Impairment Of Assets – Accounting Standards And Practice

Main Body

Discuss about the Accounting Standards and Practice.

AASB 136 addresses the acknowledgement, disclosure and measurement of impairment of assets and reversal of impairment losses. This standard includes more extensive and elaborate disclosures pertaining to impairment losses for individual assets, aggregate losses, and Cash Generating Unit (CGU). The present study is focused on theoretical description and practical application of provisions of AASB 136. For a better understanding annual report of Woolworths has been analysed by considering the applicability of AASB 136.

AASB 136 requires following disclosures:

• Disclosure of the following for every category of asset: separately the impairment reversals and losses recognised, separately, the revaluation increments and decrements recognised in equity directly (Bond, Govendirand Wells, 2016).
• For an individual asset also including goodwill or a CGU, disclosing the following for every material loss reversed or recognised; the circumstances and events leading to such a reversal or loss and the amount of the same.
• Disclosure if the recoverable asset amount or CGU is fair value minus cost of sales or its value-in-use When the recoverable sum is calculated on the former, disclosure of the base utilised for determining fair value minus cost of sales. When the recoverable sum is the latter, disclosure of the rate of discount used in the previous and current estimate (Zhuang, 2016).

The annual report of Woolworths meets the disclosure requirements specified by AASB 136. Fixed assets and investments worth $8,371.3 million reduced $1,793 million due to substantial item impairment charges of $1,633 million pertaining to the impairment of Home Improvement assets of $1,432 million and impairments arising from the group-wide evaluation of $201 million. Intangible assets worth $5,978.3 million reduced $266 million due to impairment charges of $439 million mainly pertaining to the impairment of goodwill and other intangible assets in Home Improvement and EziBuy (Woolworths Group. 2016).

The company evaluates at the end of every financial period whether there is unbiased evidence that the company’s receivables are impaired. The recoverable sum of Woolworths’ receivables is computed at the present value of projected future cash flows, discounted at the initial effective rate of interest. Receivables having a short time period are not discounted. An impairment provision for receivables is not recognised unless sound evidence are available that a loss has taken place (Woolworths Group. 2016).  

Equipment, property and plant are tested for impairment as per the impairment policy of non-financial assets. In 2016, the company recognized an impairment of equipment, plant and property of $201.3 million pertaining to important items from ongoing operations and $1,431.8 million from withdrawn operations. Assets pertaining to withdrawn operations are transferred to assets being held for sale. Goodwill signifies the surplus of the cost of acquisition over the fair value of the net identifiable assets. Goodwill is computed at cost minus any impairment loss following original recognition.Other intangible assets are also computed at cost minus accumulated depreciation and impairment loss (Woolworths Group. 2016). Intangible assets are verified for impairment as per the impairment policy of the non-financial assets. In 2016, the company acknowledged impairment of intangible assets worth $320 million pertaining to important items from ongoing operations and $119.4 million from withdrawn operations.

Impairment of the non-financial assets, intangible assets and goodwill from continued operations of $521.3 million is attributed to the results of the company’s operating model evaluation, property rationalisation evaluation, impairment of intangible assets and store network optimisation. The impairment recognised entails goodwill in EziBuy drawing on the strategic decision to segregate EziBuy and BIBW and the substantial deterioration in the business’ trading performance (Woolworths Group. 2016).

Complexities and Key Issues Involved in Impairment Testing

The carrying amount of company’s non-financial assets, intangible assets and goodwill are evaluated for impairment as follows:

In evaluating the impairment, the recoverable sum of the asset is projected to identify the degree of impairment loss. The recoverable sum is the higher of its VIU and its fair value minus costs of sales. For an asset not generating highly autonomous cash inflows, the recoverable sum is evaluated at the CGU level. An impairment loss is acknowledged whenever an asset’s carrying amount or its CGU surpasses the recoverable sum. The company does not reverse an impairment loss in respect of goodwill (Guthrie and Pang, 2013). As far as other assets are concerned, the impairment loss is reversed I if there is a change in the projections employed to decide the recoverable sum. The Group reverses the impairment loss only to the level that the carrying amount of the asset does not surpass the determined carrying amount net of amortisation or depreciation if no impairment loss is recognised (Woolworths Group. 2016).

Economic events have a considerable impact on valuations. As complicated rules pertaining to fair value reporting continue to draw regulatory examination, addressing the complexities of impairment testing might require the company to draw from its critical industry and technical experience. Not only can issues emerge because of the challenges to determine the fair value of a company subjected to impairment testing, but even in comprehending, building and supporting the market participant presumptions (Paugam and Ramond, 2015). The main complexities and issues involved in impairment testing as identified by Ernst & Young are related to valuation. An asset’s recoverable amount or CGU is to be computed as the greater of the asset’s fair value minus the cost of sales (FVLCS) and Value in Use (VIU). Measuring the VUI and FVLCS of an asset demands the use of estimates and assumptions (Ernst & Young. 2011). The below-mentioned issues prove to be especially troublesome in doing so:

• The usage of discounted cash flow method for estimating FVLCS
• Defining the kinds of future cash flows that must be covered in the computation of VIU, especially those pertaining to restructuring programs
• Identifying the suitable rate of discount to apply (Ernst & Young. 2011)
• The effect of taxation on the impairment test, provided the requirement in AASB 136 to compute VIU employing pre-tax cash flows and rates of discount
• Making sure that the recoverable sum and carrying amount which are being compared are determined consistently
• The integration of business assets into the impairment testing (Ernst & Young. 2011)

While the information required to compute VIU must always be present, it may not always be plausible to forecast FVLCS with adequate reliability for the purpose of impairment testing. Hence, as evident from the complexities identified by Ernst & Young, computing an asset’s recoverable amount leads to several valuation problems, on which the AASB 136 gives a little guidance. The standard obligates a CGU or asset to be tested in its present status, and not the status that the company’s management desires it was or intends to reach in the future. Hence, AASB 136 mandates VIU to be computed at the NPV of future cash flows. This implies neglecting several management plans of augmenting the asset’s performance (Ernst & Young, 2008).

Relevancy of Issues for Woolworths

The four issues identified for Woolworths are:

The usage of discounted cash flow method for estimating FVLCS – The Group has many intangible assets whose valuation is carried out using distinct methods. It is not possible and not justifiable also to measure the values of all the assets uniformly.

Identifying the suitable rate of discount to apply – The rate of discount is based on predictions and varies according to the market changes. It is not possible to specify a particular rate of interest because the company cannot fix a specific rate owing to the market changes and varying perspectives of the policy makers (Ramannaand Watts, 2012).

Making sure that the recoverable sum and carrying amount which are being compared are determined consistently – The determination of an asset’s recoverable amount is also an estimation based on market forces. The assets being used by Woolworths are specific to the company’s operations. It is not necessary that the recoverable amount set for the asset will be received in the market at the end of its useful life because it will be difficult to find a buyer for that also.

The integration of business assets into the impairment testing – If the impairment loss is for short term basis instead of long term and it is recorded then it reduces the profit significantly (Yao, D. Percyand Hu, 2015).

Conclusion

In accordance with the present, it can be articulated that companies are required to comply with the provisions stipulated in AASB 136 for disclosure and measurement of impairment of assets and reversal of impairment losses. However, impairment testing is concerned with various complexities which are required to be considered by the company for an accounting of assets.

References

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 and Finance, 56(1), pp.259-288.

Ernst & Young. 2008. Impairment accounting – the basics of IAS 36 Impairment of Assets. [pdf]. Available through: <https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf>. [Accessed on 20^th April 2017].

Ernst & Young. 2011. IAS 36 Impairment testing: practical issues. [pdf]. Available through:  <https://www.powertechexposed.com/IAS_36_impairment_testing_GL_IFRS.pdf>. [Accessed on 20^th April 2017].

Guthrie, J. and Pang, T. T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Paugam, L. and Ramond, O., 2015. Effect of Impairment-Testing Disclosures on the Cost of Equity Capital, Journal of Business Finance & Accounting, 42(5-6), pp.583-618.

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

Woolworths Group. 2016. Annual Report. [pdf]. Available through: <https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf>. [Accessed on 20^th April 2017].

Yao, D. F., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11, pp.31-45.

Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting and Finance, 56(1), pp.289-294.