Impact of IFRS on Goodwill Impairment

The assignment delves into the effects of International Financial Reporting Standards (IFRS) on how companies test for goodwill impairment. It requires a critical evaluation of relevant academic research papers and empirical studies to understand the influence of IFRS on this crucial accounting process. The focus is on analyzing the impact of IFRS on disclosure requirements, audit quality, and the overall compliance of firms with the standards regarding goodwill impairment testing.

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
Answer to Part (i):.......................................................................................................................2
Answer to Part (ii):......................................................................................................................3
Answer to Part (iii):.....................................................................................................................3
Answer to Part (iv):.....................................................................................................................5
Answer to Part (v):.......................................................................................................................5
Answer to Part (vi):.....................................................................................................................6
Answer to Part (vii):....................................................................................................................6
Answer to Part (viii):...................................................................................................................7
Part B:..............................................................................................................................................7
Answer to Part (i):.......................................................................................................................7
Answer to Part (ii):......................................................................................................................8
Answer to Part (iii):.....................................................................................................................8
Answer to Part (iv):.....................................................................................................................9
Answer to Part (v):.......................................................................................................................9
References:....................................................................................................................................11

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Part A:
The intention of this report is to concentrate on the criteria of impairment and
assumptions used on the part of M2 Telecommunications Group Limited for carrying out
impairment tests on assets. The report would deal with the procedures of impairment testing and
the subjectivity involved in such procedures. For commenting on these procedures, the annual
report of the organisation for the period ended 30th June 2015 has been taken into consideration,
as it has not published annual reports after the stated period. M2 Telecommunications Group
Limited was an Australian wholesaler and retailer of telecommunication services, gas, power and
insurance products. The organisation had two divisions comprising of consumer division and
wholesale division. It had over 3,000 staffs in Australia, New Zealand and the Philippines;
however, it merged with Vocus Communications on 5th February 2016 (M2.com.au 2018).
An impaired asset is an asset, which has a lower market value in contrast to its carrying
value. The assets likely to be impaired include tangible fixed assets like property, plant and
equipment and intangible assets like goodwill (Khokan Bepari, Rahman and Taher Mollik 2014).
After making adjustment with the carrying amount of the impaired asset, the loss is recorded in
the income statement of the organisation. When impairment is written off, the asset would have
minimised carrying cost, since the adjustments would be realised in the form of loss and this
would minimise the asset value.
Answer to Part (i):
According to the annual report of M2 Telecommunications Group Limited in 2015, the
impairment testing for various classes of assets has been conducted. Goodwill and other
intangible assets have not been amortised; instead, they are tested for yearly impairment. If the

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frequency is greater than once in a year due to variations in events or circumstances, it signifies
that the assets might be impaired and they are recorded in the financial statements at cost less
any accumulated loss of impairment (M Carlin, Finch and Manh Tran 2014). The other assets
such as trade receivables and property, plant, equipment and inventory are tested for impairment
at the time there is an indication that the carrying amount of the asset might not be recoverable.
Answer to Part (ii):
M2 Telecommunications Group Limited conducts a two-step process for impairment
testing. The initial step is to contrast the fair value of the reporting unit to its carrying value
comprising of goodwill. If the carrying value of the operating unit is greater in comparison to its
fair value, the second step of the impairment test needs to be carried out for ascertaining the
amount of impairment loss, if any (Bond, Govendir and Wells 2016). The second step contrasts
the implied fair value of the reporting unit with the carrying amount of that unit. If the implied
fair value is lower in contrast to the carrying amount, impairment charge is realised in an amount
identical to that excess. The loss realised could not exceed the carrying amount of the asset.
Answer to Part (iii):
The organisation recorded the following impairment expenditures for the period ended
30th June 2015:
Intangible assets and goodwill:
In this period, the organisation has recorded overall impairment of $71,323,000
($105,207,000 - $33,884,000), out of which $30,033,000 was recorded against software,
$33,461,000 was recorded against customer contracts, $7,829,000 was recorded against IRU,
while brands and goodwill are not subject to impairment.

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Trade receivables:
During the year 2015, the organisation recorded an allowance for impairment loss of
$17,487,000 in 2015, which was $18,740,000 in 2014.

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Answer to Part (iv):
M2 Telecommunications Group Limited is involved in making certain estimates and
assumptions, since it is worried about the future. The results of the accounting estimates by
definition would be identical to the related actual results (Bepari and Mollik 2015). The
estimates and assumptions having significant risks, which could result in material misstatements
to the carrying value of the assets within the upcoming fiscal year, are elaborated through notes
to accounts, in which these types of judgements are needed. Due to the continuous adverse
situation and downturn of the market, the evaluation of recoverable amount for goodwill and
other intangible assets of the cash generating units of the organisation have been carried out. The
computation of the recoverable amount in relation to cash generating units is made based on the
computation of value-in-use (Benson et al. 2015). Along with this, these computations utilise the
cash flow estimations based on financial forecast, which the management has prepared for the
past five years.
For computation of value-in-use, the following assumptions have been made:

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 Rates of discount
 Growth rates utilising the extrapolate cash flows beyond the forecast period
 EBITDA/ Sales margin
Answer to Part (v):
According to “IAS 36 Impairment of Assets”, it has been perceived that it is a typical
IFRS standard, since it needs subjective interpretation and it could be adopted in relation to the
managerial needs. Moreover, it does not restrict creative accounting (Kimbro and Xu 2016). It
has been identified from the annual report of M2 Telecommunications Group Limited that
significant subjectivity has been involved at the time the management conducted the process for
impairment test. This is because the management of the organisation might have exploited its
discretion by conducting the test for goodwill impairment opportunistically (Yao, Percy and Hu
2015). This could be validated by the goodwill allocation to the cash generating units and
calculation of recoverable amount at the time there is absence of active prices for goodwill
subject to discretion.
Answer to Part (vi):
After critical evaluation, it is realised that the confessing or difficult part of impairment is
related to the indication of impairment. Even though the indications rely on both internal and
external signs regarding the impairment of assets, the frequency of carrying out the test for
goodwill and other intangible assets rely on the discretion of the management. Henceforth, there
is a probability that the management would conduct the test opportunistically, while there is a
variation in the value.

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Answer to Part (vii):
As commented by Amel-Zadeh et al. (2016), impairment loss is the difference between
the recoverable amount of an asset and the carrying amount of that asset. The recoverable asset is
the greater between the fair asset value less cost of disposal and the value-in-use. Fair value is
ascertained through the asset in the active market or the agreement of sales, in which the trading
of asset is carried out or the availability of effective information in disclosing the amount at
which the organisation could sell the asset. On the contrary, the value-in-use is the present value
of future cash inflows, which is expected to be obtained from the asset or CGU, according to IAS
36.
Answer to Part (viii):
In accordance with “IFRS 13”, fair value is ascertained through the following points:
Asset value in active market under which the trading of asset is carried out
Agreement of sales
Presence of effective information in disclosing the amount at which the organisation
could sell the asset (Wen and Moehrle 2015)
Thus, fair value is explained as a selling price, which is accepted on the parts of both buyer
and seller by assuming that both the parties have entered the transactions freely. Most
investments have fair value, which is ascertained on the part of a market, in which security is
traded. Moreover, fair value depicts the value of the assets and liabilities of an organisation at the
time the financial statements of the subsidiary firm are consolidated with a parent organisation.
For instance, if the stock of an organisation is trading on an exchange, the market players provide
a bid by asking price of that stock. Under such situation, an investors could sell the stock to the

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market leader at the bid price, while purchasing the stock from the market player at the ask price.
Hence, it could be inferred that exchange is the most trusted method of ascertaining the fair value
of a stock.
Part B:
Answer to Part (i):
About 50% of the organisations using US GAAP or IFRS are influenced due to the
changes in accounting. According to the existing status, the organisations under IFRS or US
GAAP have leased assets and commitments amounting to nearly $3.3 million, out of which 85%
are not disclosed in the statement of financial position, since they are treated in the form of
operating leases (Jorissen et al. 2014). In order to compensate this, the investors primarily
constitute of the projections, which are inconsistent, incomparable and inaccurate. Henceforth, it
is cited that the past accounting standard failed to reflect economic reality.
Answer to Part (ii):
In accordance with the past standards of accounting, majority of the organisations have
reported 85% of their leases realising the amount under operating leases and it did not depict
those under the statement of financial position. Even though the operating leases have not been
recorded under the statement of financial position, there has been creation of actual liabilities
(Jorissen et al. 2014). Hence, at times of financial crisis, some main retail organisations have
become bankrupt, since they fail to adjust the updated economic reality rapidly. In addition to
this, the organisations had significant amount of commitments in relation to the long-term
operating leases; however, their statements of financial position have been lean deceptively.

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Thus, the lease liabilities of the organisations under the arrangements of off-balance sheet had
been 66 times higher in contrast to the debt values in the balance sheet statement.
Answer to Part (iii):
The past accounting system in relation to lease could lead to lack of comparability. The
aviation industry accounts majority of its leases in the form of operating leases and the record is
not made under the statement of financial position. Hence, an airline organisation involved in
leasing all its aircraft fleet is not similar to its rivals purchasing all its fleets; however, the
financial obligations of both kinds of airline organisations are not dissimilar (Dye, Glover and
Sunder 2014). This denotes that there is absence of level playing field among the airline
organisations. With the initiation of new standard, all leases would be accounted in the form of
assets and the lessees would record them in the form of liabilities. Hence, it is estimated that the
issue would be resolved.
Answer to Part (iv):
Any change in the accounting standard is probable to have an effect on nearly half of the
listed entities and they are not expected to be popular with all the organisations. The reason
behind this is that the changes might lead to controversies and it could result in warning effects
in relation to negative economic conditions and costs pertaining to the changes in the system
(Gimbar, Hansen and Ozlanski 2016). In addition, the changes might have grater commercial
effects.
For example, different banking covenants and contractual arrangements attached with the
financial statements of the organisation such as profit targets to arrange the bonus payment to the
staffs or gearing ratio might be needed for obtaining revisions before the initiation of the new

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standard. Furthermore, each business department needs to obtain an insight of the effect of
changes, which take into account information technology, finance, human resource, finance,
department of investor relations and procurement of assets (Pacter 2014). All such reasons might
result in lack of popularity of the new standard of accounting.
Answer to Part (v):
In accordance with the new standard of accounting, it has been found out that majority of
the organisations are treating the operating leases in the form of off-balance sheet items. As a
result, the investors and other users of financial statements fail to gain an effective insight of the
financial condition of the organisation. This restricts them to contrast the organisations leasing
assets with those organisations purchasing assets (Mora and Walker 2015). However, the new
standard is estimated to update IFRS 16 and it is anticipated that it would broadly outweigh the
costs, which would result in greater informed decisions related to investment. This would be
depicted in the lease against purchase decisions in an effective fashion on the part of the
management.

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References:
Amel-Zadeh, A., Faasse, J., Li, K. and Meeks, G., 2016. Stewardship and Value Relevance in
Accounting for the Depletion of Purchased Goodwill.
Benson, K., Clarkson, P.M., Smith, T. and Tutticci, I., 2015. A review of accounting research in
the Asia Pacific region. Australian Journal of Management, 40(1), pp.36-88.
Bepari, M.K. and Mollik, A.T., 2015. Effect of audit quality and accounting and finance
backgrounds of audit committee members on firms’ compliance with IFRS for goodwill
impairment testing. Journal of Applied Accounting Research, 16(2), pp.196-220.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Dye, R.A., Glover, J.C. and Sunder, S., 2014. Financial engineering and the arms race between
accounting standard setters and preparers. Accounting Horizons, 29(2), pp.265-295.
Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter paragraphs
and accounting standard precision on auditor liability. The Accounting Review, 91(6), pp.1629-
1646.
Jorissen, A., Lybaert, N., Orens, R. and Van Der Tas, L., 2014. Constituents’ Participation in the
IASC/IASB’s due Process of International Accounting Standard Setting: A Longitudinal
Analysis. In Accounting and Regulation (pp. 79-110). Springer New York.
Jorissen, A., Lybaert, N., Orens, R. and Van Der Tas, L., 2014. Corporate participation in the due
process of international accounting standard setting: An analysis of antecedents.

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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.
Kimbro, M.B. and Xu, D., 2016. The accounting treatment of goodwill, idiosyncratic risk, and
market pricing. Journal of Accounting, Auditing & Finance, 31(3), pp.365-387.
M Carlin, T., Finch, N. and Manh Tran, D., 2014. IFRS compliance in the year of the pig: Hong
Kong impairment testing. Journal of Economics and Development, 16(1), p.23.
M2.com.au. (2018). [online] Available at: http://m2.com.au/investor-centre/reports-
presentations-and-resources/annual-reports/ [Accessed 9 Jan. 2018].
Mora, A. and Walker, M., 2015. The implications of research on accounting conservatism for
accounting standard setting. Accounting and Business Research, 45(5), pp.620-650.
Pacter, P., 2014. Global accounting standards-from vision to reality. The CPA Journal, 84(1),
p.6.
Wen, H.J. and Moehrle, S.R., 2015. Accounting for goodwill: A literature review and analysis.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit
fees: Evidence from Australian companies. Journal of Contemporary Accounting &
Economics, 11(1), pp.31-45.