In the recent business era, utmost importance is provided on the quality of financial information provided by the business entities as this information provides great aid in the decisions-making process (Kabir and Rahman 2016). This particular report aims on the analysis of the impairment write downs for the Australian companies and Wesfarmers Limited is selected as it is one of the leading retailers of Australia (wesfarmers.com.au 2018). The first part critically identifies and analyzes the impairment write downs in Wesfarmers. The aim of the second part is to highlight the complexities and issues in the impairment testing of Wesfarmers. The third and fourth part of the report analyzes the compliance of Wesfarmers with disclosure requirement and objectives of general purpose financial reporting.
As per the 2017 Annual Report of Wesfarmers, property, plant and equipment, trade receivables, freehold property, goodwill and other intangible assets along with non-financial assets are tested for impairment. For property, plant and equipment, Wesfarmers test them at cost value less depreciation and impairment (wesfarmers.com.au 2018). Impairment is recognized in the income statement for trade receivable when the evidence is obtained that the company will not be able to recover the debt. Goodwill is initially recognized at cost and after that, it is carried out at cost less impairment losses. In case of other intangible assets, they are recognized at fair value and after that, they are carried out at cost less impairment losses and amortization (wesfarmers.com.au 2018).
It is required for the Australian organizations to review their assets in order to ensure that whether there is any sign of impairment of the assets on not and Wesfarmers has also adopted the same strategy. In Wesfarmers, the main reason behind the impairment testing of their assets is the change in technology or liquidation plan of any business operation (wesfarmers.com.au 2018). Apart from this, another major reason in Wesfarmers for impairment testing is the decrease in the usefulness of the assets and the value of estimated economic benefits associated with these assets (wesfarmers.com.au 2018). The following table shows the value of asset impairment in Wesfarmers for the year 2017 and 2016:
|
Particulars |
2017 ($ m) |
2016 ($m) |
|
Impairment of plant, equipment and other assets |
27 |
954 |
|
Impairment of Leasehold Property |
22 |
10 |
|
Impairment of Goodwill |
– |
1,208 |
Certain complexities and issues in impairment testing of Wesfarmersca can be seen in the following aspects:
Cash Generating Units and Segments: The major question related to impairment is the level at which impairment needs to be done. It depends on the asset test and other assets in order to obtain cash flows. Assets like brand name, machine and building requires other assets in order to support carrying value. Thus, there is a requirement of impairment test for these assets that can result in independent cash flow from other businesses (Linnenluecke et al. 2015).
Difference between Fair Value and Value-in-use: The use of fair value shows that how much an investor would incur for an assets where value-in-use shows the ability of asset to generate cash flow (Zhuang 2016). This difference creates complexity in the process of impairment testing. For example, fair value takes into account risks, costs and benefits for restricting or improvement in assets. On the contrary, value-in-use leads to the compromise of their synergies and economies of sales that is specific to the organization (Bond, Govendir and Wells 2016).
Use of Appropriate Discount Rate: For the determination of value-in-use related with impairment testing, many organizations use Capital Asset Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC) for ascertaining the rate of discount. These methods are validated in case there is not any variation between the related risk and cash garneting unit. However, in actual, variation in discount rates can be seen for various cash generating units. The main reasons of this are currency risk, country risk, product risk and the maturity of market (Bond, Govendir and Wells 2016).
Paragraph 126 (a) of AASB 136 puts the obligation on the companies to realise loss of impairment in the income statement (aasb.gov.au 2018). In case of Wesfarmers, the company has provided the amount of impairment loss in the income statement that can be found in 2017 Annual Report, page no. 94.
Paragraph 126 (b) of AASB 136 has made it mandatory for the disclosure of amount of reversal realized in the income statement for the specific accounting year (aasb.gov.au 2018). For the reversals of impairment, Wesfarmers ascertains whether there is any change in inherent estimated used by the company for the determination of recoverable amounts of the assets from the realization of last impairment. In Wesfarmers, there is any reversal of impairments loss for the year 2017 and it can be found in 2017 Annual Report page no. 125.
As per Paragraph 130 (g) of AASB 136, in case the recoverable value of any cash generating unit is discovered in value-in-use, there is a need to use the discount rate in current and past estimates related to value-in-use (aasb.gov.au 2018). For this purpose, Wesfarmers has made some key assumptions for the determination of recoverable amounts from different cash generating units and it can be observed in 2017 Annual Report, page no.126.
Paragraph 80 of AASB 136 puts the obligation for the allocation of goodwill to a class of cash generating units estimated for overall benefits (aasb.gov.au 2018). Wesfarmers has done the allocation of goodwill to a group of cash generating units and it can be found in 2017 Annual Report, page no. 111.
Thus, based on the above discussion, it can be concluded that Wesfarmers has fully met the disclosure requirement of impairment as per AASB 136.
Capital investors can become beneficial by obtaining information from general purpose financial reporting. Paragraph 70 of the Conceptual Framework states that impairment loss needs to be recognized in case of the non-recovery of carrying amount of an asset (aasb.gov.au 2018). Wesfarmers recognizes their impairment loss in case the asset carrying amount is more than its recoverable amount and it can be found in 2017 Annual Report, page no, 105.
As per Paragraph 130 of the Conceptual Framework, companies are required to estimate cash flow from the organizational perspective rather than market perspective for the impairment of assets under AASB 136 (aasb.gov.au 2018). Wesfarmers has not generated independent cash flows and one cannot project value-in-use near to the fair value and it can be found in 2017 Annual Report, page no. 125.
Thus, based on the above discussion, it can be concluded that the impairment related disclosure of Wesfarmers fully align with the requirement of general purpose financial reporting.
However, the company is required to put emphasis on some of the major aspects to bring improvement in impairment testing like emphasis on foreign currency cash flow, alignment of impairment information with market data, consideration of market capitalization and the scrutiny of discount rate.
Conclusion
From the above discussion, it can be seen that the correct calculation of imapitement write-downs has major significant in the companies as it helps in depicting the correct asset position of them. The above discussion shows that the major assets considered for impairment in Wesfarmers are property, plant and equipment, trade receivables, freehold property, goodwill and other intangible assets along with non-financial assets. In addition, from the above discussion, it can be concluded that Wesfarmers has fully complied with all the impairment related requirement of AASB 136. It also has fully aligned with the objectives of general purpose financial reporting. All these facts imply that Wesfarmers has carried out impairment accounting in the correct manner by complying with all the requirements and standards.
References
Aasb.gov.au. (2018). Conceptual Framework for Financial Reportin. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 28 Apr. 2018].
Aasb.gov.au. (2018). Impairment of Assets. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf [Accessed 28 Apr. 2018].
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136.
Group, D. (2018). Who we are . [online] Wesfarmers.com.au. Available at: https://www.wesfarmers.com.au/who-we-are/who-we-are [Accessed 28 Apr. 2018].
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.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Wesfarmers.com.au. (2018). Annual Report 2017. [online] Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 28 Apr. 2018].
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.
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