Goodwill Impairment and IFRS 16 Impact

This assignment delves into the complex world of goodwill impairment testing according to International Financial Reporting Standards (IFRS). It examines various aspects of this process, including indicators used for impairment recognition and the challenges faced by companies in accurately assessing goodwill value. Furthermore, the assignment explores the significant impact of IFRS 16 on lease accounting, analyzing its implications for financial reporting and the aviation industry specifically.

HA3011 Assignment
Advance financial accounting

TABLE OF CONTENTS
Task 1...............................................................................................................................................3
Part A...........................................................................................................................................3
Part B...........................................................................................................................................3
Part C...........................................................................................................................................3
Part D...........................................................................................................................................3
Part E...........................................................................................................................................4
Part F............................................................................................................................................4
Part G...........................................................................................................................................4
Part H...........................................................................................................................................5
Task 2...............................................................................................................................................5
Part A...........................................................................................................................................5
Part B...........................................................................................................................................6
Part C...........................................................................................................................................6
Part D...........................................................................................................................................6
Part E...........................................................................................................................................7
References........................................................................................................................................8

TASK 1
Part A
Impairment assets associated with commonwealth bank are goodwill, joint ventures and plant
and equipment. The goodwill arising from the combinations of business which include intangible
assets on balance sheet is impaired. If any indication occurs that the investment is being
impaired, then the whole carrying cost of the investment in the joint venture is tested for
impairment. In plant and equipment, the company calculates it on fair value based on market
valuation independently (Annual report of Commonwealth Bank 2018).
Part B
For the purpose of impairment testing of plant and equipment the company’s revaluations
adjustments are shown in the reserves of asset revaluation in the income statement. The realized
amount of the reserves of asset revaluation are then transferred to the retained profit account.
Other properties remain at a cost which includes direct increasing of the cost of acquisition by
subtracting accumulated depreciation and heading towards impairment testing (Lind and
Arvidsson, 2014).The goodwill of the company is impaired annually by locating the units from
where the cash is being generated. It is done by comparing the recoverable sum from the
carrying amount of the goodwill. If the carrying sum is more than impairment testing is
conducted by the company.
Part C
The loss held from the impairment testing of the assets of the company is further recorded in the
income statement under the section of total operating expenses. The loss occurred by impairment
testing is a reason for the reduction in the net income of the firm (Paugam and Ramond, 2015).
This is included in testing for the recoverability by calculating the future undiscounted flow of
cash for the assets and then comparing the value with the carrying cost of assets.
Part D
The applicability of Group’s impairment testing needed the relevant use of judgements,
assumptions and estimated which are based on past experience and factors that are assessed to be
viable and are considered on a continual basis. The provisions are formed on the basis of fair

value estimated and are considered as the variation between carrying the value of assets and the
future cash flow value reduced at the effective interest rate of the financial assets (Huikku,
Mouritsen and Silvola, 2017). The nature of key estimates and assumptions are considered as
uncertain as provisions vary. The Group assess that provisions are applied adequately and state
the best estimate of expected future costs.
Part E
The impairment requirement can result in prescriptive as well as subjective to for making
considerable judgements. The group must make sure that all requirements are applied in an
appropriate manner (Carlin and Finch, 2011). The impairment testing process applicable under
the AASB particularly AASB 136 of impairment assets is complex yet prescriptive. Although,
there is more subjectivity engaged in the application of these requirements and can create
significant impacts due to lack of specific guidance. For example; If or if not impairment in the
cash-generating unit is applicable to goodwill or financial asset then it will be based on the
goodwill allocation over the cash-generating units of Group (Wen, and Moehrle, 2015). In a
situation where goodwill has not been allocated to the unit for the required impairment then it
will be subjected to impairment. Thus, the actual outcomes might vary from subjectivity and can
impact the net assets and profit of the Group.
Part F
By considering the present study, I found that this topic is interesting yet complex due to the
diversity of applicable provisions. The most interesting aspect of this study was a requirement of
impairment testing by considering the viability of information for users. However, the confusing
aspect of this study was variation in applicability of provisions of impairment in different
situations. The most surprising thing about this study is that the company can use different
methods of impairment testing for different types of assets.
Part G
In accordance with the conducted study, I have gained new insights regarding the conduct of
impairment testing done by companies to consider if or if not the goodwill or other assets with
their useful lives are impaired. Subsequently, the cash-generating unit’s carrying amounts are
evaluated with their recoverable amount (Mazzi, Liberatore and Tsalavoutas, 2016). Further the

recoverable amount is identified at their fair value less costing, by applying earnings multiples to
the Banking and Wealth Management of Group.
Part H
Fair value refers to the amount that will be gained to sell an asset or paying for liability
transferring on an orderly basis with market applicants on a measurement date (Carlin, Finch and
Laili, 2009). Further, the fair value measurement is stated under standards which requires
measurement done on fair basis or disclosures about the same. The specified standards are
applicable in terms of an exit price with using a ‘fair value hierarchy' and lead to a market-based
notion rather than an entity-specified one (Sellhorn and Stier, 2017). The Group’s anticipated fair
value and fair value hierarchy for the Commonwealth Bank’s financial aspects were not
measured on the basis of fair value as on 30 June 2017. This shows consideration that small-
scale firm which is subjected to low scrutiny by management and investors. Along with this, it is
noticed that the performance of firm measures as revenue and expected cash flow are low to
small firms. However, the medium values of the same for larger firms represent that they are also
suffering from poor performance. The fair value must be indicating price estimated at which
financial instruments can be sold or transferred by a transaction among market participants.
TASK 2
Part A
In the given study; the head of the IASB has a perception that in past accounting model which
was used to record lease transactions were not capable of imitating the exact economic condition
of the company. In accordance with the accounting model for lease earlier the company can
easily separate the type of lease and was being recorded on the balance sheet. The recent lease
accounting does not need operating lease to be recorded in the firm’s balance sheet and hence the
result of this that it do not represent the assets, liabilities and the financial statements of the firm
correctly (Haywood, 2018).
Part B
The rise in the debt for lease in the companies took place because of the misleading information
recorded on the balance sheet. The issue is related to the operating lease as in the core content of
the current accounting model; it is stated that there are two type of lease financial and operating

lease (IFRS, 2018). The financial lease is identified when asset and liabilities are recorded on
balance sheet. But the operating lease is identified as the expense of the company and is not
recorded on the balance sheet. The companies face problems as writing off the operating lease
as it will show less of profitability and liability than it should be. As a consequence, the entity
overlooks this unrecorded lease and hence it will result in an lease debt 66 times more than the
actual debt.
Part C
The argument given by the president of the board for most of the aviation industries was that;
they would not be able to cope up with the new regulations of the accounting model for lease.
The reason behind his argument was that the effects would be on the financial performance of
the airline industry. Further; there will be only a little impact on the lessors but their accounting
treatment will remain same. The only problem which will arise is the change in the dynamics of
the market and also a change in the demand for borrowed aircraft (You, 2017). The coming up of
new IFRS standards will have a great impact on the aviation companies which use IFRS as a
framework for financial reporting (Lexology, 2018). The companies from now onwards will be
needed to identify all type of lease on balance sheet and will also record new assets and
liabilities.
Part D
According to the Chairman of the board, the introduction of new IFRS 16 will affect many
companies as it comes up with a single model of accounting which will abolish the differences
among the operating and financial lease. The new model will also be applicable to the previous
leases, and now all leases will be recorded on the balance sheet of the entity. In the model, the
lease will be defined as an identified asset and will have right to control the contract (Carlin and
Finch, 2010). The rent expenses will be substitute by the depreciation and cost of interest and
entities will need to identify the liability of lease for the present worth of future payments of the
lease.
Part E
The biggest benefits of IFRS16 in lease accounting model is that it will now implement both the
lease financial as well as an operating lease on the balance sheet. It will also have an effect on
the entity’s interest cover; asset turns over, net income, operating profit and cash flows. The

company will also experience great impact on the decision-making process, forecasting, and
financial reporting.

REFERENCES
Annual report of Commonwealth Bank. (2018). (pdf). Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
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perceptions of usefulness. Accounting and Business Research, 45(5), pp.602-619.
Cannon, N.H. and Bedard, J.C., (2016).Auditing is challenging fair value measurements:
Evidence from the field. The Accounting Review, 92(4), pp.81-114.
Carlin, T.M. and Finch, N. (2010), “Resisting compliance with IFRS goodwill accounting and
reporting disclosures evidence from Australia”, Journal of Accounting & Organizational
Change, Vol. 6 No. 2, pp. 260-280.
Carlin, T.M. and Finch, N. (2011), “Goodwill impairment testing under IFRS: a false impossible
shore?”, Pacific Accounting Review, Vol. 23 No. 3, pp. 368-392.
Carlin, T.M., Finch, N. and Laili, N.H. (2009), “Goodwill accounting in Malaysia and the
transition to IFRS – a compliance assessment of large first year adopters”, Journal of Financial
Reporting & Accounting, Vol. 7 No. 1, pp. 75-104.
Haywood, A. (2018). Why Is Global Lease Accounting About to Change? IFRS 16 and FASB
ASC 842: Leases. [Online].Available at: http://blog.innervision.co.uk/blog/why-is-global-lease-
accounting-about-to-change-ifrs16-and-fasb-asu-842-leases [Accessed 25 Jan. 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.
Ifrs.org. (2018). IFRS. [Online] Available at: http://www.ifrs.org/news-and-events/2016/03/hans-
hoogervorst-article-shining-the-light-on-leases/ [Accessed 25 Jan. 2018].
Kemppainen, S.P., (2015). Goodwill Impairment Testing in Accordance. Accounting
Review, 27(4), pp.283-310.

Lexology.com. (2018). How will the Aviation Industry be affected by IFRS 16? | Lexology.
[Online] Available at: https://www.lexology.com/library/detail.aspx?g=22680ff3-ec0f-4557-
85d5-520404dd4489 [Accessed 25 Jan. 2018].
Lind, E. and Arvidsson, M., (2014). Indicators of goodwill impairments: Pre-and post-
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Mazzi, F., Liberatore, G. and Tsalavoutas, I., (2016). Insights on CFOs’ perceptions about
impairment testing under IAS 36. Accounting in Europe, 13(3), pp.353-379.
Paugam, L. and Ramond, O., (2015).Effect of Impairment‐Testing Disclosures on the Cost of
Equity Capital. Journal of Business Finance & Accounting, 42(5-6), pp.583-618.
Sellhorn, T. and Stier, C., (2017). Fair Value Measurement for Long-Lived Operating Assets:
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You, J., (2017). The Impact of IFRS 16 Lease on Financial Statement of Airline
Companies (Doctoral dissertation, Auckland University of Technology).