Impact Of New Accounting Standards On Financial Reporting And Analysis

IFRS 16 and its Consequences on Transport Company

The main purpose of this part is to analyze the impact of introducing a new standard of accounting on the overall reporting and accounting process of the business. Whenever changes are made to an existing standard in the form of amendments, the accounting treatments and process also changes accordingly depending on the changes (Bugden et al. 2016). An example can be given of the changes which took place in the accounting standard related to inventory management. The changes which took place in the AS 2 brought about changes in the reporting requirements of the business and therefore need to be considered.

As per the case which is provided in the assessment, Speedy Trans is a transport-based company which provides transport services and the business operates in Cardiff, Wales. The business is in the process to expand the business and thereby need proper warehousing facilities for storage purposes. The management of the company is considering taking a property on a lease agreement for a period of two years. The difference in accounting treatment is due to the consideration of operating and financial leases which need to be considered for this case (Messina and Smith 2016). In order to analyze the leases agreement, the provisions which are set out in the standard IFRS 16. As per the provisions of the standards, leases are generally classified into two categories which are Operating leases and Financial leases. The first thing that need to analyzed is the concept of leasing which is described in the standard (Sari, Altintas and Ta? 2016).

Leasing is technique which is used by companies for the purpose of accessing properties and equipment without incurring large amount of cash flows at the start of the business. In addition to this, the option of taking leases also provides the business with flexibility and also addresses issues of obsolescence and risks which are associated with the asset (Lloyd 2016). As per the new lease standard which is introduced under IFRS 16 requires businesses to recognize every change in the lease contract and the same is to be recognized in the balance sheet of the business. The leases which are offered by the businesses need to be considered whether the same are short term or long term in nature. Another basis of classification which is to be determined before entering lease agreement is the nature of the lease which the business is about to take which is either operating leases or financial lease. Operating leases refers to the leasing agreement in which the lessee is allowed to use the assets in return of some rent payments and such transactions are off balance sheet which means the same does not need to be recorded and shown in the balance sheet of the company (Bashi and Molla 2013). In such types of lease, the risks and rewards which are related to ownership remains with the lessor or the owner of the asset. On the other hand, financial leases refer to the agreement where the owner transfers the asset to the buyer for use for a specified period. In this case, however the risk and rewards which are associated with the asset is transferred to the lessee for a specified period. Operating leases are generally treated as renting expenses and the same are not shown in the annual reports of the business while on the other hand financial leases are considered as loans and therefore the same are shown in the balance sheet of the company (Bohusova and Svoboda 2015).

Scenario Analysis of Four Clients of Hucknell PLC

As per the options which are provided in the question, Speed trans has the option to either use a 30 cubic metres of warehouse which will be depending on the usage and availability of the warehouse and in the second option the company will have the warehouse at their will for usage for a period of 2 years. The case shows that the in the first option the company does not need to record and shows the asset in the financial statement whereas in the second option where the business is provided the asset with all its risks and rewards for a period of 2 years needs to be disclosed in the financial statements as prepared by the company.

The fleet of ten trucks which is acquired by Speed trans and the additional charges which are involved in the servicing of the fleet will be treated as per the provisions which are stated in IFRS 16. As per the provisions which is provided in the standard, the lessee needs to recognize a right to use the asset and the liability which is associated with the asset. The right to use the assets will be measured by the amount of lease liability and the extra expenses which are incurred on the asset such maintenance, servicing (Ellimäki 2016). The model which is used for measuring the right to use the asset is cost model. The same needs to be disclosed effectively in the financial statements of the company and also in the notes to accounts section of the annual reports of the company.

1. In general terms, Purchased Goodwill may be defined as the difference which arises between the value which is paid for an enterprise at the time of its acquisition and the sum of the assets less liabilities of the business which is to be acquired. The purchased goodwill of a business can only be computed when each item of the assets and liabilities of the business which is going to be acquired, has been separately been identified and valued (Bloom 2013). Goodwill is generally treated as an asset of the business and is a measure of the capacity of the business to generate profits. In order to calculate Purchased Goodwill of a business, the business needs to consider the difference between the amount which is paid by the acquirer company as purchase consideration and the value of the assets less liabilities of the business which is actually being acquired (Baboukardos and Rimmel 2014). The goodwill which arises from acquisitions of a business represents the anticipation of profits by the business and therefore the same can be shown as an asset in the balance sheet of the company. Purchased Goodwill of a business arises when the business expects to earn profits in the long run due to the purchase of another enterprise (Amel-Zadeh et al. 2014). This is considered to be an asset and is also related to synergy effect which is caused due to the acquisition of new business enterprise which increases the strength of the new business which is formed after the acquisition. The purchase goodwill which is recorded in the annual reports of the business need to be amortized over the useful life of the asset in a systematic manner.
2. The treatment of Goodwill is different in case of both IFRS framework of accounting and US GAAP framework which are followed by different business in measuring goodwill of a business. As per analysis of the recent business environment, most of the businesses have either self-generated goodwill or purchased goodwill which is shown in the annual reports of such businesses. There has been amendments in the treatment and disclosure of goodwill in both IFRS framework and US GAAP framework. In case of IFRS framework amendments are made in accounting treatment of intangible assets, goodwill and business combinations. Whereas in case of US GAAP framework, the treatment has changed which is related to amortization of goodwill over the useful life of the asset. It is no longer required to amortize goodwill but the same is to be tested for impairment purposes and treated accordingly. The overall accounting treatment of Goodwill which is seen in both frameworks are quite different which is due to the application of different methods for measuring goodwill of the business. In case of IFRS framework both partial goodwill method and full goodwill method is allowed for measuring the goodwill of the business whereas in case of US GAAP framework, companies are mandatorily required to follow full goodwill method for measuring the goodwill of the business. As per the US GAAP framework, the value of goodwill is recorded as an excess of the cost of the acquisition price over the fair value of the net assets of the company. The same is recorded when the carrying amount exceeds the fair value which is implied. On the other hand, in case of IFRS framework goodwill is recognized as the value which arises due to the difference between recoverable amount over the balance sheet amount of net assets, liabilities and contingent liabilities as well.
3. The treatment for impairment of goodwill is an important consideration which businesses should follow considering the provisions which are provided in the framework of reporting which is followed by the business. Goodwill impairments are recorded when the carrying amount of the goodwill exceeds the fair value of the asset. Impairment testing goodwill is undertaken when there is a decrease in the value of the asset. Impairment of goodwill was made to be mandatory when business started to portray excessive goodwill balance in the balance in order to show better position of the business (Guthrie and Pang 2013). In order to prevent such manipulations, the current amendment to the accounting standard requires companies to conduct annual test on goodwill impairments and as per the new amendments goodwill of a business are no longer amortized. In case of impairment of goodwill under US GAAP framework, annual test need to be conducted on the goodwill so as to ascertain whether impairment for the same is necessary or not. The process of goodwill impairment are recognized in two different steps which are, a company must compare the fair value of unit to the carrying amount which is portrayed in the balance sheet of a business. In order to estimate correctly the fair value of the goodwill financial valuation models are used by businesses. In case the fair value is less than carrying value, than the same should also be compared to the net identifiable assets and liabilities of the business (Swanson, Singer and Downs 2013). The excess balance of the fair value is recognized as new goodwill of the business and the carrying amount of the goodwill needs to be reduced by the impairment loss which is associated with the goodwill of the business (Kung et al. 2013). The criticism which is faced in the implementation process of the new amendments which are made mostly on the impairments which are to be tested on goodwill on an annual basis. The old method of writing off goodwill over the useful life of the asset is not done and the change in the accounting treatment has been criticized mostly.

As shown in the question, the client is a manufacturing company which has a policy of providing warranty for the products which are sold by the business and the period of the warranty is for 3 years. The case which is provided in the question also clearly states that in the past experience of the business, a lot of returns have been made for which the business had to repair the product or replace the same as per the terms and conditions of the warranty.

The management of the company needs to report and provide for a provision for the expected loss which the business might be facing due to such return made for products. The management of the company can effectively estimate the correct amount of losses which the business can suffer due to such product recalls. The amount of losses can be estimated correctly by judging from losses business suffered from past experience. Therefore, it is advisable for the business to create a provision for the losses which is very much probable in nature. The provisions which is created also is required to be recognized in the financial statements of the manufacturing business and also in the notes to accounts section of the annual reports of the company (Balla and Rose 2015). This is done to show the reason due to which the provision was actually created.

As per the case study which is provided in the question, the business is engaged in international operations and the business operates in oil exploration and transportation of the same. The case study indicates that the business does not have a proper business structure and therefore, in many occasions due to leakages leads to contamination of water and land resources due to the activities of the business. The case study also indicates that the management of the company does not take corporate social responsibility of the business seriously as they only clean up their mess once regulations are brought in by the government.

In the present case, the management of the company needs to create a regulation of a possible loss which the business is likely to face due to the governmental regulations which is introduced by the government and the same is implemented considering retrospective effect. This means that the company will be liable for all the clean u which the business has ignored in the past. This signifies that the business will be facing significant amount of losses for which it is quite necessary that the business prepares appropriate provisions judging the amount of losses which the business will likely suffer (Shen and Huang 2013). Thus, the management of the company need to provide for a provision which is recorded in the annual report of the company.

The case which is provided in the questions shows a retail business which has the policy of refunding the money which is taken from the customer in case the customer is not satisfied with the product. This is a policy which is advertised and effectively followed by the management of the retail business and that too without asking any questions even if the seller is not legally required to return to the unhappy customer.

As per the general rule for provisions is that a provision must be created when the business can effectively estimate the amount of loss which the business can suffer. This is safeguard which the business applies in order to be prepared for the losses which is the business is likely to face (May 2013). As the business such clearly follows the refund policy with no questioned asked, it can be assumed that the products which are sold by the retail business are of highest quality and the customers are relatively satisfied with the products which are provided by the retail business. In addition to this, the policy of the business allows one to believe that it is very much unlikely that the business will be incurring losses in long run with some exception. Therefore, in this case, the management can opt for not creating a provision and the same is on the judgement of the management.

As per the case study which is given in the question, the company is engaged in a business of industrial production and the case study also makes it clear that the business is facing difficult situation for which reason the management of the company has decided to close down an underperforming section of the business. This decision has not been communicated with the labour unions and other departments as well.

The discussion above makes it clear that the decision will not be supported by the various parties involved and therefore there is a high chance that the business might be facing losses due to such a circumstance and therefore, it is necessary that a provision is made for the losses which the business might suffer. The management should create provisions for the losses which will be incurred by the business unit as the same is underperforming and the decision of the management has not been implemented to close down the unit. In addition to this, the management also needs to consider all the dues which the business needs to clear such as wages and salaries of labourers, employees and payments which is due to suppliers which will be contributing to the loss earned by the business. Therefore, management needs to recognize the losses and create provisions as per the general accounting treatments. The matching principle of accounting also requires businesses to make a provision in order to cover for any anticipated losses which the business might be expecting (Barker and Penman 2016). The only condition to this principle is that the business should be able to accurately estimate the amount of loss which the business can suffer and create the provision accordingly.

The requirement of this part is to analyze the various acquisitions which are made by Under Armour ltd during the year 2015. The company is engaged in sports apparel at a multinational level. As per the annual report of the company, the management of the company greatly believe in acquisitions and that the same can help the business to further develop and grow. As per the annual report the management of the company has undertaken two acquisitions during the year 2015 and both of the acquisition are related to Connected Fitness acquisitions which is clearly stated in the annual reports of the business for the year 2015. The businesses which was acquired by the company are MyFitnessPal and Endomondo which was done during the first quarter of 2015. Endomondo is a Denmark based connected fitness company which was acquired by Under Armour for expanding the fitness community and the cost which was incurred by the company is shown to be $ 85 million as per the notes covered in the annual report of the company (Investor.underarmour.com. 2018). The company MyFitnessPal was acquired by Under Armour for a purchase consideration which amounted to be $ 474 million. The acquisition was made by the business for improving the business structure of Under Armour.

The main purpose behind the acquisition of Endomondo was to build up a strong community of connected fitness for the company and also make the position of the business much stronger. The acquisition of MyFitnessPal also had the same impact on the company and thereby further improved the position of the business. The business also acquired the above businesses so as to bring about synergy effect and thereby improve the performance of the business and also earn more revenues as comparison to previous year’s analysis. The annual reports of the company show that overall sales of the business has increased for which a part of the credit can be given to the acquisitions which are made by the business during the period. In addition to this, acquisition which are made by the business also reduces the overall competition which is present in the market (Yetton, Henningsson and Bjørn-Andersen 2013).

The impact of the acquisition can be clearly seen in the consolidated income statement which is shown in the annual report of the company. The overall sales of the business has increased drastically from the estimates of 2014 which is shown to be $ 3,084,370. The sales which the company has been able to achieve for the year 2015 is shown to be $ 3,963,313. Due to the increase in the sales of the business, the net profit of the company has also increased in comparison to previous year’s net profit. Moreover, the acquisition has also affected the cash flow statement and the cash position of the business due to the heavy investments which are undertaken by the company during the year. The acquisition has also increased the overall assets which the company possessed before acquisition of the companies (Ahammad and Glaister 2013). Due to this, the balance sheet of the company as well the whole financial statement shows strong financial performance and potential for more growth.

The goodwill of the business is recorded at estimated fair value as at the date of acquisition of the businesses and are allocated to reporting units that are expected to receive the related benefits (Qasim, Haddad and Abughazaleh 2013). The notes stated in the annual report clarifies that the business does not amortize the goodwill but the same is subjected to impairment charges for which impairment test are conducted on an annual basis. The notes to goodwill further clarifies that the impairment testing is conducted considering the two-step testing process for ascertaining whether goodwill is subjected to impairment losses or not. As per the annual report of the business, the notes states that as on 31^st December 2015, the business has no impairment losses which can be subjected to goodwill or any other intangible asset of the business. It is further reported that no reporting unit which may be the goodwill which is generated from the acquisition of the two business at the first quarter of the year also does not show any risk for impairment losses (Abuaddous, Hanefah and Laili 2014).

The acquisition which was made by the business at the start of the year was a success as the overall sales revenue of the business increased which is shown in the income statement of the company. Moreover, the net profit of the company also increased and the overall assets which are possessed by the business increased which is indicated by the balance sheet. The reason for the success was that Under Armour had a similar business and the acquisition of Endomondo and MyFitnessPal provided the business with the synergy effect and boast to develop the business further and attain a growth in the sales and profit of the business.

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