CSR limited has recorded impairment of assets for year ending 31st March, 2017 in segments of building products so that carrying value of these assets are reduced to their recoverable amount. Moreover, plants and equipment were impaired with the written down value of $ 11 million. Intangible asset such as goodwill has been done to a written down value of $ 0.2 million (csr.com.au 2018). Impairment of all these assets have been performed for year ending, 2017. There has been no impairment conducted for year ending 2015 and 2016.
The impairment testing of plant, property, equipment and intangible assets are done by CSR limited for ensuring the fact that they are not carried at value that is above their recoverable amounts. For the trade names and goodwill, impairment testing is performed at least annually and the assessment is done at each reporting date when there is indication that assets require impairment. CSR limited makes the assessment about each individual assets recoverable value for performing the impairment testing (Nilsson and Stockenstrand 2015). If it not possible to make the assessment about recoverable amount of each assets, then recoverable amount of cash generating unit is assessed for conducting impairment testing. The Cash Generating Unit carrying amount is reduced to recoverable amount if carrying amount is more than its recoverable amount and the value is recognized in the financial performance statement (csr.com.au 2018). An impairment allowance is established by CSR group that helps in representing of incurred cost expenses in respect of receivables and trade.
From the analysis of annual report of CSR limited, it can be inferred that group has not recorded any expenses related to impairment for the year of analysis. There have been no expenses related to impairment for year ending 2015 and 2016 respectively as depicted by analyzing cash flow statement. However, for the financial year 2017, net cash flow of amount $ 11.2 million has resulted from impairment of assets (csr.com.au 2018).
CSR group is required to make estimates and assumption about assets and liabilities carrying value that are based on several factors and historical experience. Such factors are considered to be under circumstances that are reasonable. Estimates made by organization might differ from the actual value. Methodology used by organization for impairment of assets is evaluated on an ongoing basis along with making the assumptions about value in use. In order to extinguish the obligations, estimates of future costs is done by requirement of judgment. Estimations are made in estimating recoverable amount and any change in estimates leads to loss relating to impairment (Lin and Graham 2017).
The testing of goodwill impairment incorporates exercising of substantial subjectivity in accordance to current international accounting standard. Analysis of annual report of CSR limited illustrates that recoverable amount calculation, allocating goodwill to Cash Generating Unit is not subjected to discretion, and this is indicative of the fact that impairment testing of assets are not done opportunistically. However, the calculations of value in use require judgment of management for using suitable discount rate in calculation of future cash flows. Therefore, it can be inferred that there was low degree of subjectivity involved in the calculation of impairment testing. The outcome of impairment testing is considerably influenced by involvement of subjectivity and there are different factors associated with exercising impairment of assets (csr.com.au 2018). An organization can experience difference in carrying value and recoverable value of assets.
The understanding about impairment testing of assets was quite surprising as evaluated by going though the various segmented information. It was surprising in the sense that little information was presented in the annual report of CSR group. From the analysis of annual report of CSR group, it can be ascertained that there was not much information available related to impairment of assets. Discounted cash flow projections are used for determining recoverable amount of cash generating units. Detailed explanation of estimates and assumptions are used for determining the carrying or recoverable value of assets (Lubbe et al. 2014). Presence of little information on impairment of assets does not provide users or investors of annual report of company with causes associated with assets impairment and clarification on methodology adopted.
Analysis of annual report demonstrate existence of fewer information on asset impairment and with insufficient information, it becomes difficult for users of financial statement to gain some new insights concerning impairment. Moreover, organization has not adopted international accounting standard 36 for impairment of goodwill that enable organization to exercise discretion in determination of impairment testing. Management of organization is not acting opportunistically and hence the outcome of impairment has the possibility of being influenced only by changes in estimates and assumptions (csr.com.au 2018).
Preparation of financial report of CSR limited is done at historical cost by ensuring certain financial assets at fair value. Detailed explanation of fair value of liabilities and assets relating to their purchase consideration are provided in separate section. Recognition of trade receivables is made at fair value initially and subsequently it is done at amortized cost. Measurement of intangible assets such as customer lists and trade names gained through acquisition is computed at fair value. Recognition of derivates is done at fair value and a separate section of fair value measurement of financial instruments is presented in separate section (Maynard 2017). Therefore, it can be said that CSG group provides detailed presentation of fair value of financial liabilities and assets.
Lessees and lesser are required to make classification lease as operating lease and capital lease under the existing or previous accounting standard of lease. Organizations under existing standard are provided with the option of presenting leased amounts of liabilities and assets briefly but not for long-term. Operating lease is not mandated to presented under the balance sheet unlike capital lease (Scott 2015). It enables them to make the presentation of leased assets and liabilities under balance sheet optional. Total amount of liabilities as depicted in current financial statement is underestimated as an organization is not mandated to present operating lease, despite they might have thousands worth of lease liabilities pertaining to them. Consequently, organization actual value of liabilities would be might be considerably higher than liabilities that exist off balance sheet. Investors evaluating the financial statement will not be able to get the actual value of lease liabilities and assets and this would make them deceptive of financial position of company (Sandblom and Strandberg 2015).
According to previous lease standard, it is essential to recognize only capital leases on balance sheet. It lacked disclosures for assisting users of financial statement and other investors to understand the timing, amount and uncertainty associated with cash flow that arises from lease. There is lacking of qualitative and qualitative requirements for providing additional information concerning lease that are recorded in financial statements (Nilsson and Stockenstrand 2015). All this makes inability of organization in achieving a particular accounting outcome on the statement of financial position. All this contributes to less faithful representation of leases liabilities and leased assets arising from lease. Presentation of operating lease is not mandated under existing lease standard, however, such lease liabilities also comes with commitment on part of organization to make the payments (Trucco 2015). This is indicative of the fact that in while organization is not presenting leased liabilities that is underestimating over all liabilities of business. On other hand, in actual, there are thousand worth of leased liabilities and this leads to a significant difference between liabilities reported in balance sheet and liabilities that is off screen. Therefore, the total value of debt reported in balance sheet is 66 times lower than off balance sheet liabilities.
Airline companies have entered into voluminous leasing of planes and in accordance with previous lease standard, they are not required to present on balance sheet. Under standard, such companies such leases were classified historically with disclosures made only off balance sheet. There is significant difference between airlines companies leasing most of its aircraft fleets and airline companies buying its fleets. It seems that financial positions of such companies are significantly different while in actual scenario, their financial obligations might be different (Winberg 2015). All these make it difficult for investors assess and evaluate the financial position of these airline companies. Financial leverage and operational flexibilities of airline companies have difficulties in comparing. This makes it airline companies to have no level playing field.
New standard on leasing will not be popular with everyone due to various criticisms leveled against it. Balance sheets profiles of lessees will significantly change that will make them appear more leveraged. This in turn have an impact of increasing cost. Lease in relation to large volume of small assets will have increased complexity and cost of reporting. Moreover, some sophisticated lenders already estimate the effect of off balance sheet liabilities on leverage and it is not required for companies to bring such leases on off balance sheet liabilities. Organization is required to make upgrading of their system for enhancing their disclosure so that they provide adequate information (pwc.com 2018). Business is required to incur additional costs adoption of new standard requires them to spend more. All these factors have contributed to make new standard controversial and unpopular among some players.
Adoption of new accounting standard for lease will results in a more faithful representation of obligations and rights of organization that is arising from leases. Qualitative and quantitative information associated with lease transactions is disclosed in the statement of financial position of reporting entity. Investors will have improved understanding of financial commitment of organization pertaining to leases. Addition information regarding leasing activities of lessors and exposure of assets and credit risks of lessor’s will be provided to financial statements users (fasb.org 2018). All this will contribute in brining transparency and clarification to the facts of leases represented in financial statement. Therefore, investors will have more informed decisions as absolute picture of financial position of companies will be available. It will help in bringing buy decision versus balanced decision by management of organization.
References list:
Andrew, A. and Ward, A.M., 2015. Introduction to Financial Accounting.
Cheng, J., 2015. Small and Medium Sized Entities Management’s Perspective on Principles-Based Accounting Standards on Lease Accounting.
Corporate. (2018). Annual Meetings and Reports. [online] Available at: https://www.csr.com.au/investor-relations-and-news/annual-meetings-and-reports [Accessed 9 Jan. 2018].
Fasb.org. (2018). Leases Summary. [online] Available at: https://www.fasb.org/jsp/FASB/FASBContent_C/CompletedProjectPage&cid=1176167904031 [Accessed 9 Jan. 2018].
Lin, K.C. and Graham, R.C., 2017. How Will the New Lease Accounting Standard Affect the Relevance of Lease Asset Accounting?.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP Catalogue.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Nash, P., 2018. Financial Accounting Entries. Effective Product Control?Controlling for Trading Desks, First Edition, pp.271-289.
Nilsson, F. and Stockenstrand, A.K., 2015. The Objectives of Financial Accounting and Management Control. In Financial Accounting and Management Control (pp. 1-16). Springer International Publishing
Pwc.com. (2018). [online] Available at: https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf [Accessed 9 Jan. 2018].
Sandblom, P. and Strandberg, A., 2015. The Value Relevance of the Proposed New Leasing Standard. An event study of the European Stock Markets’ Reaction to the proposed replacement of IAS17.
Scott, W.R., 2015. Financial Accounting Theory 7thEdition. Canada: Pearson.
Trucco, S., 2015. Financial Accounting: Development Paths. In Financial Accounting (pp. 9-40). Springer International Publishing.
Winberg, M., 2015. The New Leasing Standard-Implementation Plan.
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