ACCG8123: Accounting Standards - Application of Professional Judgment On Impairment Testing - Accounting Assignment Help

Assignment Task:

Accounting estimates 

1. Impairment testing and asset values 

The recoverability of the carrying amounts of assets such as goodwill, other intangibles and property, plant and equipment continues to be an important area of focus. 

It is important for directors and auditors to ensure: 

a. cash flows and assumptions are reasonable having regard to matters such as historical cash flows, economic and market conditions, and funding costs. Particularly where prior period cash flow projections have not been met, careful consideration should be given to whether current assumptions are reasonable and supportable; 

b. discounted cash flows are not used to determine fair value less costs of disposal where forecasts and assumptions are not reasonable and supportable;

c. cash flows used are matched to carrying values of all assets that generate those cash flows, including inventories, receivables and tax balances;

d. discount rates and other key assumptions are reasonable and supportable;

e. cash-generating units (CGUs) are not identified at too high a level, including where cash inflows for individual assets are not largely independent; and

f. for testing goodwill, CGUs are not grouped at a higher level than the operating segments or the level at which results are monitored for internal management purposes. 

Key disclosures 

Estimates and accounting policy judgements 

Disclosures regarding sources of estimation uncertainty and significant judgements in applying accounting policies are important to allow users of the financial report to assess the reported financial position and performance of an entity. Directors and auditors should ensure disclosures are made and are specific to the assets, liabilities, income and expenses of the entity. 

Disclosure of key assumptions and sensitivity analysis are important. These enable users of the financial report to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations. 

The above extracts of the 2019 ASIC media release are calling for attention to be placed on the company’s practice of using professional judgments in arriving at the most reasonable estimates and then disclosing the sources or basis of their judgments leading to the accounting information in the financial reports. 

Specifically, the ASIC report has pointed at the process of ‘Impairment testing and Asset Valuation’ because in carrying out the impairment testing, professional judgments are required to estimate the cash flows, the discount rates, the CGUs, the allocation of corporate assets and costs to CGUs and the appropriate use of fair values. Further, the report also highlights the need for businesses to provide sufficient disclosures around the judgments applied. 

The highlights of the ASIC report is strongly indicating that companies need to be vigilant in carrying out the impairment testing and asset valuation and then provide sufficient disclosures so that the users of accounting information can carry out their own assessments about the impairments of the assets in their decision-making process. 

Required: 

To complete this assignment, you will need to select a suitable company yourself that meets the following criteria. The company must: 

• be a constituent of the S&P/ASX 300 index (www.asx300list.com); 

• publish audited annual financial reports in English, fully complying with IFRS or AASB standards; 

• must have a 30 June year end and 

• have a significant impairment presented in the annual report 

Your report must address each of the following: 

a) The role of professional judgment in accounting and two implications on the users of accounting information if the professional judgment has not been made in the most reasonable/appropriate manner. (5 marks) 

b) Provide a detailed explanation of the impairment write-down(s) made by your company for the year ended 30 June 2019. Your explanation should include a discussion of - the asset/s that were impaired; - the type of estimations required to write/calculate the impairment; - the amount of the impairment write-down and - relevant disclosures in the 30 June 2019 financial report in relation to impairment testing.

c) Based on your findings in part b, critically discuss whether the professional judgments used to estimate cash flows, discount rates, CGUs, allocation of corporate assets and costs to CGUs and appropriate fair values in the impairment write-down process have been reasonable/appropriate. Recommend actions (if any) for improvement in the application of professional judgments relating to these estimations. 

Please refer to the ASIC media release and other relevant information sources to answer the above question. (15 marks) 

d) Based on your findings in part c, critically analyse to what extent the professional judgments applied on impairment write-downs satisfy the fundamental characteristics of useful financial information and the objective of financial reporting.

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