Asset Impairment: ASIC's Call for Quality Financial Information Report

The report discusses the recent call by ASIC for a more focused and qualitative financial information report, specifically related to accounting estimates concerning asset impairment testing. It highlights the importance of periodic testing of assets for impairment and the steps required to be followed in the process. The report also covers the information required to determine the impairment of assets and management's flexibility when it comes to impairment decisions. The report concludes that impairment testing is a necessary tool for determining the true and fair value of assets and liabilities recorded in financial statements.

MP212 Financial Accounting and
Reporting

EXECUTIVE SUMMARY
The report has summarised the needs that the business is currently facing for asset
impairment. Myer Holdings ltd. is a competing business brand for operating store chains in
departmental form. The recent call taken by the Australian Securities and Investment
Commissions (ASIC) asks the corporate houses to provide for a focused and qualitative
financial information report.

Table of Contents
EXECUTIVE SUMMARY...................................................................................................................2
INTRODUCTION.................................................................................................................................3
MAIN CONTENT.................................................................................................................................3
ANNOUNCEMENT OF ASIC REGARDING IMPAIRMENT........................................................3
EVIDENCES THAT STATES THAT IMPAIRMENT TESTING IS NECESSARY.......................4
THE PROCESSES REQUIRED TO BE ADDRESSED IN DETERMINING ANY ASSET
IMPAIRMENTS THAT MIGHT BE NECESSARY........................................................................5
INFORMATION REQUIRED TO DETERMINE THE IMPAIRMENT OF ASSETS.....................6
MANAGEMENT’S FLEXIBILITY WHEN IT COMES TO IMPAIRMENT DECISION..............6
CONCLUSION.....................................................................................................................................7
REFERENCES......................................................................................................................................8

INTRODUCTION
Impairment of asset is a major accounting adjustment. As per the AASB 136,
Impairment of Assets, impairment refers to the permanent or the irreversible brought down of
the value of the fixed or the tangible assets and intangible assets. Impairment happens when
the carrying value of the asset is maintained at a higher level in relation to its recoverable
value. This means that the asset of sold shall fetch a value which shall be below the carrying
amount reflected in the books. The report that is prepared here is having the main intention to
relate the media release that ASIC had done in ending May 2018. The media release is all
about a declaration that has been given on the preparers of the financial statements to
promote more focus on the quality with which the reports are presented. But the focus in this
report is related to accounting estimates that is concerned with impairment testing related to
assets. All this has been tried to be presented in context of Myer Holdings ltd. However, due
to the changes in time, this company may have
MAIN CONTENT
The declaration brought upfront by the ASIC has extended high focus on the asset
impairment adjustment which deals in accounting estimates. At the end of the report reading
it would get clear that how important it is for any business corporation to periodically test
assets for impairment. The steps that are required to be followed in any impairment of asset
process are briefly discussed. An idea about the requisite information for impairment and the
management flexibility for impairment shall be gathered1.
ANNOUNCEMENT OF ASIC REGARDING IMPAIRMENT
As per the announcement the directors and the auditors are responsible to ensure that:
 The assumptions that have been laid by the company regarding its projections about the cash
flows from the assets are adequate or not.
1 Yugui HAO, Kuankuan ZHAO, and Zheng HAO. ‘Research on Fair Value, Fluctuation of
Assets' Value and Audit Fees: Based on the Empirical Evidences of Listed Companies in
ShangHai and ShenZhen Stock Markets from 2009 to 2012 [J].’(2014) 1 Journal of Nanjing
Audit University 112-154

 The fair value and the value in use have been calculated using appropriate and proper
calculations along with appropriate cash flows.
 No hypothetical cash flows are used and only the real and relevant cash flows that are
consistent with the asset that is tested for the impairment are used in making the impairment
calculations2.
 The impairment testing is based on the carrying value and revised value of the assets and
liabilities base on the internal and external factors which might impact its overall outcomes.
 The discount rates used do vary in accordance with the differentiated risk that is associated
with the different cash generating units. The risk level and the geographical locations are
considered before deciding on the discount rates3.
 The allocation of costs to the related assets has been made on a reasonable and appropriate
basis.4
 Cost drivers are used to bifurcation the costing of the process and determine the true value of
the assets and liabilities recorded in the books of account of company.
EVIDENCES THAT STATES THAT IMPAIRMENT TESTING IS NECESSARY
Evidences of impairment basically refer to the indicators that make the company think about
the asset impairment in a serious manner. These include both internal as well as the external
indicators. The evidences that have been observed in case of the company include5:
1. INTERNAL EVIDENCES
 the recent physical harm observed in the assets of the company
2 Ferrer, Rodiel and Glenda J. Ferrer. ‘Earnings management indicators and their impact on
inventory turnover under food, beverage and tobacco sector: a thorough study using
simultaneous equations model. (2016): 20 (2) Academy of Accounting and Financial Studies
Journal 93-95
3 Biancone, Paolo Pietro. ’ Italian Experience on Impairment Test of Goodwill’ International
2(1) (2014). Journal of Advances in Management Science , 162-176.
4 Wang, Jing, and Keith Hooper, Recognition and disclosure of impairment in China
(Pearson, 2014).
5 Carrol. Iroham, "Pedagogy (IPSAS), OFRS) & International Valuation Standards."
(Pearson, 2016): 108-125.

 The business combination ideas that are discussed in the annual report of the company. The
business combination plan shall make certain assets go obsolete to use for the company.
 The bad operating performance that the assets are showing in the recent time.
 The high range that is being touched by the operating costs of the organisation.
 The unrealised budget performance regarding the estimated revenues6.
2. EXTERNAL EVIDENCES
 The rising interest rates in the market that is directly impacting the discount rates which shall
eventually fall as a load on the value in use of the concerned assets.
 The new advancements introduced in the market relating to technology, laws and economy.
 The relative presentation of carrying value of the assets in the balance sheet on the higher
side as compared to the market capitalisation valuation of Myer Holdings Ltd7.
THE PROCESSES REQUIRED TO BE ADDRESSED IN DETERMINING ANY
ASSET IMPAIRMENTS THAT MIGHT BE NECESSARY
With the ramified changes, the value of the assets decreases and by using the impairment
testing company determine the true value of its recorded assets in the books of account. Only
the identification of evidences is not necessary, but a complete process is to be followed by
the company to reach a conclusion whether the impairment is required or not. The process
includes the following steps8
 At the first level, it is important to look whether the evidences are appropriate enough to
check for the further requirement of impairment in relation to nay cash generating unit.
6 Biancone, Paolo Pietro. ’ Italian Experience on Impairment Test of Goodwill’ International
2(1) (2014). Journal of Advances in Management Science , 162-176.
7 Korošec, Bojana, Mateja Jerman, and Polona Tominc. ‘The impairment test of goodwill: an
empirical analysis of incentives for earnings management in Italian publicly traded
companies. 29(1) (2016):’ Economic research-Ekonomska istraživanja 162-176.
8 Syden, Mishi. Dynamic interactions between stock markets and banks in South Africa:
testing for market disciplining of banks. 2nd ed, Australia: Diss. (University of Fort Hare,
2015).

 Secondly the company needs to make calculations regarding the several requisite elements.
These include, recoverable amount of the tangible and intangible assets by comparing the fair
value deducted by the costs to sell and the value in use.
 The third most important part is to check whether the carrying value of the assets is actually
lesser than the recoverable amount that has been estimated.
 After the assets have been certain that they are to be impaired, the company needs to make an
account for the loss that has been recognised on the impairment of the assets in the account of
profit and loss9.
INFORMATION REQUIRED TO DETERMINE THE IMPAIRMENT OF ASSETS
The information that is must to have to determine the impairment of assets includes:
 The evidences that Myer Holdings is showing that demand an impairment process to run.
 The market conditions that suggest the actual recoverable amount10.
 To calculate the recoverable amount of the assets, the information value in use and the fair
value are required.
 The details about earlier impairment done and the calculations made for the same are to be
checked.
 It also assists in keeping the clients more informed for the recorded assets and liabilities.
MANAGEMENT’S FLEXIBILITY WHEN IT COMES TO IMPAIRMENT
DECISION
The management has the flexibility to determine the methodology in which they are
going to gather the information which is required for the impairment of the assets. However,
the evidences that the management obtains and the information they find about the
impairment suggests that impairment is necessary, then the management gets no flexibility to
make a decision. If impairment is required that it is must to be conducted by the organisation.
The management cannot deny when the situations demand an impairment to be made as per
the AASB 36, Impairment of Assets. This will assist in keeping the recorded assets and
liabilities more transparent towards the stakeholders.
9
10 Biancone, Paolo Pietro. ’ Italian Experience on Impairment Test of Goodwill’ International
2(1) (2014). Journal of Advances in Management Science , 162-176.

However, when the earnings management is followed by the organisation, the
management falls in a stiff situation. The recoverable amount is calculated on market data
and the manipulations that have been made are easily visible after that. Hence, ultimately if
the case is requiring impairment, nothing can be done which can resolve the requirement11.
CONCLUSION
Impairment is done to provide the users with the true performance and position of the
company. If the organisation carries the assets at a value which is not even recoverable, then
false results are obtained. It is analysed that finding the carrying value of the assets could be
done when it is compared with the the values shown in the balance sheet and compare it with
the market capitalisation valuation of Myer Holdings Ltd. The financial performance gets
impacted due to wrong depreciation charges, and the financial position is impacted because
of the wrong carrying value used. This calls for a change in the real image that was required
to be presented in front of the company’s users of financial information. However, the best
way is to follow a complete approach that lest the management to understand the need and
requirement to adhere to the impairment policies. After assessing the details, it could be
inferred that impairment testing is required tool which is used by the company to determine
the true and fair value of the assets and liabilities recorded in its financial statement.
11 Biancone, Paolo Pietro. ’ Italian Experience on Impairment Test of Goodwill’ International
2(1) (2014). Journal of Advances in Management Science , 162-176.

REFERENCES
Bojana K, , Mateja J, and Polona T. ‘The impairment test of goodwill: an empirical analysis
of incentives for earnings management in Italian publicly traded companies. 29(1)
(2016):’ Economic research-Ekonomska istraživanja 162-176.
HAO, Y, ZHAO, Kand HAO, K. "Research on Fair Value, Fluctuation of Assets' Value and
Audit Fees: Based on the Empirical Evidences of Listed Companies in ShangHai and
ShenZhen Stock Markets from 2009 to 2012 [J]." Journal of Nanjing Audit University 1
(2014): 012.
Iroham, C. "Pedagogy (IPSAS), OFRS) & International Valuation Standards.’ (2016): 108-
125.
Jing,W and Hooper, K, Recognition and disclosure of impairment in China (Pearson, 2014).
Mishi. S. Dynamic interactions between stock markets and banks in South Africa: testing for
market disciplining of banks. 2nd ed, Australia: Diss. (University of Fort Hare, 2015).
Paolo P, B,. "IFRS:’ Italian Experience on Impairment Test of Goodwill’ International 2(1)
(2014). Journal of Advances in Management Science , 162-176.
Rodiel F, .and. Ferrer. G ‘Earnings management indicators and their impact on inventory
turnover under food, beverage and tobacco sector: a thorough study using simultaneous
equations model. (2016): 20 (2) Academy of Accounting and Financial Studies Journal 93-
95