Concept of Impairment and Its Treatment-Myassignmenthelp.Com

Question: Disucss about the Concept of Impairment and its treatment by Myer Holdings Ltd. Answer: Introduction The report will assist the reader in getting a clear idea regarding the concept of impairment and its treatment by Myer Holdings Ltd, an ASX listed company from Australia. The aim of this report is to determine the impairment test in accordance with AASB 16. Further, this report will focus into the evidence of impairment, process required for impairment, information requirement for impairment and finally the flexibility of managements for determination of impairment. ASIC media release 17 - 162 ASIC through their media release 17 162 specified that every organization shall prepare their financial statement in such way that will assist the users to understand the statement clearly and will be significant and helpful for fulfilling their purposes. As per the statement of ASIC commissioner, Mr John Price, the auditors and the directors of the company must concentrate on the choices of the accounting policies with regard to the financial statements of last reporting period. ASIC announced the key areas for the financial statement dated 30th June 2017 for the public interest organization, listed organization, and key areas to be addressed. It has been noticed by ASIC that most of the organizations use unrealistic assumption for testing the assets value or apply the inappropriate strategies for recognition of revenue. Further, as the part of ASICs surveillance program for financial reporting, the financial reports are chosen for the purpose of review on the basis of risk-based c riteria and for determining the compliance with accounting standards and Corporation Act (Aasb.gov.au 2017). As per AASB 136 on impairment of assets, an asset got impaired when the carrying amount of the asset is more than its recoverable value. Under Para 12-14 of AASB 136, some conditions may be considered as the indication for impairment. The indications for impairment are segregated under two heads external information source and internal information source. Information under different heads are described as below External information sources The market value of the assets has significantly reduced as compared to expectation within the course of normal use or a specific period of time. Carrying value of the organizations net asset exceeds the market capitalization Market rate of return or interest with regard to investment is increased which in turn affects the value of the assets in use and recoverable value has been materially reduced (Kabir and Rahman 2016). The legal, market, environmental and technological environment under which the company operates has faced considerable changes that have an impact on the asset. Internal information sources It is evidential that the asset is physically damaged or been obsolete Considerable changes taken place in the usage method of the asset. The asset is not performing as per the prospect Asset is being held for the purpose of sale in the near future time period The asset or significant part of the asset is restructuring or the asset is kept as idle for long period of time. Impairment evidence for Myer Holdings Ltd. Asset base if asset base test is selected for determining the indication of impairment for the stores of Myer Holdings Ltd., it can be identified that as per the asset base criteria no indication is there for impairment. The decision can be taken as it is seen that there is no significant change in the asset base of the company for the stores and it is more or less same (Investor.myer.com.au 2017). Asset turnover - if asset turnover test is selected for determining the indication of impairment for the stores of Myer Holdings Ltd., it can be identified that as per the asset turnover criteria no indication is there for impairment. As the asset turnover of the company is moving between 1.80 and 1.40 and no significant up-downs has been noticed the decision can be taken. Asset flow if asset flow test is selected for determining the indication of impairment for the stores of Myer Holdings Ltd., it can be identified that as per the asset flow criteria no indication is there for impairment. This decision can be taken as the asset flow of the company for last few years are increased very little or has not been changed which in turn states no indication for impairment. Despite the fact that through the above systems, impairment test couldn't be resolved, a few signs are there concerning the retail chain of the organization in Frankston. It has been distinguished that to contend with Amazon, organization intended to modify their conventional white and dark shades of the stores with the signage of brilliant yellow and besides, the staff of the organization will show up in the uniform which is unique in relation to the general uniform of the organization. Further, the storage approach of the organization's item will be transformed from the past framework that will empower to have all the more free space. According to AASB 136, these things will be viewed as incomplete reproduction that fits the bill for the assurance of the test for hindrance. Impairment determination process When the company experience the indication of impairment for any particular asset, it measures the assets carrying value as well as value-in use to calculate the amount of impairment. Further, the management forecasts the long term that is 5 years cash flow of the asset on the basis of the budget that is previously approved by the companys management (Bond, Govendir and Wells 2016). However, for the cash flow after 5 years, terminal growth rate is used. Assumptions for the calculation of cash flow are as follows Rate assumed for terminal growth is 2.5% Rate assumed for pre-tax discount is 14.4% Rate assumed for the gross profits operating margin is 39.5% Each of the stores of the company is separately evaluated for establishing the requirement of impairment. Further, the cash flow of the asset is forecasted on the basis of the budget for the cash generating unit (Zhuang 2016). If somehow it is established that the impairment indication is there, the assets carrying value as well as value-in use to calculate the amount of impairment. Information for impairment determination Information required is as follows Detail disclosures are needed for carrying out the impairment test and recognizing the impairment loss As the calculation of impairment is made trough the value in use and recoverable value, thee values are crucial to be determined (Malone, Tarca and Wee 2015). The impairment loss is recognized as the expense under the revenue statement and the amount is deducted from the closing value of the asset under the balance sheet The amount of impairment loss that is recognized for the asset or goodwill in any previous accounting period shall be reversed if there is any change in the projected value of the recoverable amount of impaired assets (Linnenluecke et al. 2015). The asset or the cash generating unit is considered for impairment only when the carrying amount exceeds the recoverable amount. Flexibility from the management of Myer Holdings Ltd for determining impairment As per ASIC, the management of the company may not be expert in accounting, therefore, they can seek helps from the accounting expert wherever necessary. They must look into the matter deeply where the outcomes do not match with the projected forecasting. This will help them to present the data in the financial statement more clearly (Amiraslani, Iatridis and Pope 2013). It is found in the case of Myer Holdings Ltd. that as per the requirement of AASB 136, the company carries out the impairment test for the asset at least once in a year. Further, where it is found that any indication of impairment is there, the company immediately measures its recoverable value and value in use to measure the amount of impairment loss. Therefore, it can be said that the management is flexible in carrying out the test of impairment and determining the loss from impairment (Gackstatter and Mller 2016). References Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au/ [Accessed 26 Aug. 2017]. Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013.Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR). 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. Gackstatter, T. and Mller, K., 2016. Triggering Events in Asset Impairment Accounting-a Case Study in the Automotive Industry. Investor.myer.com.au. 2017. Myer Investor Relations. [online] Available at: https://investor.myer.com.au/Investor-Centre/ [Accessed 26 Aug. 2017]. 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. Malone, L., Tarca, A. and Wee, M., 2015. Non-GAAP earnings disclosures and IFRS.Accounting and Finance. 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.