IFRS 16 and Goodwill Impairment Accounting

This assignment examines two key aspects of financial reporting under International Financial Reporting Standards (IFRS). Firstly, it delves into the process of goodwill impairment testing, outlining its purpose, frequency, and the factors considered. Secondly, it explores the implications of IFRS 16 on lease accounting, highlighting the removal of off-balance sheet financing and its impact on financial statement transparency. The assignment concludes by discussing the benefits of these new standards for investors and management decision-making.

Advance Financial Accounting

TABLE OF CONTENTS
Introduction......................................................................................................................................5
Task A..............................................................................................................................................5
Impaired Assets...........................................................................................................................5
Impairment Testing......................................................................................................................5
Accounting treatment of Impairment Expenditure......................................................................6
Key Estimates and assumption relating to impairment expenditure...........................................8
Subjectivity involved in impairment testing procedure...............................................................8
Analysis of impairment testing....................................................................................................8
New insights learned about impairment testing...........................................................................9
Fair value measurement...............................................................................................................9
Task B..............................................................................................................................................9
Assessment of former accounting standard for lease in accordance with view of chairmen of
IASB............................................................................................................................................9
The reason behind the increase in off-balance sheet lease liabilities in comparison to debt
reported on the balance sheet.......................................................................................................9
Argument relating to former accounting standard lease regarding airlines companies.............10
Reason and cause behind unpopularity of new accounting standard relating to lease..............10
Reason due to which new accounting standard is expected to be better...................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

LIST OF FIGURES
Figure 1: Notes relating to Impairment of Intangibles....................................................................5
Figure 2: Impairment Loss for the year...........................................................................................6

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
Zealand’s 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.
TASK A
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 provided in the table given
below-
Table 1: Impairment of Goodwill in 2015 and 2016.
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.
Figure 1: Notes relating to Impairment of Intangibles
(Source: AMP Limited Annual Report, 2016)
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 P&L 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)

Figure 2: Impairment Loss for the year
(Source: AMP Limited Annual Report 2016)
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 resulted 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.
TASK B
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 < http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?
article=1247&context=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.