ACCG8123 Accounting Standards: Application Of Professional Judgment On Impairment Testing Answer

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ACCG8123: Accounting Standards and Practice Session 1, 2020

Individual Assignment Application of Professional Judgment On Impairment Testing

Business Research Report

“In a perfect world, investors, board members, and executives would have full confidence in companies’ financial statements. They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current share price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Unfortunately, that’s not what happens in the real world, for several reasons. First, corporate financial statements necessarily depend on estimates and judgment calls that can be widely off the mark, even when made in good faith…..” (Sherman and Young, 20166, p.1).

The above clearly shows how crucial it is for accountants to apply their professional judgment in arriving at the most reasonable / appropriate accounting choices / estimates which can be a challenging process. There is not necessarily one correct answer in most cases and therefore accountants need to be vigilant while dealing with such situations.

As a new accountant, you have recently joined the accounting department of an ASX listed company. Your supervisor, the senior accountant, has sent you an email containing a Media Release (MR) from the Australian Securities & Investment Commission (ASIC) relating to 2019 financial reports where the major concern is relating to Impairment testing and asset values. To demonstrate your understanding of the application of professional judgment applied to undertake impairment testing and asset valuations:

  • you have been asked to look into the company’s annual report;
  • undertake required research and
  • prepare a report for presentation to other finance team members and the audit committee. A link to the MR is provided below:

In their last meeting, the Board of Directors of your company has discussed ASIC's press release 19-143MR

Major Financial Reporting Changes and other focuses for 30 June 2019 financial reports: reporting-changes-and-other-focuses/

Relevant extracts from the link


Accounting estimates

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:

  1. 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;
  2. discounted cash flows are not used to determine fair value less costs of disposal where forecasts and assumptions are not reasonable and supportable;
  3. cash flows used are matched to carrying values of all assets that generate those cash flows, including inventories, receivables and tax balances;
  4. discount rates and other key assumptions are reasonable and supportable;
  5. cash generating units (CGUs) are not identified at too high a level, including where cash inflows for individual assets are not largely independent; and
  6. 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 a 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.


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 (;
  • 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:

  1. 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)
  2. 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 (10 marks)

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)

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. (10 marks)

Assessment of report

The research-based report represents 15% of your total mark for ACCG8123. Your assignment will be marked out of 60 as shown in the Report Marking Rubric on page 7 of this document and will then be converted to a mark out of 15 percent.

Report submission instructions

Where to submit
The written report must be submitted in electronic form using Turnitin (through
iLearn via the ‘Assessment Tasks’ folder). Detailed submission instructions are provided on iLearn. Please ensure that you are familiar with these instructions and submit before the deadline in case of technical issues.

A hardcopy submission is not required.
When to submit
The deadline for submission is 5pm Monday 4 May.
No extensions will be granted. There will be a deduction of 10% of the total available marks made from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late in submission – 20% penalty). This penalty does not apply for cases in which an application for disruption of studies is made and approved.
How to submit
The report can be submitted either in a PDF or word format. The filename of your report must be as follows:
ACCG8123_XXXXXXXX (where the crosses represent your eight-digit SID)

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