Accounting Standards and Their Impact

This assignment delves into the effects of innovative accounting standards on businesses. It examines how changes in standards, particularly IFRS 16 concerning leases, influence financial reporting and decision-making. The analysis discusses both the challenges and benefits associated with adopting new accounting standards, considering their impact on various departments within a company and users of financial statements.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Part A:..............................................................................................................................................2
Question (i):.................................................................................................................................2
Question (ii):................................................................................................................................3
Question (iii):...............................................................................................................................3
Question (iv):...............................................................................................................................5
Question (v):................................................................................................................................6
Question (vi):...............................................................................................................................6
Question (vii):..............................................................................................................................7
Question (viii):.............................................................................................................................7
Part B:..............................................................................................................................................8
Question (i):.................................................................................................................................8
Question (ii):................................................................................................................................8
Question (iii):...............................................................................................................................9
Question (iv):...............................................................................................................................9
Question (v):..............................................................................................................................10
References......................................................................................................................................11

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Part A:
The intention of the paper was to centre on impairment and supposition criteria
implemented with respect to Incitec Pivot Limited for carrying out impairment tests based on
assets. The paper has an objective of assorting process of impairment testing as well as related
subjectivity in the procedure. In order to elucidate such processes, the annual report of the
organization over the year end 30th June, 2015 was considered as this did not offer the annual
report over a predefined period. Incitec Pivot Limited is associated with production and
distribution of industrial explosives, fertilizers and industrial chemicals along with provision of
associated services. The organization has its business segments in America, Asia Pacific and
Corporate. The company produces ammonium phosphates and is a distributor of produced
fertilized goods to wholesalers within Australia and the export market (Incitecpivot 2018).
In addition, an asset is regarded as impaired if it has lesser market value in contrast to the
carrying value. The assets which are referred to be impaired are tangible and this encompasses
property, plant and equipment and goodwill which serve as an intangible asset. Once adjustments
are conducted with impaired asset relied on carrying amount, loss is recorded in the income
statement of the organization. At the time impairment is written off, these assets might have
lesser carrying cost for some adjustments are recorded to be loss that might lead to reduced asset
value (Hoskin, Fizzell and Cherry 2014).
Question (i):
In alignment with Incitec Pivot Limited Company’s annual report for the year 2015, the
impairment testing for certain classes of assets is conducted. Goodwill and the intangible assets
was not amortized devoid of the fact that these are evaluated in situations or instances which

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signifies that impairment of assets can be conducted in a situation where financial statements are
examined in annual reports with costs deducted from impaired accumulated loss (Beatty and
Liao 2014). These assets encompass plant, equipment and property as well as trade receivables
which experiences impairment testing in case where there is an indication on carrying amount of
assets which cannot be recovered.
Question (ii):
Incitec Pivot Limited implemented a two-step process in testing impairment. The initial
step greatly centered on fair value that is related with reporting unit as well as carrying value that
encompass the goodwill. In a case in which an operating unit’s carrying value is high in
comparison to fair value, the second step is related with conducting impairment test for
entertaining existence of impairment loss amount (Cortesi et al. 2015). This second step is
associated with implied fair value associated with reporting unit in consideration to carrying
amount of units. In a condition where there is a decrease in implied fair value in contrast to
carrying amount, some impairment charge existed in the amount linked with such excess.
Moreover, this realized loss cannot be more than carrying amount of the assets.
Question (iii):
The organization took into consideration the below mentioned impairment expenses over
the period ended on 30th June, 2015.
Intangible assets as well as goodwill:
With the passing years, the organization presented a total impairment of $61,223,000
($116,207,000 - $54984000), from which $20,033,000 was mentioned to be software charges,
$23,461,000 was mentioned for the consumer contracts and $6,829,000 is the record made in

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contrast to IRU in a situation where brands and goodwill is not associated with impairment
(Hemmer and Labro 2016).
Trade receivables:
For the year 2015, the company focused on impairment loss allowance recording of
around $17,487,000 in 2015 that happened to be $18,740,000 in 2014.

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Question (iv):
Incitec Pivot Limited is involved in developing certain estimations and suppositions for
the company was concerned for the upcoming years. The results from accounting estimations by
definition can be recognized based on linked related results. Some anticipations and suppositions
leads to emergence of risks which might lead to misstatements of material in carrying value of
assets in the upcoming financial year (Horton 2018). This is elucidated through the accounts
notes within which such type of opinions are needed. With the continuity of constant poor
condition and market performance, evaluation based on recoverable amount focused on
intangible assets and goodwill for cash generating units is carried out with calculations on vale in
use. Additionally, such computations enable cash flow estimations through relying on financial
forecast that is prepared by the management over the past five years. For calculations on value
for use, some estimation is taken into account:
 Discount rates
 Growth rates by employing extrapolate cash flows rather than the forecasted period

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 EBITDA/ Sales margin
Question (v):
In adherence to “IAS 36 Impairment of Assets”, it is observed that this particular IFRS
standard needs some subjective analysis based on which it can be implemented as per the
requirements of the management. Additionally, this did not support restriction of creative
accounting (Hoskin, Fizzell and Cherry 2014). This has been found out that the annual report of
Incitec Pivot Limited which has significant subjectivity related with management time case
conducted the process of impairment test. This is because of the reason that an organization’s
management might be used while initiating opportunistic goodwill impairment test. This can be
supported through goodwill allocation within all cash generating units with the calculation of
recoverable amount in a situation where there is no active goodwill prices associated with
discretion subject.
Question (vi):
With an elaborated evaluation it is considered that some complex or confessing factor
associated with impairment is linked with indication of impairment. Other than this situation
indications rely on internal along with external considerations in account for asset impairment,
continuity of implementing (Hoskin, Fizzell and Cherry 2014). In such case, these tests for
goodwill and the tangible assets is deemed to rely in management’s discretion. For such factors
there is an increased opportunity for the management to conduct an opportunistic test in a
situation where there are variations in value.

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Question (vii):
This was gathered that impairment loss serves as a difference between recoverable
amounts of specific assets along with carrying amount of these assets. The recoverable asset is
observed to remain increased among fair value asset disposal cost and value in use (Weygandt,
Kimmel and Kieso 2015). Fair value is elaborated through taking an instance of asset in active
market or sales agreement in which trading of asset is carried out. Moreover, existence of vital
information within an organization through disclosure of amount can experience asset sales. On
the contrary, the value in use can be recognised as upcoming cash flows present value which is
observed to be attained from asset or CGU in adherence to IAS 36.
Question (viii):
IFRS 13 accounting standard, fair value is elucidated through the points mentioned
under:
In active market, there exist asset value within asset trading which is conducted
Sales agreement
Presence of effective information for disclosure of amount within which organizations
can support the asset sales.
For such reasons, fair value can be denoted as selling price which is considered from the
part of the seller along with acquirer by making sure that every party is associated with the free
transactions. Numerous investments achieved fair value that is ensured from the part of the
market in which security trading is accomplished. Moreover, fair value elucidates a business’s
assets and liabilities value in comparison to financial statements of a subsidiary firm which is
consolidated with a big organization (Weygandt, Kimmel and Kieso 2015). For instance, in a

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situation where there is an organization’s stock trading in the exchange, all the market players
provides a bid by asking price of the same share. In this scenario, the investors carry out stock
selling to the market leader in a bidding price along with attaining shares from the market players
at an ask price. In account of this, it can be inferred that exchange might serve as a dependable
technique of ensuring shares fair value consideration.
Part B:
Question (i):
Approximately 50% of business firms those consider using IFRS or US GAAP gets
affected because of certain changes in accounting. Based on such status, the businesses aligning
with IFRS or US GAAP standards attain leased commitments along with $2.3 million assets
based on which 85% are positioned in annual report (Macve 2015). They are also deemed as a
part of operating lease. For paying compensation on this, the investors basically consider that
evaluation is inconsistent, incomparable and inaccurate. In account for this, it has been revealed
that the past standards of accounting failed to explain economic reality.
Question (ii):
Majority of businesses took into consideration all prior accounting standard and specified
that 85% of leases amount to the operating leases. Conversely, it also did not represent the
aspects those are explained within the financial statement position. In case the operating leases
are not recorded within the company’s financial statement there will be drastic generation of real
liabilities (Weygandt, Kimmel and Kieso 2015). Due to such fact, at the time financial crisis took
place most of the renowned retail businesses experienced heavy loss for they were not capable to
address new economic reality in a better way. In addition, these businesses have a good fraction

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of commitments focussing on areas of long term operating leases as well as having lean annual
reports. For this reason, the companies lease liabilities in off balance sheet arrangements is
depicted to be higher than 66 times in contrast to debt values in the balance sheet statement.
Question (iii):
Previous accounting process which takes into account lease can lead to loss of
comparability. The industry has observed most of its leases to be a fraction of operating lease
and this record is not sustained in the annual report of the firm. Conversely, the firm linked with
leasing is not observed to be identical for its business rivals having some financial obligations in
two kings of these companies are not similar (Weygandt, Kimmel and Kieso 2015). Such
situation denotes that there is an increased deficiency of level playing field in such organizations.
After commencement of a new standard, every lease can be mentioned in the form of asset and
these leases can function as a liability factor. However, it is estimated that dealing with such
concerns is achievable.
Question (iv):
Some variations in accounting standard are deemed to have a drastic effect on most of the
listed organizations and these are well established in all the organizations. The reason behind this
is that some variations might cause numerous controversies. Moreover, this can result in warning
effects along with negative economic effects as well as expenses related with alterations in the
system. Additionally, some changes might pose drastic commercial purposes effects (Kim and
Schmidgall 2017). For example, alterations in banking covenants in addition to contractual
agreements associated with annual report of a business that encompasses profit targets in the
direction of arranging bonus payment to staff. Gearing ration might be necessary for achieving
revisions before the initiation of a new standard. However, every department in the firm needs

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achieving an opinion concerning changes effect. This takes into account human resource,
finance, and information technology and investor relations department having asset procurement.
These considerations might result in popularity ad they are deemed as aspects causing adverse
impact on new accounting standards reputation.
Question (v):
In alignment with innovative standard of accounting, this has been explained that most of
the businesses are deemed as operating leases and as a fraction of the company’s off balance
sheet. Due to the same, users of financial statement and investors might not achieve a better
viewpoint on financial situation of the business (Kahng 2015). This does not enable them to
differentiate between leasing of the business assets along with purchasing assets of the business.
Moreover, such new standard is focussed on developing IFRS 16 and it is also forecasted that
this can result offering of expenses. In addition, it can result in increasingly well-versed
decisions related with investment. It can be signified that the leases that do not consider purchase
decisions in a better way can be a part of the management.

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References
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383.
Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I. and Castoldi, S., 2015. Advanced
Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA
spa.
Hemmer, T. and Labro, E., 2016. Productions and Operations Management & Management
Accounting.
Horton, J., 2018. Advanced Financial Accounting and Reporting: Theory, Practice and
Evidence. Routledge.
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective.
Wiley Global Education.
Incitecpivot, 2018. [online] Available at:
https://www.incitecpivot.com.au/~/media/Files/IPL/Sustainability/2016%20Sustainability
%20Report/IPL_2016_Annual%20Report.pdf [Accessed 23 Jan. 2018].
Kahng, L., 2015. Perspectives on the Relationship between Tax and Financial Accounting.
Kim, M. and Schmidgall, R.S., 2017. Key managerial and financial accounting skills for private
club managers: Comparison to lodging managers. International Journal of Hospitality &
Tourism Administration, pp.1-21.

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Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John
Wiley & Sons.