Impairment takes place when the business ensures that the assets are carrying not more than the recoverable price (Huikku, Mouritsen and Silvola, 2017). In Service Stream Limited, the company applies impairment testing on various assets. These include goodwill which is a significant asset for any company, inventories which are termed as the lowest of all the cost and net realizable value and financial assets which include financial liabilities and instrument of equity (Annual report of Service Stream Limited. 2017)
For the objective of impairment testing the goodwill of the company is allocated to each of the units or groups which generate cash. All these units and groups which generate cash are then tested annually for the impairment. Further, if the recoverable sum of such units is less than the carrying sum the loss of impairment is allocated, then it is mandatory to decrease the carrying sum followed by a pro rata in the units (Kabir and Rahman, 2016). Further for the impairment of the intangible excluding goodwill and tangible assets, the company reviews the total carrying assets to identify any indication which states the impairment loss.
By the annual report of the company; impairment losses are recorded in the section of “total operating expenses” present in an income statement thereby net income of organisation is decreasing (Wen and Moehrle, 2015). It is also known as an impairment charge. However, it takes place when a corporate writes-off goods or assets that it assess as damaged, unworthy, or unusable. Despite a P&L statement, an impairment loss impacts other financial information abstracts; it is another name given by accountants to the financial report (Sandell and et al., 2017). Asset’s value impairment generates a fall in the statement of shareholder’s equity change, as high expenses and reduced income impacts the retained earnings account is an item of equity statement. Moreover, Low value of asset produces a numerical dent in the balance sheet of corporate, particularly in the section of total resources.
In the current study, the company has made assumptions while using the impairment testing which was related to discount rates and growth. The company has evaluated the effect of the company’s organizational structure on the units generating cash and also assessed the enclosure of obtaining the tech safe area in the water and energy forecast of the cash flows (Annual report of Service Stream Limited, 2017). The company also evaluates the correctness of the rates of discounts adopted by the PwC experts of valuations. They have estimated the underlying flow of cash by assuming that the level of a model of the single client along concerning the current year’s outcomes and future projects stayed in the pipelines. It also considers the industry data and market information externally. The company also checks the calculations of the model in mathematical technique (Annual report of Service Stream Limited, 2017). The calculation sensitivity reflects that the key assumptions made by the company in the structure are related to the application of applies other values in a possible and reasonable range for water and energy business.
Most of the features of impairment are extremely doubtful and subjective and often turn into an illusory. When the subjectivity is given, the treatment of impairment is considered weak in the manipulation of the P&L and balance sheet (Gronachan and Lemberger, 2016). In general situations, the company would expect a few portion of the impairment to be written off slowly, and as the estimated synergies for which the impairment was paid are being used. While in practice the company hesitant to use impairment as it will provide wrong decision for the investments.
The present study is about the impairment testing of the assets of Service Strea . The interesting thing about this testing is that if this is done correctly and effectively it will offer the stakeholders with essential and valuable data and information. In impairment testing the most confusing point is the company uses it on their own presumptions and calculations supporting the testing of the assets is bit complex (Sinclair and Keller, 2017). The surprising aspects associated with the present study were the company is using different process of impairment testing for goodwill and other process of testing for the tangible assets. The most difficult thing about this testing was that it is easy to understand, but while implementing it, the company face issues as each asset has a different testing process.
From this study, I have learned about the impairment testing is that the calculations of the cash flows in these are reasonable and supportable for the company so that they get the best estimation of the conditions of the economy. Another thing about this testing was that while calculating the value in use for the future flow of cash it estimates the assets in the current condition (Kola?evi? and Hreljac, 2014). It will help the company to know about the cost of future expenses so that they can intent to enhance or improve the business from the forecast of cash flows.
Based on the present study, it can be stated that the fair value measurement is needed to calculate the price on which a transaction for selling an asset or transferring the liabilities takes place among the participants and the markets at the date of measurement under the prevailing conditions of the market (Cannon and Bedard, 2016). The fair value measurement entails the company to determine the specific asset and liability which is subject of the calculation, the market principle of the asset and liability, the technique of valuation and the assumptions made by the participants and the market. The study also tells about the guidance of the fair value which includes a company which takes into accounts the features of the assets and the liability.
The chairman of the International Accounting Standards Board believes that the prior accounting structure for lease did not replicate the reality of the economy. As per the previous model of accounting for lease, it was essential to have both the lessors and the lessees so that they can classify the lease differently, as either operating lease or finance lease (Hussey, 2017), whereas in today’s accounting representation the operating lease is not being recorded in the balance sheet, and in no doubt they make the real liabilities (Griffith et al., 2015). At the time of financial crises, some of the major retail companies went insolvent as they were not able to get adjusted to the sudden change in the new economy.
The main reason behind the rise in the lease debt as compared to any other debt was their long-term commitments on operating lease prevailing in the stores. Additionally, the balance sheet was showing the misleading information. So the current debt consists of lease obligation which leads to deficient of comparability (Beckman, 2016). Hence, the prior accounting model reports that the off-balance sheet liabilities of the lease were 66 times more than the actual debt calculated on the balance sheet.
The chairman of the IASB argued that the previous accounting model of lease was of no status of playing on the fields for some of the airline’s businesses (Vernimmen et al., 2014). This was because the standards were not appropriate as per the level of comparability, on the other side, most of the airline companies put a maximum of aircraft on a lease, which is not similar with the number of competitors, but in reality, the financial obligations can be same (You, 2017). Another reason can be that, all the companies had different types of standards of bookkeeping, and because of this differences between the lease structure of the businesses occur.
The new accounting standards for lease will affect half of the companies and will not be readily accepted by everyone because, it will impact their business process, controls and systems. The new system will require more critical data for applying lease as compared to an earlier model (Warren, 2016). The companies will not only have to do accounting but will also have to take a cross-functional approach to implement the process of leasing further.
The current visibility of lease will now lead to better investment decisions made by the stakeholders and will also balance the lease buying decisions by the management. This will be useful for almost all the companies who are using leasing such as sectors like airlines, shipping and retailing (Edeigba and Amenkhienan, 2017). The lease is a significant form of the finance for most of the businesses and listed companies internationally. The chairman expects the advantages of IFRS 16 to prevail over the costs highly. This will also lead to enhancement in the allocation of the capital and financial resources which will prove to be beneficial for the growth and development of the economy of Australia.
Reference
Annual report of Service Stream Limited, 2017. Retrieved on 24th January 2018, from <https://www.servicestream.com.au/investors/asx-announcements>
Beckman, J.K., 2016. Introductory comments for the special edition on the effects of International Financial Reporting Standards (IFRS). International Journal of Managerial Finance, 12(2).
Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), pp.81-114.
Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate Transparency and Accountability: Evidence from New Zealand. Australasian Accounting, Business and Finance Journal, 11(3), pp.3-19.
Griffith, E.E., Hammersley, J.S., Kadous, K. and Young, D., 2015. Auditor mindsets and audits of complex estimates. Journal of Accounting Research, 53(1), pp.49-77.
Gronachan, D.B. and Lemberger, L., 2016. Integrated impairment value calculation system. U.S. Patent Application 14/717,370.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.
Hussey, R., 2017, May. Leasing of Assets: A Content Analysis of Comment. In GAI International Academic Conferences Proceedings (p. 23).
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.
Kola?evi?, S. and Hreljac, B., 2014. Fair Value Measurement. Ra?unovodstvo i porezi u praksi, (3), pp.44-49.
Sandell, N., Sandell, N., Svensson, P. and Svensson, P., 2017. Writing write-downs: The rhetoric of goodwill impairment. Qualitative Research in Accounting & Management, 14(1), pp.81-102.
Sinclair, R. and Keller, K.L., 2017. Brand value, accounting standards, and mergers and acquisitions:“The Moribund Effect”. Journal of Brand Management, 24(2), pp.178-192.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.
Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).
Wen, H.J. and Moehrle, S.R., 2015. Accounting for goodwill: A literature review and analysis.
You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline Companies (Doctoral dissertation, Auckland University of Technology).
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