision for impairment losses in the year 2019 shows an increase of 2M$ as that of the year 2018. Hence, there is an impact on receivables of the company in the F.Y. 2019 (Qantas Airways: Annual Report, 2019).

  • Impairment of Assets: Intangible Assets

Amortization and impairment both relate to the value of a company's intangible assets, which are reported on the balance sheet. Impairment occurs when an intangible asset is deemed less valuable than is stated on the balance sheet after amortization (Dagwell and Lambert, 2015).

The company is required to conduct a test for assessing the impact of impairment on intangible assets. In the given case, Qantas did the impairment test of its CGU’s which includes Goodwill and other Intangible assets, which did not show any impact. Hence, as per company’s annual report of 2019, no impairment was recognized for the identified CGU’s during the year ended 30 June 2019.

In-fact, the total goodwill and total other intangible assets with indefinite useful lives of the company has increased by 2M$ each in the year 2019 (Qantas Airways: Annual Report, 2019).

  • Impairment of Assets: Property, Plant and Equipment

The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed. To determine whether an item of property, plant and equipment is impaired, an entity applies AASB 136- Impairment of Assets.

As per the Annual Report of the company, the company has not conducted any test of impairment of Property, plant and equipment. There were no such indications to the company, as to conduct a test of impairment from its internal as well as external sources.Hence, there is no impact of impairment on property, plant and equipment (Qantas Airways: Annual Report, 2019).

Part 2: Discussion of Challenges faced by Qantas in Reviewing the Measurement and Recognition of Relevant Accounts Impacted by AASB 136 for the 30 June 2020 financial year

The two challenges that will be encountered by Qantas in reviewing the measurement and recognition of relevant accounts impacted by AASB 136 for 30 June 2020 financial year are:

  1. The need for, and adequacy of, asset impairment and the adequacy of related disclosures. Also, to assess whether management and staff have adequate skills to deal with impairment issues:

The need for impairment testing

A company must test non-financial assets for impairment when there are any indicators that the assets may be impaired.

Even if there are no impairment indicators, companies must undertake annual impairment tests of-

  • Identifiable Intangible Assets with indefinite useful lives
  • Intangible Assets not yet available for use, and

Matters to consider

  • plans to dispose of assets earlier than expected
  • physical damage to assets
  • changes in interest rates (this may affect discount rates used in calculating an asset’s value)
  • changes in economic conditions
  • changes in law or regulations
  • Possible indicators of impairment - it examines whether there are indicators ascertaining that the overall value of any of the company’s CGUs may be less than the value attributed to the related assets. Also, it evaluates the significant changes in the business or its environment in present and future context. For example:
  • Assets require annual testing – It tends to analyse whether the company have identifiable intangible assets with indefinite useful lives, intangible assets not yet available for use, or goodwill requiring annual impairment testing (Deloitte, 2020).
  • The company’s approach to impairment testing, particularly where there is a risk that assets may be materially impaired:

Impairment testing often relies on estimating the value of assets by discounting estimated future cash flows using appropriate discount rates. Although calculations supporting impairment or valuation of significant assets can be complex, company can review the cash flows and assumptions used in calculations for material assets, bearing the knowledge of the business, the assets, the environment in which the company operates, and the future prospects of the business.

The extent to which directors can rely on management’s work on impairment will vary depending on the circumstances (IFAC, 2019).

Considerations may include:

  • whether the assets are material
  • the level of expertise of management and staff in the area of impairment
  • the appropriate use of external experts, and
  • examines the performance of the company and the environment in which it operates may affect the recoverability of the value of assets through operating activities or the sale of those assets (ASIC, 2020).

Part 3: Evaluation from the Agency Theory Lens

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.

  1. Yes, in the given case, it is suggested that Qantas Management must carry out “big bath accounting” as-
  • It is a typical scenario of manipulation of books of accounts, where accountants understate the current year’s income or loss to make year look even worse so that they can enhance the future earning and show a better picture. This strategy is applied to artificially blow up future income potential (Pierk, 2020).
  • In this process, it can enrich the managerial performance, as a bonus is often looked in tandem with the company performance. When they show a picture where the company is in bad shape, the bonus level gets impacted, which in some form or the other is the right amount of savings for the company. This strategy, on the other hand, may lead to substantial future earnings for the company where it can lead to high bonus amounts for the executives (ASIC, 2020).
  1. Yes, in the given case, "Big bath accounting" is aligned with the interest of the shareholders. This theory aims to lower expenses in the future periods hence resulting to a higher income which will then be distributed to the shareholders as cash dividends.
  • The main intention of this strategy is to take a more significant blow to the earning in the current period so that in future, the earning can be made to dress more attractive or shown in the books as accounts to be more pleasing and of higher magnitude.
  • This approach is legal but also has the reputation of the business involved in the form of to what magnitude the company is manipulating the books of accounts and what extent or value of the income statement is getting financially dressed. An investor should stay aware of a company or be a little suspicious about companies who have repeatedly applied the big bath strategy and thus shown better earnings reports in the consecutive period (Davis et al., 2014).
  • This strategy is usually taken when the firm is aware of the financial condition that it is going through a loss-making phase and, thus, based on the belief that a more substantial loss in the future should not affect the investors to a great extent. A big bath at times is also implemented when the firm wants to write off their assets which are over-inflated or have suspicious values that are not correct.
  • It may also be applied when the business wants to distribute or earn an excessive bonus in the upcoming period. In the initial year, they will implement this strategy and provide no bonus stating the earning are low, and immediately next year, they will report excessive income and distribute bonuses accordingly (Pierk, 2020).

Part 4: Evaluation of an Alternative Profit Measure by Qantas Management for Excluding the Impact of Covid-19 Pandemic

It is recommended to the management of the company that it should report an alternative profit measure for excluding the impact of COVID-19 pandemic impact, in addition to the mandated net profit and loss. This is because Qantas own substantial assets and relatively low ROA on substantial absolute profits (Deloitte, 2020).


  • Qantas Management should report an alternative profit measure that excludes the impact of the COVID-19 pandemic impact, in addition to the mandated net profit and loss.
  • Due to Covid -19, most of the flight routes were impacted for a period of 3 to 5 months. This has resulted in abnormal earnings.
  • The income statement is not normal and is expected to return to pre-Covid19 levels once the pandemic is controlled (International Air Transport Association 2018, 2018).

Hence, it can be said that, Qantas management should report an alternative profit measure that excludes the impact of the COVID-19 pandemic impact, in addition to the mandated net profit and loss.

As per Consolidated Interim Financial Report of Qantas, subsequent to 31st December, 2019, due to evolving situation of Coronavirus, the Qantas got affected by the same and the unprecedented travel bans imposed by various governments. As a result, there has been a fall in demand and intakes. In this response, company had announced plans to reduce capacity across the domestic and international network. There had no material effect on consolidated interim financial report as at 31st December, 2019 (Qantas Airways Limited, 2020).

The other alternative measures that might be considered are stated as follows:

  • Anticipating the opportunities and challenges the industry will face and take actions to address them: It is critical to understand the potential landscape in which airlines can grow sustainably in the future and maximize its potential to deliver the economic and social benefits that greater connectivity brings (PwC Ireland, 2019).
  • Facilitate similar discussions at an airline and alliance level: It examines the ways in which alliances address the risks and take advantage of the opportunities. It also evaluates the strategic planning and focuses on the themes and implications for the specific business model.
  • Partner with governments to lay the groundwork for sustainable air connectivity growth: The changes that lie ahead using internationally accepted smarter regulation principles, governments can ensure that their economies and societies will reap the benefits of increased connectivity (CPA Australia, 2019).

Conclusion on Corporate Accounting in Australia

The business report concludes that due to COVID-19 Pandemic, the company should also engage in “big bath accounting” via conducting test of impairment of assets: receivables, intangible assets and Property, plant and equipment in compliance with AASB 136. This standard does not apply on impairment of inventories. Hence, shall not apply on it. The findings of the report focuses on the impact of Coronavirus pandemic on the business of the company and to mitigate the challenges by taking into consideration alternative profit measures available to the company.

References for Corporate Accounting in Australia

ASIC. 2020. Impairment of non-financial assets: Materials for directors. [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: 8 July 2020].

Bloom, D. 2013. Double Accounting for Goodwill: A Problem Redefined. UK: Routledge.

CPA Australia. 2019. Impacts Of Covid-19 On Annual Report Disclosures. [Online]. Available at: https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/covid-19/business-advice/impacts-of-covid-19-on-annual-report-disclosures-guide.pdf?la=en&rev=ce834704fb55450199388a36b19aed1a [Accessed on: 8 July 2020].

Dagwell, R. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson Higher Education AU.

Davis, A., Ge, W., Matsumoto, D. and Zhang, J. 2014. The effect of manager-specific optimism on the tone of earnings conference calls. Review of Accounting Studies, 20 (2), pp. 639–673.

Deloitte. 2020. Accounting Technical and Financial Advisory – M&A Valuations. [Online]. Available at: https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-impairment-diagnosis-the-impact-pandemic-on-aasb-136-assessment-150420.pdf [Accessed on: 8 July 2020].

IFAC. 2019. The Financial Reporting Implications of COVID-19. [Online]. Available at: https://www.ifac.org/knowledge-gateway/supporting-international-standards/discussion/financial-reporting-implications-covid-19 [Accessed on: 8 July 2020].

International Air Transport Association 2018. 2018. Future Of The Airline Industry 2035. [Online]. Available at: https://www.iata.org/contentassets/690df4ddf39b47b5a075bb5dff30e1d8/iata-future-airline-industry-pdf.pdf [Accessed on: 8 July 2020].

Pierk, J. 2020. Big baths and CEO overconfidence. Accounting and Business Research.

PricewaterhouseCoopers. 2020. Key disclosures under AASB 136 Impairment of Assets. [Online]. Available at: https://www.pwc.com.au/assurance/key-disclosures.pdf [Accessed on: 8 July 2020].

PwC Ireland. 2019. COVID-19: The increased risks of aircraft impairment. [Online]. Available at: https://www.pwc.ie/issues/covid-19/increased-risks-aircraft-impairment.html [Accessed on: 8 July 2020].

Qantas Airways Limited. 2020. Interim Financial Report. [Online]. Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/2020HY/HY20-Interim-Financial-Report.pdf [Accessed on: 8 July 2020].

Qantas Airways. 2019. Annual Report. [Online]. Available at: https://investor.qantas.com/investors/?page=annual-reports [Accessed on: 8 July 2020].

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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