Revaluations and Impairment Testing of Non-Current Assets

This document discusses the revaluations and impairment testing of non-current assets in company accounting. It explores the benefits and drawbacks of the revaluation model and the relevance of impairment testing. The document also provides insights from the annual report of Medibank on fair value measurement and asset impairment.

Running head: COMPANY ACCOUNTING
Company Accounting
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COMPANY ACCOUNTING
Table of Contents
Part A: Revaluations and impairment testing of non-current assets................................................2
Question 1:...................................................................................................................................2
Question 2:...................................................................................................................................2
Question 3:...................................................................................................................................3
Requirement (a):......................................................................................................................3
Requirement (b):......................................................................................................................4
Requirement (c):......................................................................................................................5
Requirement (d):......................................................................................................................6
References:......................................................................................................................................8
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Part A: Revaluations and impairment testing of non-current assets
Question 1:
Based on the provided information, it could be seen that one board director of Simba
Limited has proposed the introduction of revaluation model for non-current assets. However, it is
noteworthy to mention that before the acceptance of such proposal, the benefits and drawbacks
of the same need to be considered.
The primary reason behind the use of revaluation model is to determine the actual asset
values. By implementing this model, the organisations could obtain fair market prices of non-
current assets after significant appreciation since the acquired or purchase price. Such accurate
revaluation helps the organisations in obtaining greater loan amounts1. Along with this, it
becomes easy for the organisations in negotiating the prices of the non-current assets during
mergers and acquisitions when they have complete understanding of the fair values. Moreover,
revaluation model needs manual re-evaluation of the fixed asset values in every period and it
does not need the projection of the economic life and residual amount for computation of
depreciation2. This minimises the overall burden related to depreciation computation from the
organisations. However, one drawback is that it minimises net income, if there is fall in fair
values of non-current assets3.
Based on the above discussion, Simba Limited could be benefitted in a number of aspects
from the implementation of revaluation model with little drawbacks, which could be mitigated
by implementing suitable techniques. Therefore, the board needs to accept the proposal of the
director by adopting revaluation model for non-current assets to obtain more accurate values.
1 Asif, Chaudhry, Interpretation And Applications Of International Financial Reporting Standards (Wiley, 2016)
2 Carl S, Warren, Reeve James M. and Jonathan Duchac, Corporate Financial Accounting(South-Western Cengage
Learning, 2014)
3 Tadeusz, Dudycz and Jadwiga Praanikkw, "Does The Mark-To-Model Fair Value Measure Make Assets
Impairment Noisy?" [2018] SSRN Electronic Journal
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COMPANY ACCOUNTING
Question 2:
The fundamental goal of impairment testing is to ensure that an organisation is not
carrying assets at prices, which are beyond their recoverable amounts. Moreover, the asset
revaluation model results in rise and fall in carrying values of the assets owing to the change in
fair value.
It is noteworthy to mention that fair value is different from recoverable amount, although
they have relationship between them. This is mainly owing to a number of reasons. The
recoverable amounts of re-valued assets could expose the organisation to the risk that their fair
values could beyond their recoverable values4. This could occur at the time the recoverable
amounts of assets are obtained by subtracting the disposal cost from fair value. This would lead
to overstatement of the carrying values of assets by the disposal cost amount, if there is
revaluation of assets to the fair values.
In addition, it is necessary to be taken into consideration that the organisations conduct
impairment test annually, in which it becomes possible to conduct asset revaluation less
frequently like after three to four years. There would be rise in the risk of overstatement of the
asset values; if the potential impairment losses are not considered during the cycle of revaluation.
By taking into account all the above-discussed aspects, impairment is deemed to be relevant for
the assets carried at revaluation model and the organisations need to test such assets for
impairment5. Therefore, it could be said that assets could be tested for impairment under
revaluation model.
Question 3:
Requirement (a):
In accordance with the annual report of Medibank in 2018, it could be observed that the
organisation has carried a portion of its assets at fair values. These assets mainly include global
equities, Australian equities, infrastructure, fixed income and property. It is to be mentioned that
4 Michael, Greener, Between The Lines Of The Balance Sheet (Elsevier Science, 2015)
5 Bilal, Kimouche, "(IAS 36) (Evaluation Of The 'Impairment Of Assets' According To IAS 36)" [2014] SSRN
Electronic Journal
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COMPANY ACCOUNTING
the organisation has carried these assets based on fair value by complying with the three-tier
hierarchy related to fair value6. Finally, it is necessary to state Medibank has disclosed the values
of the above-stated assets based on the measurement of fair value.
Requirement (b):
It is obligatory for the all the listed organisations in Australia to adhere to the principles
and guidelines mentioned in AASB 13/IFRS 13 related to fair value measurement in order to
gauge their assets at fair values. This standard defines fair value as the price to be obtained by an
organisation in order to sell an asset or payment to transfer a liability in an orderly transaction in
the main market at the measurement date under the existing market conditions7. Besides, the
standard enforces the obligation on the organisations in utilising the techniques related to fair
value, which are appropriate in the situations and adequate data are available in order to gauge
fair value. Along with this, AASB 13 provides the organisations with the opportunity of having
fair value hierarchy in order to gauge assets based on their fair values. The Level 1 Inputs could
be considered in the form of quoted prices for similar liabilities and assets in active markets. The
Level 2 Inputs are derived from the prior level, which are observable for liabilities and assets8.
Finally, Level 3 Inputs are those inputs that could not be observed for liabilities and assets9.
It could be witnessed from the latest annual report of Medibank that the organisation has
implemented fair value hierarchy mentioned in AASB 13 in order to gauge its assets at fair
values. The information could be found from Note 7 disclosed in the annual report of the
organisation, which is mentioned as Investment Portfolio in the financial footnotes. In this note,
the organisation has revealed its fair value hierarchy it follows to gauge the fair values of assets
and the presence of the levels in this process10. This clearly signifies that Medibank has adhered
to the AASB 13 fair value hierarchy. Moreover, Medibank has disclosed the asset names gauged
6 Lavi, Mohan R, The Impact Of IFRS On Industry (Pearson, 2015)
7 Aasb.Gov.Au (Webpage, 2019) <https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf>
8 Jay S, Rich and Jefferson P Jones, Cornerstones Of Financial Accounting (Pearson, 2015)
9 Roy, Sidebotham et al, Introduction To The Theory And Context Of Accounting (Elsevier Science, 2014)
10 Medibank.Com.Au (Webpage, 2019) <https://www.medibank.com.au/content/dam/retail/about-assets/pdfs/
investor-centre/annual-reports/Medibank_Annual_Report_2018.pdf>
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under fair value that constitute of property, global equities, fixed income, infrastructure and
Australian equities.
Besides, Medibank has conducted various significant judgements and projections about
its financial assets at fair values via loss or profit in the similar section. According to the
disclosure, the organisation has taken into account measurement of fair value as subjective and
hence, it has classified investments based on the engaged subjectivity. The hierarchy has been in
line with AASB 13. Moreover, the organisation ascertains fair value at level 2 hierarchy with the
assistance of various valuation techniques and they include a number of assumptions based on
the market conditions.
In the identical section of the annual report of Medibank in 2018, it has been disclosed
that the Australian and global securities are gauged at level 2 hierarchy of fair value, since it
holds them indirectly via unit trusts. These assets are gauged at fair values via loss or profit.
From note 11 of the annual report, it has been identified that the organisation has gauges its land
and buildings based on fair value after subsequent subtraction of depreciation. In note 7 of the
annual report, fixed income is gauged based on fair value.
Moreover, the organisation has gauged its premium business revenue at fair consideration
value receivable or received and they are realised based on the straight-line method. It has been
identified from Note 9 of the annual report that the organisation has disclosed its cash and cash
equivalents at fair value. Note 12 of the annual report of Medibank states that it has measured its
customer relationships and contracts at fair value on the date of acquisition after impairment
losses and accumulated depreciation are subtracted effectively. Note 15 of the Annual Report
reveals that Medibank has considered the transfer of fair values of assets along with liabilities
incurred. Therefore, it could be observed from the above analysis that AASB 13 gauges its assets
at fair value and it has disclosed the essential disclosure related to fair value measurement as
well11.
11 Janice, Loftus et al, FINANCIAL REPORTING 1E (Wiley, 2015)
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Requirement (c):
From the annual report of Medibank in 2018, the organisation has conducted a test of a
number of assets in relation to impairment. Initially, goodwill is not subject to amortisation;
however, it takes into account in order to conduct test for impairment. Secondly, the organisation
has considered its business software, which is conducted for yearly impairment testing. Finally,
the organisation takes into account customer relationship and contracts in relation to impairment
testing at the time there has been change in the conditions. These include three assets that
Medibank has considered for test of impairment.
Requirement (d):
The Australian listed organisations are obliged to adhere to the principles and standards
of IAS 39/AASB 136 Impairment of Assets. In accordance with the standard, the organisations
are required to analyse whether any indication for asset impairment exists at the closure of the
accounting year. If any indication is identified, it is crucial for the organisation to anticipate the
recoverable amount of the asset12. Besides, regardless of the fact of impairment indication, the
organisation is required for testing intangible asset having identifiable economic life for
impairment annually by contrasting the carrying amount with the recoverable amount13.
It is to be mentioned that Medibank has revealed the crucial information about its
accounting treatment for asset impairment in its latest annual report. The organisation has
revealed its implemented accounting policies for accounting related to impairment in Note 20(c)
as financial statement footnotes. It could be seen that Medibank has conducted impairment
testing for all assets except goodwill when there is variation in circumstances or events providing
the signal of non-recoverability of the carrying values of assets. Moreover, the organisation
realises impairment loss for the particular amount by which the carrying values of assets exceed
the recoverable amounts. The recoverable amounts are the maximum between the fair values of
assets less cost of disposal and value-in-use. In order to analyse value-in-use, the organisation
12 Aasb.Gov.Au (Webpage, 2019) <https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-
04_ERDRjun10_07-09.pdf>
13 Tennyson, Oghoghomeh and Fynface N. Akani, "Assets Impairment Testing: An Analysis Of IAS 36" (2016)
10(1) African Research Review
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has discounted its projected future cash flows to the current value by using the rate of discount,
which represents the existing analysis of the market. For analysis of impairment, Medibank has
categorised its assets at the lowest levels owing to which the presence of distinctive identifiable
cash flows could be witnessed.
From Note 12(a) of the annual report of Medibank in 2018, the organisation has
considered goodwill as well as other intangible assets having identifiable economic lives, which
are subject to amortisation and the organisation has considered the same in order to test
impairment annually or more frequently, if there is indication of impairment owing to the change
in various circumstances or events. Owing to this reason, the organisation has recognised
impairment loss for the particular amount by which the carrying values exceed the recoverable
values14. For analysing asset impairment, Medibank classifies its assets at the lowest level. In this
regard, it needs to be stated that the organisation has not received an indicator for impairment of
goodwill in 2018.
In relation to consolidated accounting policy, Medibank has undertaken the eradication of
unrealised losses, if the transactions provide evidences regarding the impairment of transferred
assets. Hence, the subsidiaries are required following the policies of impairment of the
organisation15. After this, subsidiary investments have been accounted for cost of goods sold
after accumulated losses of impairment are subtracted in the financial statements of the
organisation. In addition to this, Medibank has disclosed its impairment evaluation on trade and
other receivables16. These assets are gauged at amortised cost by utilising the method of effective
interest after the subtraction of allowance for losses related to impairment. Hence, it could be
inferred from the above analysis that Medibank has carried out its various aspects related to
impairment accounting by adhering to the norms and guidelines mentioned in AASB 136/IAS
36.
14 William Robert, Scott, Financial Accounting Theory (Pearson, 2014)
15 Ruth, Picker, Applying IFRS Standards (Nelson Education, 2016)
16 Pietersen, M. E, IFRS Applications (McGraw Hill, 2017)
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References:
Aasb.Gov.Au (Webpage, 2019)
<https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf>
Aasb.Gov.Au (Webpage, 2019)
<https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf>
Chaudhry, Asif, Interpretation And Applications Of International Financial Reporting
Standards (Wiley, 2016)
Dudycz, Tadeusz and Jadwiga Praanikkw, "Does The Mark-To-Model Fair Value Measure Make
Assets Impairment Noisy?" [2018] SSRN Electronic Journal
Greener, Michael, Between The Lines Of The Balance Sheet (Elsevier Science, 2015)
Kimouche, Bilal, "(IAS 36) (Evaluation Of The 'Impairment Of Assets' According To IAS 36)"
[2014] SSRN Electronic Journal
Lavi, Mohan R, The Impact Of IFRS On Industry (Pearson, 2015)
Loftus, Janice et al, FINANCIAL REPORTING 1E (Wiley, 2015)
Medibank.Com.Au (Webpage, 2019) <https://www.medibank.com.au/content/dam/retail/about-
assets/pdfs/investor-centre/annual-reports/Medibank_Annual_Report_2018.pdf>
Oghoghomeh, Tennyson, and Fynface N. Akani, "Assets Impairment Testing: An Analysis Of
IAS 36" (2016) 10(1) African Research Review
Picker, Ruth, Applying IFRS Standards (Nelson Education, 2016)
Pietersen, M. E, IFRS Applications (McGraw Hill, 2017)
Rich, Jay S and Jefferson P Jones, Cornerstones Of Financial Accounting (Pearson, 2015)
Scott, William Robert, Financial Accounting Theory (Pearson, 2014)
Name:
Student ID:
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Sidebotham, Roy et al, Introduction To The Theory And Context Of Accounting (Elsevier
Science, 2014)
Warren, Carl S, Reeve James M. and Jonathan Duchac, Corporate Financial Accounting(South-
Western Cengage Learning, 2014)
Name:
Student ID:
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