ACCG8123 Application Of Professional Judgment On Impairment Testing Assessment Answer

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Question :

ACCG8123: Accounting Standards and Practice

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

Relevant extracts from the link


Accounting estimates

2. 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

9. 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)

  1. 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 Format

Before you start writing your report, it is recommended that you undertake the following (both of these can

be accessed through the ‘Assessment Task’ folder on iLearn):

1. Take a look at the sample Business Research Report provided on iLearn.

The report must contain the following (in this order):
  • Report cover page (You can design your own cover page)
  • Table of contents
  • Executive summary
  • Introduction
  • Body
  • Conclusion
  • Reference list
  • Appendix
You should include relevant parts of the annual reports that you have used and referred to in your report. Do NOT attach entire annual reports. You can include the relevant parts of annual reports as screenshots rather than copying and pasting content, since it can impact the TurnitIn similarity percentage

Total word count limit = 1,200 words.
Your word count must be included on your cover page
Penalties for exceeding the word limit are as follows:

Word count

  • 1,201 – 1,319 words
  • 1,320 – 1,439 words
  • 1,440 or more word

  • No penalty
  • 10% of total marks
  • 20% of total mark

The report must be presented as follows:
Font: Times New Roman 12 pointSpacing: 1.5 times line spacing Margins: not less than 2.5 cm
Each page must have a footer containing the following:
ACCG8123 S1 2020Your SIDPage number
In text referencing is required for all sources used and a complete list of references must be provided using the Harvard Referencing System.
A copy of the Harvard Referencing System is available under the ‘Assessment Task’ folder
on iLearn.
Please note that as this is a research assignment it is not appropriate to reference to textbooks or lecture slides.
All assignments will be manually and electronically checked for plagiarism and it is extremely important that you are familiar with the policy on Academic Honesty.
A link to the policy is available in the ‘Assessment Task’ folder on iLearn.

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Answer :

application of professional judgment on impairment testing

1. Executive summary

The research report discusses about the importance of professional judgment in the estimations that are required to be made by the accountants. The report covers the practical example of an ASX listed company as to how the impairment has been done in the company and the professional judgments and estimations that have been done for the asset impairment.

2. Introduction

Due to the high reliance placed by the investors, members and other stakeholders on the companies financials, it is evident that the accountants apply their professional judgements vigilantly while making estimates and while making appropriate accounting choices (Ionela, 2016). This report describes the importance of professional judgement  and its implication on the users if reasonable estimates have not been made in the the judgment. Further, the study has been conducted on the financial statement of the Abacus property group and a detailed explanation has been provided in context to the impairment written down for the year ending June 2019. Afterwards, an analysis has been done on the professional judgements on the impairment policies applied on the assets impaired. At last, the characteristics of financials and objective of reporting has been explained along with a brief in relation to the application on the impairment written down.

3. Importance of professional estimation in accounting and impact on the users if the estimates is not made prudently

The professional judgment is applying the knowledge  gained with the help of relevant training and using the ethical standards that results in taking an informed action in relation to various activities (Chiang, 2016), it ensures that decision or action remains within the specified accounting principles. The professional judgments is useful:

  • for the presentation of  fair view of the financial statements of the company,
  •  helps in providing the high level of financial reporting
  •  Helps in the identification of risk and develops the procedures for the control of the risk. 

If the professional estimation is not made in a prudent manner than the users may not be able to get the fair view of the workings of the company, as the accounts may be window dressed to attract various stakeholders. Also, the figures of the company may not align with the various laws such as IFRS and GAAP which mentions the requirement of the company to make various disclosure. Hence, the financial reporting of the company will be weak and the users will not be informed about various risk and exposures that the company is facing or might face in the future.

4. Explanation of impairment written down 

The Abacus group, an ASX listed companies’ financial statement has been analysed to assess the impairment policies used by the company. The company is working in the real estate sector. The impairment of asset is done at the time when market value of the asset has reduced than the cost or the book value of the asset (Vanza, Wells, and Wright 2018). The abacus group has done impairment on the property loans and financial assets, inventory, trade and other receivables goodwill and other non-financial assets. In the current financial year company has recorded an impairment charge of a$7,771,000. The impairment has been on the inventory, property plant and equipment. The goodwill has not been impaired in the current financial year. The company has made all the relevant disclosure in relation to the impairment in the financial statements and the notes to the financial statements (Linnenluecke, Birt, Lyon, and Sidhu, 2015). The impairment has been shown in the income statement of the company and has been reduced from the net earnings of the company.

5. Critical discussion in relation to the professional judgements on various issues along with recommendation for the improvement of judgements in estimation

The company has adopted the latest AASB 9 financial instruments and related amendments. The cumulative effect of AASB 9 on the net operating profit has been mentioned by the company in the financial statements of the company (Bond, Govendir, and Wells, 2016). The groups accounting for the impairment of loss on the financial asset has been replaced by AASB 139 having incurred loss approach to the forward looking ECL approach. Overall impact of the adoption of the AASB 9 is:

  1. In relation to the classification, the cash, trade receivables and property motgages are held  at the amortised cost (AASB, 2016). The financial asset and the derivate assets  are measured at the (FVTPL) fair value through the profit and loss account
  2. In relation to the measurement, the company measures financial asset at its fair value plus, the assets not at the FVTPL and costs are directly in realtion  to the acquisition of the financial asset (Kabir, H. and Rahman, A., 2016).
  3. The impairment of CGU is done based on fair value less cost to sales calculation based on the cash flow projection on 30th June 2019.
  4. The discount rates have been estimated at the time value of money along with risk not depicting in the cash flows.

It can be said that management has used prudent judgements in their estimations. The company has applied the relevant alterations in relation to the AASB 9 and the disclosures has been made in the regards. However, the comparison of the AASB from which the AASB 9 has been replaced is not provided. It is recommended that company should also present the comparison for providing the information to the users. Although, the company has taken reasonable steps to prudently discloses all the relevant information.

5. Characteristics of financial and objective of reporting

The characteristics are:

  • Relevancy
  • Representation which is done in a faithful manner
  • Understandability
  • Comparability

The main objective of the reporting is providing of fair view to the users of the financial statements. The accountants and the auditors of the Abacus group has clearly followed the characteristics of financials The financial statements of the company provide the true and fair view and has been prepared after following various legislations that have been enacted by the government. 

6. Conclusion

After, the preparation of the report it has been observed that it is evident for the accountants and the auditors of the company to use the professional judgements and estimations while the preparation of the financial statements. Various users rely on the financial statements and hence to protect their interest of the users, the auditors and accountant owes a big responsibility.