In this report the major concern is on the accounting standards related with impairment of assets and accounting for leases. For the purpose to understand the impairment of assets and its testing procedure in better way, the annual report of the CSR Limited has been evaluated in detail. The annual report of CSR Limited has been taken from the company website in investor sector. The new accounting standard related to leases has also been evaluated in this report.
The provisions of impairment of the assets are provided in the AASB 136 and the main objective of this accounting standard to prescribed such procedures that the company has to follow in order to ensure that their assets are carried not more the values that is greater the recoverable amount (AASB 136, 2007). In order to understand this accounting standard, the annual report of year 2016 has been used of CSR Limited (Annual report 2016: CSR Limited).
CSR Limited has various types of assets that need to be tested for the impairment purpose. In year 2016, CSR Limited has tested assets such as plant, property and equipment and intangible assets for the impairment purpose. Intangibles assets contain non-current assets such as goodwill, software, and other intangible assets (Henderson, Peirson, Herbohn and Howieson, 2015). The two main headings under which tangible assets have been divided are land and building, and plant and equipment. The impairment testing of the goodwill and other non-current assets are done at least once in the reporting period. Assets such as trade names that have indefinite lives are also checked for impairment purpose once in a year (Annual report 2016: CSR Limited). Where it has been found that assets need to impair during the testing phase, they are further checked for carrying out the impairment process.
As per annual report, CSR Limited carries out the impairment testing process through assessing the recoverable amount of each individual asset and where it is not possible, the recoverable amount of cash generating units that belongs to such assets are being taken. As per the definition given in the AASB 136, cash generating units defined as the “Smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets” (Dagwell, Wines and Lambert, 2015). CGU are smallest identified unit that are capable of capable of generating cash flows. Impairment has been to such assets where the recoverable amount is the higher of an asset or a CGU’s fair value less costs of disposal and value in use (Ernst & Young, 2008).
It has been seen from the annual report of the CSR Limited that only goodwill amount is impaired to the recoverable value which is ascertained using the recoverable amounts of the cash generating units using the discounted cash flow projection up to 10 years. The projections of the cash flows are reforecast every year and it covers ten years in every calculation. It has been seen that goodwill shows the excess of cost of acquisition over and above the fair value all assets and liabilities acquired in the process of acquisition (Annual report 2016: CSR Limited). Management has not amortized the goodwill but it carry out the process testing it for impairment every year, Similarity software either generated internally or acquired from outside are initial measured at cost which include the development cost and after the initial measurement it is carried at cost less any impairment and amortisation (Dagwell, Wines and Lambert, 2015).
In order to carry out the impairment testing CSR Limited has made some assumptions such as discount rate used to calculate the present value of cash flows from the cash generating units and valuation used to forecast these cash flows. The key estimates used in impairment testing are based on the future cash flows that are taken into consideration when changes in the value of building cycle, aluminum prices and exchange rates takes place (Annual report 2016: CSR Limited).
The accuracy of the impairment testing gets impacted by the subjectivity of estimations and assumptions made by the management in the impairment testing. CSR Limited has used the discount rate based on their best estimation to calculate the present value of cash flows (Henderson, Peirson, Herbohn and Howieson, 2015).
It is very interesting to understand the procedure of impairment testing as involves very creative method to estimate the correct value of assets to be recognised in the balance sheet. It has been found that CSR Limited has not presented any proper calculation related to impairment testing in the notes to accounts which might be confusing while performing the analysis. No new insights have been gained through analyzing the annual report of the CSR Limited (Annual report 2016: CSR Limited).
The concept of fair value measurement is linked with the assets and liabilities and their estimation of value to represent in the balance sheet. The key objective of the fair value measurement is that assets and liabilities must be valued at fair value as per the provisions given in AASB 13 (Henderson, Peirson, Herbohn and Howieson, 2015).
Part II
(i): Explanation of the Belief of the Chairperson of the IASB about the Former Accounting Standard for Leases not Depicting the Economic Reality
The Chairperson of the IASB has regarded the current accounting standard of leases to be inappropriate for depicting the economic reality as the standards do not record the financial entry of the leases in the balance sheet. The current lease accounting standard has classified all the leases under the operating leases and also they are not featured on the balance sheet of a business entity. Therefore, many assets and liabilities are not recorded in the balance sheet as per the current accounting standard and therefore do not depict real financial position of a firm. It has been reported that the companies in the industrial sectors of airline, retail and shipping have high amount of operating leases that are not reported in the balance sheet. Therefore, the businesses incorporating the use of large amount of leases are not depicting their actual debt position to their shareholders and creditors. This has also caused bankruptcy of some retail chains having high amount of operating leases and therefore not able to adjust to the economic conditions. Thus, the IASB is emphasizing on implementing the use of new accounting standard for leases for overcoming the issues related to understatement of assets and liabilities (IFRS 16: The leases standard is changing, 2016).
(ii)Reason for Reporting Entities ‘off balance sheet lease liabilities were up to 66 times greater than the debt reported on their balance sheet’ under the former accounting standard
The current IASB accounting standard for leases is leading to developing deceptive balance sheets as per the comments made by the IASB chairperson in the article ‘’introductory comment to the European parliament’. This is because as per the current leases standard the operating leases of businesses are not reported in the balance sheet. The leases used by businesses are included under operating leases which are not required to be recorded in the balance sheet as per the current accounting leases standard of IASB (Stice and Stice, 2013). The balance sheet of business organizations having high amount of operating leases such as retail companies does not disclose the financial information regarding the amount of their real liabilities. The occurrence of the financial crisis has caused the bankruptcy of the retail chains as they were not able to meet their liabilities under the changed economic scenario. They were having long-term commitments of operating leases on their retail stores and thus their real balance sheet has up to 66 times more debt in comparison to the debt reported in their balance sheet disclosed to the public.
(iii)Reason for the IASB Chairperson Arguing that former accounting standard for leases caused ‘no level playing field’ between some airline companies
The Chairperson of the IASB under the given article has expressed his concern over the ineffectiveness of the current accounting standards in representing the accurate and relevant financial information about the leases used by business entities. The article has also emphasized about the ineffectiveness of the current accounting standard in comparing the financial performance of two firms having varying amount of operating leases. The fact has been illustrated in the article through the use of airline companies that have high amount of operating leases as the aircraft fleet used by them is mostly taken on ease. Thus, the financial position of the airline company that is leasing its aircraft fleet is largely different from its competitor that is purchasing its aircraft fleet. However, under the current lease standard such difference in the financial position of two companies cannot be identified by the stakeholders as operating leases are not reported in the balance sheet. Therefore, it can be said that current accounting leases standard leads to lack of comparability between the financial performances of two companies that are using different operating leases (Hussey and Ong, 2017).
(iv) Reason for the belief of the IASB Chairperson regarding the unpopularity of the new accounting standard for leases
The IASB Chairperson is focusing on the development of new standard for leases reporting in order to protect the interests of the stakeholders. The new accounting standard will help in overcoming the problems of the current accounting standard discussed above. However, the IASB Chairperson is of the belief that the new accounting standard will not be accepted positively by business entities around the world. This is because the business has to incur high cost in complying with such accounting changes. The proposed accounting changes of the IASB can have adverse economic affects and therefore there is risk associated with the implementation of the new accounting standard for leases. Thus, the risk and the costs associated with the introduction of the new accounting standard for leases is the reason regarding the belief of the IASB Chairperson regarding the unpopularity of the new accounting standard for leases (IFRS 16: The leases standard is changing, 2016).
(v) Reasons for the new visibility of all leases will lead to better informed investment decisions by investors and to more balanced lease versus buy decisions by management
The current accounting standard for leases is associated with many drawbacks as discussed above. As such, the IASB is planning to implement new accounting standard for leases for reflecting the economic reality. The leases will be categorized into assets and liabilities by lessees and will lead to better compatibility between the financial performances of the companies using varying amount of leases. The shareholders, investor and creditor will gain accurate and relevant information about the leases used by a business and thus its real debt position. The IASB though is expecting some problems to be faced by business entities for comply with the planned accounting changes. The major problem that will be faced by businesses is incurring high expenditure in recognizing assets and liabilities for leases. The IASB however has maintained that businesses will provide large benefits to the end-users as investors can make better informed decisions. As such, the new accounting standard for leases would be beneficial for companies through leading to more balanced decision by the management through recognizing leases as assets and liabilities in the balance sheet (Ryan, 2007).
Conclusion
The overall analysis annual report of the CSR Limited regarding the impairment testing shows that company has followed all provisions provided in the AASB 136. CSR Limited has provided the impairment in the carrying value of goodwill after following the procedure of impairment testing and calculating the recoverable value of goodwill. The new accounting standard related to leases has proved to be effective as compared to previous accounting standard in depicting the real debt position of the companies.
References
AASB 136. 2007. Impairment of Assets. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed on: 21 January 2018].
Annual report 2016: CSR Limited. [Online]. Available at: https://www.csr.com.au/~/media/corporate/files/annual-reports/2016_annual-report-for-31-march-2016.pdf [Accessed on: 21 January 2018].
Dagwell, R., Wines, G. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson Higher Education AU.
Ernst & Young. 2008. Impairment accounting – the basics of IAS 36 Impairment of Assets. [Online]. Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed on: 21 January 2018].
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B. 2015. Issues in Financial Accounting. Pearson Higher Education AU.
Hussey, R. and Ong, A. 2017. Corporate Financial Reporting. Springer.
IFRS 16: The leases standard is changing. 2016. [Online]. Available at: https://www.pwc.com.au/assurance/ifrs/assets/ifrs16lease-brochure.pdf [Accessed on: 21 January 2018].
Ryan, S. 2007. Financial Instruments and Institutions: Accounting and Disclosure Rules. John Wiley & Sons.
Stice, E. and Stice, J. 2013. Intermediate Accounting. Cengage Learning.
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