Accounting Financial Analysis Report

The report discusses the usefulness of professional judgments in the accounting profession and reviews the impairment testing of JB HI-FI from the 2018 Annual Report. It also examines the alignment of professional judgments with the fundamental characteristics of financial information and the objectives of general purpose financial reporting.

Running head: ACCOUNTING FINANCIAL ANALYSIS REPORT
Accounting Financial Analysis Report
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................3
Requirement 1.a.........................................................................................................................3
Requirement 2.b.........................................................................................................................4
Requirement 3.c.........................................................................................................................5
Requirement 4.d.........................................................................................................................6
Conclusion and Recommendations............................................................................................7
References..................................................................................................................................8

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Executive Summary
The first part of the report discusses about the usefulness of professional judgments on the
accounting profession. The second part of the report reviews the impairment testing of JB HI-
FI from the 2018 Annual Report. The third part of the report sheds light on the
appropriateness of the used professional judgments of JB HI-FI. The last part of the report
examines the alignment of the used professional judgements in JB HI-FI with the
fundamental characteristics of financial information and the objectives of general purpose
financial reporting.

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Introduction
The users can obtain the required financial information about the financial
performance and position of a specific company from its financial reports so that they can
make effective investment decisions. The use of certain judgments, accounting models and
estimates can be seen by the senior managements of the firms in order to prepare and present
the financial reports to the users (Batta, Ganguly and Rosett 2014). This report undertakes the
analysis of different aspects of impairment accounting of JB HI-FI Limited (JB HI-FI).
Requirement 1.a
Two main elements of professional judgements are accounting knowledge and
expertise; and these are extremely significant in the accounting profession. The correct
application of practical training, accounting knowledge and expertise determines the quality
of disclosed financial information. Thus, professional judgments are needed for correct
decision-making process. Ethics is a matter of concern to the accounting profession as the
profession has lost its credibility due to numerous accounting scandals in both the private and
public companies; and effective professional judgments hep in retaining ethics in the
accounting profession that is crucial for professional success. Overall, professional judgment
assists in disclosing quality financial information to the users of the financial reports (Edgley
2014).
The two implications are mentioned below:
1. The use of improper or irrelevant professional judgment fails in ensuring the
representation of correct financial position as well as performance of the companies.
In this way, the users of financial information cannot obtain the correct information
on the financial performance and position (Jefrey 2018).

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2. In the presence of incorrect financial information as a result of the use of irrelevant or
incorrect professional judgment, the users of the financial information are not able in
making proper investment decisions about these companies (Glover and Prawitt
2014).
Requirement 2.b
o It can be seen from the 2018 Annual Report of JB HI-FI that the company has tested
plant and equipment, leasehold improvements and intangible assets with indefinite
useful life for impairment. The company recorded impairment in plant and equipment
in 2018 and there was not any impairment in intangible assets (investors.jbhifi.com.au
2019).
o According to the 2018 Annual Report of JB HI-FI, there is a requirement of certain
key estimation to write the impairments; they are sales growth, gross margin, cost of
doing business (CODB) and the rate of discount. The basis of these estimations are
past experience and the forecasted operating as well as financial performance of the
company for each CGU. JB HI-FI derives the discount rate from the company’s
weighted average cost of capital, adjusted for varying risk profiles
(investors.jbhifi.com.au 2019).
o The following table shows the impairment of plant and equipment and goodwill of JB
HI-FI:
(Source: investors.jbhifi.com.au 2019)

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It can be seen from the above that the amount of impairment write-down for
plant and equipment for the years 2018 and 2017 are $0.7 million and $1.1 million
respectively. There was not any impairment of goodwill in 2018, but the impairment
write down of goodwill in the year 2017 was $14.7 million.
o
(Source: investors.jbhifi.com.au 2019)
As per the 2018 Annual Report, JB HI-FI undertakes the impairment testing of their
property and equipment and leasehold improvements when the changes in events and
circumstances indicates that the carrying amount of these assets may not be
recoverable.
(Source: investors.jbhifi.com.au 2019)
As disclosed by the JB HI-FI, for the purpose of testing the goodwill impairment, the
company allocates goodwill to each of the group’s CGUs or group of CGUs as they
expect to benefit from the interactions of the business combination. The company has
used value in use calculation for the determination of recoverable amount of CGU. In
addition, the firm also allocates the carrying amount of goodwill and brand names to
the flowing CGUs of group of CGUs for the purpose of impairment testing
(investors.jbhifi.com.au 2019).
Requirement 3.c
According to the ASIC, the cash flow assumptions are subject to certain matters like
historical cash flows, funding cost and economic and market condition (asic.gov.au 2019). JB

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HI-FI has used a 2.5% long-term growth rate for the extrapolation of cash flows beyond
budget, but this assumption does not include historical cash flow and funding cost. Thus, it is
recommended to include all these aspects for making the assumption for cash flows.
According to the ASIC, companies do not use discounted cash flows in order to
determine fair value less cost of disposal where there is no reliability on forecast and
assumptions (asic.gov.au 2019). However, JB HI-FI has used 10% discount rate which
implies that they have reliable forecasting and assumptions.
ASIC puts the restriction on the companies that they cannot use increasing cash flows
after five years without considering the offsetting impact on discount rates (asic.gov.au
2019). For this reason, JB HI-FI has used the technique of extrapolation for considering the
impact of cash flows more than five years (Knauer and Wöhrmann 2016).
According to the ASIC, companies do not identify the CGUs at too high a level where
individual asset’s cash inflows are not independent (asic.gov.au 2019). By considering this
rule, JB HI-FI has ensured grouping the CGUs at lower level for which there is presence of
separate identifiable and largely independent cash flows.
The ASIC states that corporate costs and assets need to be allocated to the CGUs on a
suitable basis where there is reasonableness that they can be allocated (asic.gov.au 2019). It
needs to be mentioned that JB HI-FI has not used these aspects in their estimations and
judgments; and thus the recommendation to them is to consider these aspects.
The ASIC has also mentioned that the companies are needed to appropriately use the
fair value for testing exploration (asic.gov.au 2019). However, JB HI-FI has not mentioned
anything about fair value in their judgements and they are recommended to consider this
aspect.

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Requirement 4.d
There are three major objectives of the general purpose financial reporting. The first
objective puts the obligation on the companies to disclose information about the financial
position of the firms. The second objective puts the obligation on the companies to disclose
information on the financial performance of the firms (Robinson et al. 2015). The third
objective puts the obligation on the companies to disclose information on the cash flows of
them. The main motive behind these three objectives is to assist the users in the decision-
making process. In addition, the fundamental qualitative characteristics of useful financial
information are Relevance and Faithful Representation (Henderson et al. 2015). It needs to be
mentioned that the applied professional judgements by JB HI-FI in impairment has made the
information relevance to the users of the financial information. For this reason, these
assumptions have helped in the decision-making process of the users by providing the
necessary information on asset impairment. However, the above section shows that JB HI-FI
has not included certain aspects in this professional judgment and lack of faithful
representation can be considered as the reason for this. Thus, it can be said that the used
professional judgments do not fully align to the objectives of general purpose financial
reporting and the fundamental qualitative characteristics (Flower 2015).
Conclusion and Recommendations
It can be seen from the above discussion that professional judgments play a crucial
role in accounting since inappropriate professional judgment can affect the quality of
financial information and decision-making process. The discussion also shows that JB HI-FI
has disclosed the necessary details of impairment of assets in their 2018 Annual Report and
most of them are in line with the required standards. However, it is needed for JB HI-FI to
consider the regulations of the ASIC for improved impairment reporting.

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References
Asic.gov.au. 2019. 18-159MR Major changes affecting reported net assets and profit, and
other focuses for 30 June 2018 reporting | ASIC - Australian Securities and Investments
Commission. [online] Available at: https://asic.gov.au/about-asic/news-centre/find-a-media-
release/2018-releases/18-159mr-major-changes-affecting-reported-net-assets-and-profit-and-
other-focuses-for-30-june-2018-reporting [Accessed 25 Apr. 2019].
Batta, G., Ganguly, A. and Rosett, J., 2014. Financial statement recasting and credit risk
assessment. Accounting & Finance, 54(1), pp.47-82.
Edgley, C., 2014. A genealogy of accounting materiality. Critical Perspectives on
Accounting, 25(3), pp.255-271.
Flower, J., 2015. The international integrated reporting council: a story of failure. Critical
Perspectives on Accounting, 27, pp.1-17.
Glover, S.M. and Prawitt, D.F., 2014. Enhancing auditor professional skepticism: The
professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Investors.jbhifi.com.au. 2019. Annual Report 2018. [online] Available at:
https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-
Chairmans-CEOs-Report.pdf [Accessed 25 Apr. 2019].
Jefrey, C. ed., 2018. Research on professional responsibility and ethics in accounting.
Emerald Publishing Limited.
Knauer, T. and Wöhrmann, A., 2016. Market reaction to goodwill impairments. European
Accounting Review, 25(3), pp.421-449.

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Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.