Accounting of Consequence of Booking Market-driven - Free Samples

Question: Discuss about the Accounting of Consequence of Booking Market-driven. Answer: Introduction This report is based on analysis of accounting of impairment and operating lease by considering suitable accounting standards. The considered company; AMP Ltd is Australia and New Zealands leading wealth Management Company which provides expert financial advice and assists customers to explore in order to realize their goals. The main aim of the report is to assess accounting treatment applied by the company relating to the impairment of assets. Further, another emphasis has been made on the reviews and arguments relating to old accounting and new accounting standards relating to leases. Impaired Assets As per provision of AASB 116, an asset is impaired if the market price is less than the book value of asset listed on the balance sheet of the Company (Chen, Shroff and Zhang, 2014). Generally, the assets which are exposed to impairment are goodwill, accounts receivables and other non-current assets. These are vulnerable to impairment because the carrying values of these assets have an indefinite lifespan. The asset on which impairment test has been made in AMP limited is Goodwill, which is part of the Intangible asset. Goodwill acquired in a business combination is accounted at cost and the cost which has been subsequently applied on same. Further, accumulated loss relating to same is reduced from the value ascertained from above procedure. The company impairs its assets on the basis of AASB 116 (Impairment of asset). The standards require reviewing the assets for impairment annually by assessing the recoverable amount. The impairment loss of the goodwill for 2016 and 2015 are provi ded in the table given below- 2016 2015 $668m - It can be observed from the above table that there was no impairment in the year 2015. Impairment Testing AASB 136 has provided provision relating to impairment test that Companies must comply in order to identify the recoverable amount of assets (Huikku, Mouritsen and Silvola, 2017). For testing the assets for impairment is important to assess the useful life of the asset. For the purpose of investment testing, the goodwill that is acquired in a business merger is allocated to the cash generating units which are expected to benefit the organization in long-term future. Each unit is to which the goodwill is allocated must be represented at the lowest level in the entity and must be monitored for the purpose of internal management. The company has followed the all the procedures of AASB 136 procedure for testing the assets for impairment. Accounting treatment of Impairment Expenditure The impairment expenditure of the Company of the year 2016 was $668m. Carlin and Finch (2010), asserted that impairment loss is measured by variation between the carrying amount of asset and its present recoverable value discounted at effective tax rate (AMP Limited Annual Report 2016, 2016). The company performs procedure relating to the assessment of impairment, and same is done through comparing the carrying value of the CGU with its recoverable amount. The difference between both of them is charged from PL account. The amortized and impairment expense of the company regarding the financial assets and goodwill in the year 2016 are as follows- Amount in $m Goodwill Capitalization cost Value of in force business Distribution Networks Other intangibles Total Amortization expense - 129 103 37 269 Impairment loss 668 - - - 668 Accumulated amortization and impairment (776) (884) (591) (165) (94) (2,510) Key Estimates and assumption relating to impairment expenditure Estimates regarding impairment involve- The fair value of the asset at the acquisition date is considered for valuation and subsequently evaluated at a cost reduced by accumulated depreciation. Estimation regarding the useful life of intangible assets acquired by the Company Future cash flows are estimated and discounted at the effective interest rate in order to ascertain impairment of financial assets. Judgment is being applied by the management in order to take a decision relating to valuation technique and assumptions are made regarding the estimation of allocation of CGU and evaluating the recoverable value of goodwill. Subjectivity involved in impairment testing procedure There is subjectivity involved in the Goodwill acquired by the business in a merger of some units which were initially recognized at cost and subsequently they are measured at cost after deducting the accumulated losses for impairment. As per the analysis of Khairi and Laili, (2014), the Costs of financial assets are capitalized when the asset is created and is capable of delivering future benefit to the Company. These costs are amortized on the straight-line basis over the useful life of the asset. Analysis of impairment testing On the basis of present analysis; I get to know that impairment testing is significant for companies as it assist fair disclosure of assets in books of accounts in accordance with their market value. Interest aspects regarding impairment testing of intangible assets such as the Goodwill and other assets like distribution networks have a useful life for an indefinite period, and they are annually tested for impairment. Other intangible assets like the value in force of business are tested for impairment whenever there are any events or circumstances that indicate the recoverability of the carrying amount. However; computation and analysis of impairment loss are bit complex process as the recognition of impairment loss is done when the carrying amount of asset exceeds the recoverable amount (Khokan, Rahman and Taher, 2014). Analysis of impairment testing procedure of the Company shows that impairment in the unit of Australian Wealth Protection; the same is fully impaired which has resu lted in an expense of $668m in 2016. New insights learned about impairment testing Roberts (2015) asserted that assets are grouped where they cannot be identified individually for the purpose of impairment. For the purpose of impairment of financial assets, if they are measured at fair value, the changes in the same are reflected in the consolidated Income statement, and they are not subjected to any impairment testing. During the assessment I learned that in case the financial assets are measured at amortized cost, like loans and advances, maturity investments and other such receivables, then the impairment in these cases is reflected in the Income statement only when the Group has evidence for the loss incurred. Fair value measurement Provisions of IFRS 13 Fair Value Measurement is applicable to accounting transactions that require fair value measurements or disclosures regarding the same. This standard provides a framework for measuring fair value and assist with the disclosure of the same. The company takes in to account the fair value measurement for impairment of intangible assets. For instance, the in-force business value reflects the fair value of the business in the future that may arise from current contractual arrangements and other business combination. This value is subjected to impairment and is initially measured at market value, and later the impairment is recorded with the difference in carrying amount and the market value. Assessment of former accounting standard for lease in accordance with view of chairmen of IASB In accordance with views presented by the chairman of IASB provision of former accounting standard of the lease is not able to represent the economic reality of organization to which it applies. The reason behind the same is that as per the applicable provision operating lease were recorded as an off-balance-sheet item, but the fact cannot be denied that they create real liabilities. Thus, the users of the financial statement were not able to access the actual picture of the organization. The reason behind the increase in off-balance sheet lease liabilities in comparison to debt reported on the balance sheet. The main reason for the same is that like 85% of the total lease were operating lease and due to this they were accounted as off-balance sheet item and not recorded on the balance sheet. Thus, the debt which was presented as off-balance sheet item was 66 times greater than the about present as debt in the balance sheet. In case an asset is acquired through debt financing; liability relating to same is accounted in the financial statement. However, in case an asset is leased, no liability is created even though the company is legally obliged to make a future payment relating to lease. Due to same higher difference can be assessed between debt presented in off-balance sheet item and debt reported in Balance Sheet. Argument relating to former accounting standard lease regarding airlines companies As the details relating to lease were not provided in the balance sheet and major of information relating to operating lease was provided as off-balance sheet item; in the airline industry, the fleet was represented in a different manner even though in reality the financial obligations were same. Thus, investors were not able to compare the existing information available in financial statements (Edman, 2014). Due to this appropriate investment decision were not made by them on the basis of information provided in financial statements. Reason and cause behind unpopularity of new accounting standard relating to lease The reasons and cause behind unpopularity of new accounting standard relating to lease as follows: Removal of cosmetic accounting benefits. The cost will be applied in order to update system for implementing new accounting standard. Reason due to which new accounting standard is expected to be better In accordance with the provisions of IFRS 16; companies will be able to develop accounting policies in which leases will be reflected in the balance sheet irrespective of industry in which they operate. This will result in the better presentation of financial statements, and other reasons due to which new accounting standard is expected to be better are enumerated as below: IFRS 16 will not put leasing industry out of business and lease will remain a flexible source of finance. Asset and liabilities for the short term will not require complying with the provision. The new provision will lead to making a better decision as an investor will know about the actual economic condition of organization (Edman, 2014). New AS will lead to efficient capital allocation which will assist in economic growth. Conclusion The study depicts that treatment of impairment of asset is the easy and interesting procedure. Companies are required to conduct impairment testing at regular time intervals to ensure values of assets are reflected in fair value, and financial statements are providing viable disclosure of financial information. Further, the second part of the report depicts that new accounting standard relating to the lease of assets will lead to a better informed investment decision by investors and through same management will be able to take appropriate buy decision. It is because; it will assist better disclosure of financial information by considering off-balance sheet items as well. References AMP Limited Annual Report 2016. 2016. [PDF]. Available through https://www.asx.com.au/asxpdf/20170320/pdf/43gx9bppxvx00n.pdf. [Accessed on 25th January 2018]. Carlin, T.M. and Finch, N., 2010. Resisting compliance with IFRS goodwill accounting and reporting disclosures: Evidence from Australia. Journal of Accounting Organizational Change, 6(2), Pp.260-280. Chen, W., Shroff, P.K. and Zhang, I., 2014. Fair Value Accounting: Consequences of Booking Market-driven Goodwill Impairment. Edman B. Leases: Off-Balance Sheet Financing and the Strive for Transparency Today. (2014). [PDF]. Available through https://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1247context=honors. [Accessed on 25th January 2018] Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value.Accounting, Organizations and Society,56, pp.68-83. Khairi, K.F. and Laili, N.H., 2014. Goodwill Impairment Disclosures: A Test for IFRS Compliance in Malaysia. Khokan Bepari, M., F. Rahman, S. and Taher Mollik, A., 2014. Firms' compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics. Journal of Accounting Organizational Change, 10(1), Pp.116-149. Roberts, R.A., 2015. Goodwill Impairment: A study of Australian Companies 2007-2013.