ACCTING 7023 Advanced Financial Accounting

The financial impairment depends on the costs that include exceeded amount of the book value. This report would provide the insights of the financial impairment and the underlying assumptions. Codan Limited, the financial corporation, would prepare the financial statements and the annual report by conducting the impairment tests based on the measurements of existing assets. Furthermore, the report would also focus on the associated practices and procedures related to the impairment tests process developed by the organization. The study would also provide the clear elaboration of the subjectivity associated with the developed tests of financial impairment. Codan Limited has captured the leading position in manufacturing and supplying the mining technology, communication, and metal detection technicalities. Headquarter of the company is in South Australia from where the company generates the revenues of almost $132.3 million. The information obtained from the annual report of 2016 suggests that the company utilizes the highly advanced technologies to overcome the issues emerge due to the security, communication, safety parameter, and productivity. Currently, the company has secured the position in the competitive business market by selling the products in 150 nations from which almost 85% revenue is gathered.

According to Amiraslani, Iatridis and Pope (2013), asset impairment is conceptualized as the measurement of the lower value of the existing asset than the actual value. It is necessary to facilitate the impairment in the tangible fixed assets, such as plant, property, and equipment. Apart from these tangible assets, it is necessary to impair the intangible assets as well, such as establishing the good will and developing the remarkable account receivable. The income statement of the company highlights the subsequent loss, which is needed to be adjusted for improving the values of the assets by undertaking impairment practices. The practices for writing off impairment display the reduced level of the carrying cost. The asset value is decreased as some of adjustments are made and the result further discloses the significant loss.

Codan Ltd published the annual report on 30^th June, 2016, in which the entire financial impairment test result is systematically informed.  It has been observed that the impairment tests are conducted annually or more than once in a year. The report of these tests specifies that the reputation of the company, which is considered as the major intangible asset, is not amortized n the field of financial account. Andrews (2012) implied that the asset impairment is generally required if the company makes any changes to the event or to any specific circumstance. The further report indicates that the accumulated loss during the impairment affected the financial aspects by decreasing the costs.  The other assets in Codan Ltd. include property, equipment, inventories and plants. These assets are also needed to be tested for the impairments, especially when the irrecoverable amount becomes the major concern. 

The carrying amount of the asset is sometimes unrecovered due to which the impairment tests become essential to be conducted. The intangible assets and the company reputation are also needed to be tested for impairment (Jennings and Marques 2013). This test is needed to be conducted for more than once in a year. The particular set of assets is needed to be combined together for the impairment assessment since the separated cash inflow indicates the reduced level. The cash generating units depends on the independent cash inflows received from the group of assets. On the other hand, the non-financial assets also require the impairment analysis (Filip, Jeanjean and Paugam 2015). In fact, it is noticed that each of the reporting date of the impairment in the organization can be reversed at times.   

The report presented in the annual report published on 30^th June, 2016 highlights the expenditure amount, which is as follows:

• Expenditure of the Tangible Asset Impairment

It is reported that Codan Ltd. has recorded the total amount of the impairment on building, which reached up to almost $1,379 during the period. The total amount of the impairment including the costs of property, plants, and Minetec equipment reached up to $524 in the year if 2016.

• Expenditure of the Intangible Asset Impairment

The expenditure amount of the intellectual property and the inventory process has reached up to $592 and $1,287 respectively as presented in the annual report.

It has been observed that Codan Ltd. is much concerned about the future opportunities due to which the company has made few of the estimations and assumptions much significantly. It is important to make the equal estimation outcome in accordance with the related actual outcomes. In fact, if there will be any specific mistakes occurred in making proper estimation, it may affect in leading the adjustments of the materials of any specific asset. This asset would carry the value for the next financial year that will be disclosed through presenting the notes (Rennekamp, Rupar and Seybert 2014). The judgments are generally based as per the necessary accounting necessity. It has been observed that the business atmosphere of Codan Ltd. has been experiencing adverse and negative conditions that developed and the continuous downturn in the market is also much foreseen. The ash generating unit was conducted to ascertain the recoverable amount of both the tangible and intangible assets. CGU (Cash Generating Unit) of the recoverable amount depends on the value-in-use calculations, which can be utilized in projecting the cash flow based on the financial forecast. The management has been working since last five years to develop this forecast report. The impairment report is developed by comparing the values of the present and the estimated cash flows for the future (Cotter 2014). The discount is estimated by depending on the previous interest rate. The following assumptions are utilized for assessing the value-in-use:

• Margin of Sales
• Rate of the estimated discount
• Use of the growth rate with the help of extrapolate cash flows beyond the forecast time

The accounting regulations IAS 36 of asset impairments imply that the asset impairment demands subjective interpretation and the appropriate IFRS standards. However, the estimation can be adjusted as per the requirements presented by the managers in the company. It is notable that the asset impairment does not depend on the limited portion of the creative accounting (Ramanna and Watts, 2012). The report obtained from the 2016 annual report highlights that the involvement of the subjective assumptions is huge. The organization has the considerable opportunity of exploiting the discretion and conducting the impairment tests for the developing the goodwill of the company. The cash generating units can also be utilized for allocating the goodwill. The amount is quite recoverable and there is no possibility of the active prices since the goodwill can become a subject of discretion (Bertomeu and Cheynel 2015).

Presenting the indication of the impairments is highlighted as the most difficult and confusing part as per the report derived from the above assessment. Both the internal and the external signal of the asset impairment help in creating this indication as a whole. The management discretion is responsible for delivering more frequency in the impairment test (Bertomeu and Cheynel 2015).  In fact, it has been observed that the management can even practice the test opportunistically if there will be any value downturn is visible.

There are the considerable differences observed between the recoverable amount and the carrying value of the assets. The higher fair value of the recoverable amount can be decreased due to the deposal of the value-in-use cost (Costantini and Zanin 2015). The sales agreement and the asset value determine the fair value of the organization in which the asset trade exists. The fair value of the company discloses the exact amount of the existing asset, which can be sold by the company (Bepari, Rahman and Mollik 2014). As mentioned in IAS 36, the business value-in-use is characterized by the future cash flow that is to be gained from the cash generating units.

As highlighted in the IFRS 13 standard, the fair value of the company is determined by the following aspects:

• Sales agreement
• Existing assets in the trade market
• Availability of the adequate information in which the asset can be sold. 

In 1 out of 3 companies that are utilizing the US GAAP or IFRS standards are recognizably affected by various forms of the accounting techniques. The current status is reflecting that the organizations under these standards amount and commits for more than 3.3 trillion (Ifrs.org. 2018). It is noticed that almost 85% of the total asset are not shown in the financial statement or balance sheet of the company as these are considered as the operational leases. The real liability is created if these leases are not shown. Therefore, the company can face bankruptcy if it does not maintain the standards with the latest economic reality during the financial crisis (Fitó, Moya and Orgaz 2013). The company is committed towards the long-term operating leases which were shown as lean in the balance sheet. 

The earlier accounting standards present the report, which determines 85% of the operating lease and it even reflects on the balance sheet. It creates the real liability even though it is not mentioned in the balance sheet (Fitó, Moya and Orgaz 2013). Therefore, during the time of the financial crisis, the major companies need to make the amendments in the economic reality. The company even requires developing the commitments for the long-term operating leases due to which it is noticed that the lease liabilities are proved to be 66 times more than compared to the existing debts under balance sheet.

The former lease accounting technique lacks the compatibility. Airline industries usually deal with the operating leases, which are not shown in the balance sheet or in the financial statement. Therefore, the airline firm is proved to be quite dissimilar from the competitors that are purchasing the overall fleets (Lee and Hooy 2012). There is no sign of the negligible level playing field foreseen among the airline industry. Hence, these leases are considered as the liabilities of the firm.

The new standards is not considered to be popular among the companies but is expected to have the long impacts in many of the listed companies. The changes are made in a very controversial way (Banker, Basu and Byzalov 2016). It can even create negative impact on the economic situations and the fair costs. It is necessary for the organization to accept the changes readily and make amendments in the balance sheet and the income statements. For instance, several contractual arrangements and banking covenants are associated with the financial statement

The operating lease for all the new documents are treated as off balance sheet items in the former accounting standards. The complete picture about the financial business position is not there with the financial statement users or the investors. Thus, it is not possible to compare the organization are buying assets and that are leasing assets. IFRS 16 consist of advanced updates which can be used for outweighing costs and providing better decisions.

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR).

Andrews, R., 2012. Fair Value, earnings management and asset impairment: The impact of a change in the regulatory environment. Procedia Economics and Finance, 2, pp.16-25.

Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2), pp.41-67.

Bertomeu, J. and Cheynel, E., 2015. Asset measurement in imperfect credit markets. Journal of Accounting Research, 53(5), pp.965-984.

Codan.com.au (2018). Annual Reports. [online] CODAN. Available at: https://codan.com.au/news-media/annual-reports/ [Accessed 24 Jan. 2018].

Costantini, A. and Zanin, F., 2015. The influence of total quality management on risk identification and non-financial performance measures: an Italian-based empirical analysis. International Journal of Management Cases, 17(4).

Cotter, D. (2014). Advanced financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall.

Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill impairment losses: Evidence and effect on future performance. Journal of Business Finance & Accounting, 42(3-4), pp.515-554.

Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 42(159), pp.341-369.

Gordon, E.A. and Hsu, H.T., 2017. Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under US GAAP and IFRS. The Accounting Review.

Ifrs.org., 2018. IFRS. [online] Available at: https://www.ifrs.org/ [Accessed 24 Jan. 2018].

Jennings, R. and Marques, A. (2013). Amortized cost for operating lease assets. Accounting Horizons, 27(1), pp.51-74.

Lee, C.H. and Hooy, C.W., 2012. Determinants of systematic financial risk exposures of airlines in North America, Europe and Asia. Journal of Air Transport Management, 24, pp.31-35.

Md Khokan Bepari, Sheikh F. Rahman and Abu Taher Mollik. (2014) Firms’ compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics, Journal of Accounting & Organizational Change, Vol. 10 Issue: 1, pp.116149, https://doi.org/10.1108/JAOC-02-2011-0008

Nawaiseh, M.E., 2016. Can Impairment Recognition under IAS 36 Be Improved by Financial Performance?. International Journal of Economics and Finance, 8(12), p.163.

Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in required goodwill impairment. Review of Accounting Studies, 17(4), pp.749-780.

Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment. The Accounting Review, 90(2), pp.739-759.