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:
In their last meeting, the Board of Directors of your company has discussed ASIC's press release 19-143MR
Relevant extracts from the link
FOCUSES FOR 30 JUNE 2019 FINANCIAL REPORTS
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:
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:
Your report must address each of the following:
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)
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.
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):|
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:
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
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.
application of professional judgment on impairment testing
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.
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.
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:
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.
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.
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:
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.
The characteristics are:
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.
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.