Impairment Testing Of Assets And New Lease Standard: Analysis Of GUD Holdings Limited’s Annual Report

Impairment Testing of Assets

From the analysis of annual report of GUD holdings limited, it can be ascertained that organization has written down value of some assets. This comprise of impairment of brand names, goodwill, product development and inventory. Organization has also undertaken impairment of Dexion resulting from recent performance of trading. Amount that was charged under inventory impairment involved $ 1 million.

Organization conduct annual impairment of both tangible and intangible assets whenever there is an indication of conducting impairment. There are various factors considered by entity while conducting impairment such as fair value, recoverable amount and value in use. Assets that do not have possibility of conducting impairment individually are grouped into cash generating units and they are subjected to operating segment ceiling test. Aggregation of cash generating unit to which goodwill have been allocated reflects the lowest level at which impairment testing has been done. Future cash flow of assets is estimated by discounting to their present value using discount rate for value in use assessment. Carrying amount of cash generating unit are compared to their recoverable amount for testing the impairment of goodwill and other intangible assets.

GUD holdings limited has recorded impairment expense in financial year 2016 by amount $ 76697000 and there was no such expenditure recorded in year 2015. The impairment charge for its business segments that is Davey and Dexion stood at $ 1000 million, $ 75695 million and resulting and continuing operations of $ 76697000.

Recognition of impairment is done immediately in the income statement and there is no subsequent reversal. Calculation of value in use is done by making the assumptions about projections cash flow. The appropriateness of methods employed for the impairment of assets is evaluated by the organization by making assumptions about calculations of value in use.

Management of organization makes estimation about impairment of assets based on experience concerning their historical loss. Estimates are made for determining recoverable amount of assets and impairment losses are recognized resulting from change in estimation that is recognized in the income statement.

It has been ascertained from conducting analysis of annual report of GUD holding limited that the process of impairment testing involved few degree of subjectivity. Involvement of subjectivity has the possibility of significantly influencing the impairment-testing outcome. Managers are provided with opportunistic behavior when there is involvement of subjectivity as calculation of recoverable amount of cash generating unit is subjected to discretion. Therefore, it is projected by analysis of annual report that there was no sort of subjectivity involved in impairment testing.

Recognition of Impairment Expenses

The methodology and techniques involved in testing of impairment of assets differs from organization to organization. Hence, it is always interesting to understand the impairment testing of particular organization as it enables viewer and analysts to gain new knowledge about the way organization is conducting impairment.  GUD holding limited provides segmented information about impairment testing of different assets and there is a clear presentation of costs involved in carrying out impairment. It has been found that calculation in impairment of financial assets have been done by employing a new expected credit loss model.

The way companies are conducting impairment testing of assets have simplified in recent years as per the guidance released by Financial accounting standard board. Such method involves lower cost and fewer efforts on part of management. Organizations conducting impairment testing has the option of performing both qualitative and quantitative assessments. Nonetheless, it is considered appropriate to perform qualitative and quantitative assessment of impairment of assets that will assist users of annual report in undertaking accurate decision.

Fair value measurement is about estimation of price at which the transactions of transferring liabilities and selling the assets is done at present conditions of market so that it reflects true value. GUD holding limited recognize adjustments to fair value of hedging reserves in the consolidated statement of comprehensive income. Any changes in cash flow hedges fair value is transferred to inventory. Measurement of derivatives and other financial instruments are done at fair values that are not qualified hedging accounting. There is immediate recognition of any changes in derivative instruments fair value Measurement of financial liabilities and assets are done at fair value through loss or profit.

In the former accounting standard for leasing, there was ignorance of criteria for determining capital lease. Previous standard did not require organizations to report their operating leases on statement of financial position or balance sheet. As a consequence of this, there was no actual assets and liabilities representation. There is underestimation of actual amount of liabilities, as large volumes of assets are not incorporated in financial metrics. Investors viewing annual report were deceived as the total amount of liabilities reported in balance sheet was considerably lower than off balance sheet liabilities. Moreover, there were arbitrary calculations involved in determining substantial obligations pertaining to leases. Hence, former accounting standard failed to reflect economic reality.

There exist similarity between leases that are done economically and purchasing the leased assets. Under former standard, in some situations the impact of classification of lease is not reported on lessee’s balance sheet. Organizations having operating leases generated financial liabilities but the liability impact is not presented under the balance sheet. Leasing of assets generates liabilities in actual, however, there is no recording of the same in balance sheet. This explains why off balance sheet liabilities were 66 time higher than debt that is reported on balance sheet.  

Fair Value Measurement

The financial position of airline companies is difficult to be assessed by investors intending to make investments. There seems to be significant difference between airline companies leasing most of its aircraft fleets and those buying most of its fleets. In actual scenario, there might be little difference or similarity between their financial positions and in this aspect it becomes difficult to make comparisons between such companies. Investors face difficulties in comparing airline companies’ financial leverage.

Business adopting new lease standard will experience change in terms of internal control and system. Recognition of lease will be done by gathering necessary data and determining robustness of current accounting policies of organization. It is required by organization to update their system in order to gain relevant and adequate information for enhancing disclosure concerning leases. It becomes essential for companies to make negotiation of agreements or loans resulting from change in financial metrics. In the initial year, profitability of business might get reduced due to additional cost required in lieu of imposition of standard. Moreover, companies might witness default on debt covenants followed by negative economic impacts. All these factors make new standard adoption controversial among companies.

The assessment of lease term is done by taking into consideration proper judgment as it requires identifying circumstances and recognizing liabilities pertaining to lease in actual sense. Assessment of lease by organization is done by considering economic factors such as whether leases are contract based, asset based, entity based and market based. All these make considerable improvement in conditions, terms and contracts of lease holding.  It is not required by investors to perform rough calculations and organizations are not required to maintain their structuring of leasing off balance sheet to look attractive for investors. Therefore, while making investment in any entity, investors will have informed decision as they will be getting absolute financial position.

References list:

Ghani, Erlane K., and Kamaruzzaman Muhammad. “The Effect of Freemind on Students’ Performance in an Advanced Financial Accounting Course.” International Journal of Academic Research in Business and Social Sciences 6, no. 7 (2016): 262-275.

Gud.com.au. (2018). Annual Reports & Reviews – GUD. [online] Available at: https://www.gud.com.au/annual-reports-reviews [Accessed 6 Jan. 2018].

Haskin, Daniel L., and Megan M. Burke. “Incorporating Sustainability Issues Into The Financial Accounting Curriculum.” American Journal of Business Education (Online) 9, no. 2 (2016): 49.

Hoskin, Robert E., Maureen R. Fizzell, and Donald C. Cherry. Financial Accounting: a user perspective. Wiley Global Education, 2014.

Jalil, Abdul, Nor Azah Binti, and Hasnah Binti Haron. “The Association Between Prior Knowledge and Learning Approaches, in Performance in an Advanced Accounting Course.” Advanced Science Letters 21, no. 4 (2015): 922-925.

James, Marianne L. “Accounting for Leases: A Case Exploring the Effect of the New Lease Accounting Standard on the Financial Statements.” Journal of the International Academy for Case Studies 22, no. 3 (2016): 152.

Lubbe, Ilse, Goolam Modack, and Alex Watson. “Financial Accounting GAAP Principles.” OUP Catalogue (2014).

Wong, Karen, and Mahesh Joshi. “The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia.” Australasian Accounting Business & Finance Journal 9, no. 3 (2015): 27.