Disclosure of Goodwill Impairment †Free Samples to Students

Question: Discuss about the Disclosure of Goodwill Impairment. Answer: Introduction: AASB 136 and IAS 36 Impairment of assets assure that an organizations asset is not written in the financial statement at the value which is more than its recoverable amount. The recoverable amount for the asset is higher among the value in use and the fair value less the disposal cost. Only exception to this is some intangible assets and the goodwill. All the organizations are required to conduct the test for impairment of its assets if there is any indication that the asset will be impaired. Further, the test can be carried on for the cash generating unit where the asset does not create any cash flow which is widely independent of those of the other assets (Linnenluecke et al. 2015). An organization shall assess at end of the each accounting period that whether any indication exists there for the impairment of any asset and if any indication is there, then the recoverable amount of the asset shall be measured. Various indications for impairment of assets are as follows External sources Reduction in the market value of the asset Negative changes with regard to markets, laws, technologies or economies Increase in the interest rate of the market Higher level of net asset of the company as compared to market capitalization Internal sources Physical damage or obsolescence The asset is held for disposal or it is idle or part of the asset is restructuring Worse performance as compared to the expectation Evidence required for impairment testing of Myers asset Flow of the asset it has been recognized from the given data flow of the company that the flow for all the stores of the company is either stable or has increased and for none of the asset any reduction trend is found for the past one year period. Therefore no indication of impairment is there. Asset base from the asset base of the company is recognized that the asset base for all the assets has not altered much and all the assets are maintaining more or less the same percentage of contribution towards total assets for last few years. Therefore, no indication of impairment is there (Malone, Tarca and Wee 2015). Asset turnover looking at the asset turnover ratio of the company, it is identified that the asset turnover ratio of Myer Holdings Ltd for the last few years are moving around 1.41 to 1.76. Therefore, it can be said that no significant increase or decrease is found with regard to the asset turnover ratio of the company. Therefore, this test also cannot establish that there is any indication for impairment. Procedures required to be addressed for determination of impairment AASB 136 for Impairment of assets requires the organization to annually test the assets for impairment and Myer holding Ltd follows this requirement. However, for testing the assets for the purpose of impairment, recoverable amount is found out through usage of value-in-use discounted cash flow model. This model utilises the cash flow forecasting on the basis of the financial budget that is approved by the management and it covers the period of five years. Further, the cash flow for the period of more than five years are extrapolated through usage of the terminal growth rate. Key assumptions utilised for the mode are as follows Rate of discount (pre-tax) at14.4% Rate of terminal growth at 2.5% Gross profit margin from operation at the rate of 39.5% Thereafter the management determines the fact that whether level of the future cash flows for the carrying value of the assets for the CGU of Myer further, during the period under consideration, the review for the assets carrying value for each of the store of the company is undertaken and identified whether indication of any impairment is exists. Where there is any indication, the assets recoverable amount was measured through discounted cash flow model. Major assumption for the model is consistent with the above mentioned assumptions. However, no impairment indication is recognized at Myer stores for the year ending 2016 of the companys operation. Information required for determination of impairment Other key information required for determining the impairment for Myer Holdings Ltd is as follows If the indication is there regarding an asset that it can be impaired, then the recoverable amount for the asset or for the assets cash generating unit shall be determined (Kabir, Rahman and Su 2017) The CGU or the asset is impaired on the condition that the carrying value of the asset is more than the recoverable value The recoverable value of intangible asset or goodwill with the indefinite useful life or the intangible assets those are not ready to be used on the date of report, are required to be valued at least per year basis, irrespective of the fact that there exists any indication of impairment or not. For the purpose of measurement, the recoverable value is stated as higher among the value in use and fair value less the selling cost (Bond, Govendir and Wells 2016) The amount of loss from impairment is identified as expense under the profit and loss account and is carried out at cost. Further, if the impacted asset is already a revalued asset under the permission of IAS 16 PPE (IAS 16) and the intangible asset (IAS 38) and impairment if any is 1st recorded against the revaluation recognized previously recognized as gains and then as the comprehensive income to the other assets. Wide disclosures are required for the rest of impairment and recognition of impairment loss (Guthrie and Pang 2013) Impairment loss that is recognized in the previous period for the goodwill or any asset must be reversed if any alteration is there with regard to the estimates that were used for determining the recoverable amount of the asset. Availability of flexibility from the management for determination of impairment It is recognized that the management of Myer Holdings Ltd is quite flexible in carrying out the tests for determining the impairment with regard to the asset. As per the requirement of AASB 136, they assure to carry out the test for impairment at least one in each year (Zhuang 2016). Further, the management determines various facts like determination of the fact that whether level of the future cash flows for the carrying value of the assets for the CGU of Myer. Moreover, the management carries out review for the assets carrying value for each of the store of the company is undertaken and identified whether indication of any impairment is exists. Where there is any indication, the assets recoverable amount was measured through discounted cash flow model. Major assumption for the model is consistent with the above mentioned assumptions (Bond, Govendir and Wells 2016). Further, the management of the company determines the recoverable value of the cash generating unit on the basis of VI U approach. Therefore, taking into consideration all these facts, it can be said that the management of Myer Holdings Ltd take active part and comply with all the requirements of AASB 136 for carrying out the procedures for impairment test and determination of impairment. Reference 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. 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. Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 20052010.Australian Accounting Review,23(3), pp.216-231. 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. Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. 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.