Impairment Of Assets: Issues, Compliance And Analysis

Asset Impairment Analysis of Ansell Limited

Discuss about the Analysis Of Issues in The Impairment Testing.

For each and every company, the main regulator is the assets of the company. With the effective and efficient utilization of the assets, the company can have the better results in terms of profit as well as in terms of the reputation which in turn will affect the decision of the users of the financial statements of the company. For reflecting the correct and fair value of assets of the company, the major part which has been charged to the asset is known by the name of depreciation and impairment. In this report, the impairment of an asset will be discussed and detailed.

At first the data will be detailed as collected from the annual report of the company regarding assets which have been written off during the year and the amount of impairment thereon. After that the analysis of issues involved in the impairment testing will be discussed. Then the analysis of the annual report shall be made as to whether the same complies with the provisions of the Australian accounting standard and at last the alignment with the objective of the general purpose financial reporting framework will be detailed. The report has then ended up with the conclusion and appropriate recommendation.  

The company that has been selected for the purpose of the report is Ansell Limited. The company is listed in the Australian Stock Exchange and is engaged in the business of healthcare products and other industrial equipments. It is established in the year of 1883.

As per the annual report of the company for the year ending 30^th of June 2017, the company has impaired the following items:

• Property Plant and Equipment – As per note number 8 of the annual report of the company, there are five assets covered under this head namely – Freehold Land, Freehold Buildings, Leasehold land and Buildings, Plant and equipment and Buildings and plant under construction. Although the impairment is being tested annually and being no indicators for impairment, no impairment has been charged during the financial year under consideration. The impairment is charged as and when the carrying amount of the asset exceeds the recoverable amount of the asset. The estimation of future cash flows has not been disclosed but the disclosure of discounted rate has been made which shall vary between the 8 % to 9% and which will be post tax.

• Current Trade and Other receivables – For the year ending 30^th June 2017, 4.5 million dollars have been charged as an impairment against the 8.2 million dollars in the year ending 30^th of June 2016 (Company Official Website, 2017). The company has been reviewing the trade receivables and other receivables at the end of each year. It includes checking of the past credit history, checking the account which has been transferred to the collection agency and checking whether any debtor has become an insolvent and checking the high risky customers through the close monitoring and checking of the transactions of that particular receivable (Zucca, 2012).

There are many key issues involved in the impairment testing. Following are the major issues which have been listed below;

• First issue that is being faced by all the companies while proceeding with the impairment testing is the estimation of future cash flows. The company has estimated the cash flows on the basis of the previous year’s figures and has undertaken the growth in revenue which may vary from 3% to 5%. The cash flows shall be estimated correctly otherwise the asset which is required to be impaired will not be impaired and assets which are not required to be impaired will get impaired very easily (Chow and Marchev,2012).

• Second issue that is being faced by the companies is the means of adopting and calculating the discount rate. The companies usually take the discount rate which will be equivalent to the weighted average cost of capital. It sometimes gets failed due to non consideration of the external factors prevailing in the market. Therefore, the correct discounting rate shall be calculated and applied so that the cash flows will at par and will not be in any case varies with very high or low figure (Dolson, 2015).      
• Third issue is that mostly all the companies review all assets for the impairment testing at the end of each reporting period. Instead it shall be tested for impairment on regular basis.
• Fourth issue is the estimation of the fair value which always puts many investors in doubtful situation as to how the fair value of the asset has been arrived (Riedl, 2014).
• Fifth and last issue is the process of determining the cash generating units. The cash generating units shall be identified correctly and in fair manner otherwise there will not be proper allocation and the amount of value in use cannot be said to be correct.   

As the company Ansell Limited has been selected for the purpose of this research, the annual report for the financial year ending 30^th of June 2017 have been considered. The analysis as whether the annual report of the company meets the disclosure requirements of the company has been discussed below: (Company Official Website, 2017):

• In accordance with the note number 8 of the annual report, the value of the property plant and equipment has been calculated after deducting the depreciation and the amount of impairment if any.
• In accordance with the note number nine of the annual report, it is mentioned that impairment will be charged only when the carrying amount of that intangibles exceeds the recoverable amount.
• Also, the impairment amount shall be charged to the statement of the profit and loss on one hand and on the other hand, the amount shall be deducted from the assets value.
• In accordance with the AASB 136, the company has detailed the nature of the asset, the amount charged for the impairment and the net balance of the asset thereon (AASB 136, 2010).
• The company has disclosed as to how the cash generating unit has been identified and how the allocation have been based.

In this manner, the company has complied with the disclosure requirements of AASB 136.

The main objective of the general purpose financial reporting is to provide the users with the financial information of the entity under consideration. The users may be potential or the existing but the financial information shall be in such a manner that it serves the interest of both of the investors as well as other stakeholders of the company including the government agencies. The information shall help the users of the financial information to make the decision. The decisions may be regarding the buying of the securities, selling of the securities, issuing the loans and any other means of the loan arrangements (Lohrke, 2012; Colson, 2015).

Issues in Impairment Testing

In the given case, the annual report of the company has provided all the required details that every user requires to make an effective and efficient decision. But one detail is pending which includes the identification of the cash generating units and the amount of `cash flows estimated for the five years in future in respect of each cash generating unit. Secondly the discount rate adopted and applied for calculation of the present value of future cash inflows and in turn value in use (Renshall, 2012).

In this manner, although the annual report aligns with the framework but still there is some pendency.       

Conclusion And Recommendation

The effective and efficient maintenance of each and every asset belonging to the organization is very necessary for the well being of the company. The report has revolved around the impairment of an asset and it has been observed that the impairment is also necessary to be charged to an asset in addition to the depreciation as there always are some chances where the assets will get impaired. The issues that have been faced by most of the companies in impairment testing have been well addressed and discussed and have given an insight as to how the same shall be calculated. The analysis of annual report has detailed that the requirements of Australian Accounting Standard number 136 have been properly met and meets the objective of the general purpose financial reporting. Therefore, it is concluded that impairment also play important part in identifying the value of assets at the end of the reporting period.

It is recommended to have the estimation of future cash flows in the correct manner with correct estimation of rate as it forms basis for the calculation of impairment. 

References

AASB 136, (2010), “Impairment of Assets”, available at https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf   accessed on 26-04-2018.

Chow E and Marchev M, (2012), “Impairment Issues to watch” available at https://www.pwc.com.au/assurance/ifrs/assets/ifrsinbrief-se-15may13.pdf   accessed on 26-04-2018

Colson, R.H., (2015), “General purpose financial statements”, The CPA Journal, 134(3), p.78 – 82.

Company  Official Website, (2017) available at https://www.ansell.com/en   accessed on 26-04-2018.

Dolson M, (2015), “A Look at Current Financial Measures” available at https://www.pwc.com/hu/hu/services/assets/ifrs_kiadvanyok/in_depth/testing_for_impairment_in_the_upstream_industries.pdf    accessed on 26-04-2018

Lohrke, C., (2012), “The effects of differing information presentations of general purpose financial statements on users’ decisions” Journal of Information Systems, 12(2), pp.99-107

Renshall, M, (2012), “Added Value in External Financial Reporting: A Study of Its Aims and Uses in the Context of General Purpose Financial Reports” Institute of Chartered Accountants in England and Wales.

Riedl, E.J., (2014), “ An examination of long-lived asset impairments” The Accounting Review, 85(9), pp.936-945

Zucca, L.J., (2012), “A closer look at discretionary write-down’s of impaired assets”,  Accounting horizons, 58(5), pp. 52-71.