The Australian Agriculture Company LTD has recorded the impairment of the assets for the year ended 31St March 2017. For the purpose of impairment testing the Australian Agriculture Company LTD has tested plant and equipment and industrial land and building. The impairment of property and equipment and industrial land and equipment for determining the carrying values of these assets (Picker et al. 2016). The impairment testing is done by the Australian Agriculture Company LTD on the circumstances when it becomes apparent that the carrying value might not be recoverable.
The impairment testing for the plant and equipment and industrial land and equipment is conducted by Australian Agriculture Company Ltd in order to make sure that these assets are not carried anything beyond their recoverable value. According to the Australian Agriculture Company Ltd an asset that does produce high independent cash inflows the recoverable value is ascertained to the cash generating unit to which the assets belongs (Yu and Xu 2015). Given that there is any sign of impairment existed and on the circumstances where the carrying value of the asset goes beyond the recoverable amount the written down amount of the assets is written down or transferred to the cash generating units.
In carrying out the impairment of the plant and equipment the recoverable if the amount of the assets is higher than the fair values then the cost is subtracted front the sales and value in use. In determining the value in use, the projected future cash flows are discounted to their current amount by making use of the pre-tax discount rate (Lubbe, Modack and Watson 2014). This eventually reflects the present market assessments relating to the time value of the money and the risk that is associated to the cash generating unit.
On conducting a detailed analysis of the Australian Agriculture Company Ltd annual report it is noticed that the company has not recorded any impairment expenditure. Additionally, there have been no instances associated to the impairment expenditure in the preceding years of 2015 and 2016 respectively as stated in assessing the cash flow statement of the firm. However, it is noticed that provision related to impairment of receivables have been stated in the financial statement (Tsalavoutas, André and Dionysiou 2014). The trade receivables are regarded as the non-interest bearing and are usually based on the 14 day terms. An impairment is identified at the time when there are objective evidences that no individual accounts receivable will be considered collectible.
The preparation of the financial statements requires the organization to make certain judgements, estimations and assumptions that might create an impact on the reported amount of the firm in the financial statements. The Australian Agriculture Company Ltd on regular basis evaluates and estimates the assets, liabilities, income and expenditure (Ono, Rodrigues and Niyama 2014). The judgement and the estimation is conducted based on the historical cost experience and other numerous factors that are reasonable in the circumstances where the carrying value of the assets and liabilities is not readily obtainable from the other sources. The impairment of financial and non-financial assets is based on the different assumptions and circumstances which might materially create an impact on the financial result or financial position of the firm.
The accuracy of the impairment testing will be impacted by the degree and subjectivity of the estimations and judgements relating to the inputs and parameters that is used in ascertaining the recoverable amount. Hence the application of the International Accounting Standard 136 requires careful consideration. The goodwill impairment testing requires the exercise of substantial amount of subjectivity in compliance with the present standard of accounting (Banker, Basu and Byzalov 2016). On assessing the annual report of the Australian Agriculture Company Ltd the allocation of the goodwill to the cash generating unit does not contain any kind of subjectivity and this reflects that impairment testing of the assets are carried out in an opportunistic manner.
Nevertheless, the computation of the value in use needs sufficient amount of estimation and assumptions for using the appropriate discount rate in the determination of the anticipated future cash flow. Taking into the consideration the analysis it can be stated that there prevails a lower amount subjectivity in the determination of the impairment testing. The result of the impairment testing is significantly influenced by the involvement of the lower amount of subjectivity (Ajupov, Mishina, and Ivanov 2014). The result of the impairment testing is constantly influenced by the prevalence of the subjectivity and there are numerous factors that are related with the application of the impairment assets. An organization can experience differences in determining the carrying value of the asset and recoverable amount.
The knowledge regarded the impairment testing of assets was very surprising after conducting an in depth analysis of numerous information. Surprisingly a large amount of evidences has been presented by the company in the annual report relating to the impairment. The company has made use of the cash flow projections in ascertaining the recoverable value of the cash generating unit (Penner, Kreuze and Langsam, 2016). In in depth explanation of the estimation and assumptions have been applied by the company in ascertaining the carrying value of the assets.
On conducting the analysis of the annual report it is understood that noteworthy information has been provided by the Australian Agriculture Company Ltd relating to the impairment. The users of the financial information would be better able to gain an understanding of the financial position of the firm and impairment testing simultaneously. The company has not applied the international accounting standard 36 relating to the impairment of intangible assets that enables the firm in implementing the discretion of impairment testing (Nawaiseh 2016). The management of the firm has not acted in an opportunistic manner and the outcome that is derived from the impairment testing possess the possibility of influencing the changes in estimation and accounting assumptions.
The financial statement of the Australian Agriculture Company Ltd is in compliance with the historical cost basis and the financial assets are valued at fair cost. The company in its annual report has provided a detailed explanation relating to the value of the assets and liabilities in the separate section. The company has recognized the accounts receivable at the fair value and has subsequently done amortization at the amortized cost. Measurement of the intangible assets has been conducted on the fair value means (Kabir, Rahman and Su 2017). The deferred shares are valued based on the fair value based on the market price of the company shares. The livestock is measured by the company based on the fair value following the deduction of cost and any form of changes that is identified in the income statement. The company at the end of the accounting year measures the livestock based on the fair value.
An important classification is required to be made by the lessees and Lesser in the form of operating lease and capital lease in respect of the earlier standard of accounting for lease. Commercial firms under the current lease standard are offered with the choice of stating the amount of lease as liabilities and assets for small period but not for the long period of time. Unlike the capital lease, operating lease is not obligatory to be stated in the balance sheet. This provides the companies with the opportunity of stating their lease assets and liabilities in the balance sheet on the optional basis (Sinclair and Keller 2014). The total liabilities under the present financial statement is undervalued since commercial entities are not obligatory required to state their operating lease in spite of having several lease liabilities that is applicable to the companies. Commercial firms generally value their liabilities that may be significantly greater than the liabilities that prevailed out of the balance sheet. External investors would not be able to obtain a true and fair view of the lease liabilities and assets (Vasile and Vasile 2015). Consequently, the investors may not be able to get the true and fair view of the firm.
The earlier standard of lease mandated the commercial entity to identify lease capital on the statement of financial position. The standard required appropriate disclosure for helping the investors in determining the financial position of firm along with the determination of the timing, amount and ambiguity related with the cash flow originating from the lease (Bond, Govendir and Wells 2016). Both the quantitative and qualitative aspects lacked to provide sufficient data relating to lease standard that is considered in the financial report. This enables the commercial entity in attaining the specific book-keeping result on the balance sheet. This result in less realistic presentation of lease liabilities and lease assets originating from lease.
Demonstration of lease is not compulsory in the present standard of lease but they accompany commitment for the commercial entity in making payments. This reflects that commercial entity that is not presenting liabilities is undervaluing the business liabilities (AACo 2018). There are numerous lease liabilities that results in noteworthy differences between the liabilities that is stated in the statement of financial position and liabilities that are not included. Hecnce, the amount of debt presented in the balance sheet results in sixty-six times less than off than the liabilities that are off the balance sheet.
Airline organization generally entered in huge leasing of the aircraft and in agreement with the earlier standard of lease they are not mandated to be reflected in the balance sheet. In the current standard of accounting aircraft companies have classified leases on historical cost basis with revelation made are off the balance sheet. There are numerous differences amid the airline firms that are leasing most of the air fleet and the airline companies that are purchasing the airplane (Camfferman and Zeff 2015). Apparently the financial position of the airline firms exclusively varies from other firms in real situations because their financial requirements are not alike. As a result of this, external investors find it difficult to determine and assess the true and fair position of the firm. There are also arise problems in determining the financial leverage and operative suppleness of the airline companies. Accordingly, this results in no level playing field for the airline firms.
The new standard presented on lease would not be considered popular among everybody because of numerous criticism associated with it. Unpopularity of the lease standard is primarily because the balance sheet profiles of the lessees would change significantly which would enable the commercial entity look highly leveraged. Subsequently this result in rising cost for the firms. Leasing of huge number of small assets would result in added difficulties with higher cost of reporting. Additionally, lenders have estimated the adverse impact that would create on the balance sheet liabilities (Brusca and Martínez 2016). Commercial entities would be required to update their accounting system for improving their accounting disclosure to provide sufficient information to the shareholders. Business would be forced to incur added cost of implementing the new standard which would require them to spend more. Therefore, the above stated elements have significantly contributed to the unpopularity of the new leasing standard.
Implementation of the new standard of accounting relating to lease will lead to more realistic demonstration of commitments and rights of commercial firms that is originating from the lease standard. Both the qualitative and the quantitative data related to the lease transaction is stated in the balance sheet of the company. The outside investors would get the better understanding of the financial obligation relating to leases (Camfferman and Zeff 2015). The new standard would enable the leasing activities of the lessors know to the users of financial statement along with the credit risk associated to such activities. The application of new standard would help in promoting transparency and clear representation of the leasing facts in the financial report. Hereafter, the investors would be offered with more informed decision making by obtaining the true view of the financial position for a commercial entity.
Reference List:
AACo. (2018). Annual Reports | AACo. [online] Available at: https://aaco.com.au/investors-media/annual-reports [Accessed 25 Jan. 2018].
Ajupov, A.A., Mishina, M.S. and Ivanov, M.E., 2014. Method of valuation of financial factors influencing the implementation of liquidity risk for leasing companies. Mediterranean Journal of Social Sciences, 5(24), p.154.
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.
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.
Brusca, I. and Martínez, J.C., 2016. Adopting International Public Sector Accounting Standards: a challenge for modernizing and harmonizing public sector accounting. International Review of Administrative Sciences, 82(4), pp.724-744.
Camfferman, K. and Zeff, S.A., 2015. Aiming for global accounting standards: the International Accounting Standards Board, 2001-2011. Oxford University Press, USA.
Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP Catalogue.
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.
Ono, H.M., Rodrigues, J.M. and Niyama, J.K., 2014. Disclosure of impairment: a comparative analyse of brazilian listed companies in 2008.
Penner, J.W., Kreuze, J.G. and Langsam, S.A., 2016. INSTRUCTORS’NOTES: IMPAIRMENT ANALYSIS: COMPARISON OF IMPAIRMENT OF LONG-LIVED ASSETS BETWEEN US GAAP AND IFRS. Academy of Educational Leadership Journal, 22(2), p.90.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2016. Applying international financial reporting standards. John Wiley & Sons.
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.
Tsalavoutas, I., André, P. and Dionysiou, D., 2014. Worldwide application of IFRS 3, IAS 36 and IAS 38, related disclosures, and determinants of non-compliance.
Vasile-Cristian-Ioachim, M. and Vasile, B., 2015. REVERSIBLE IMPAIRMENT OF ASSETS AND THE IMPACT ON ECONOMIC PERFORMANCE. Annals of’Constantin Brancusi’University of Targu-Jiu. Economy Series, 2(1).
Yu, C. and Xu, J., 2015, March. Research on accounting conservatism and investment efficiency of IT enterprises: A perspective of impairment of assets. In Information Technology and Applications: Proceedings of the 2014 International Conference on Information technology and Applications (ITA 2014), Xian, China, 8-9 August 2014 (p. 113). CRC Press.
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