Impairment of Assets and Acquisitions in Corporate Reporting
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This article discusses the concept of impairment of assets and the appropriate IFRS standard for recognition. It also explores the acquisitions made by a UAE company and their impact on financial statements.
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Running head: ADVANCED COPRORATE REPORTING Advanced Corporate Reporting Name of the Student: Name of the University: Author’s Note:
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1CORPORATE REPORTING Table of Contents Question 1........................................................................................................................................2 Question 2........................................................................................................................................7 References......................................................................................................................................10
2CORPORATE REPORTING Question 1 a) Impairment of Assets can be well done with the Accounting Standard“IAS 36”, that sets out the requirement to accounting for reporting and impairment of various non-financial assets of the company. The IAS 36 specifies the needs to undertake and perform the various impairment test, recognition of any asset impairment test and the associated disclosures for the company. Impairment of Assets can be well explained with the help of a sudden or an unexpected fall in the asset service utility or property. Changes in the legal code, physical damage in the asset, obsolescence due to technological innovation (ACCA Global 2019). The impairment value is calculated with the help of the carrying value of the asset and the fair value of the asset whereby any changes recorded in the value of asset is recorded as an impairment expenses for the company and the associated amount is charged in the income statement of the company (Ifrs.org 2019). Impairment losses is the total amount by, which the total carrying amount exceeds the cash-generation unit or the recoverable amount. The concept of impairment of assets applies to all the assets except from the assets that arise from the constructioncontracts,inventories,deferredtaxassetsandvariousotherfinancialassets (Readyratios.com 2013). The key reason for the impairment of assets as stated in the IFRS Guidelines and in accordance with the “IAS 36” is as follows: i) When the market value for the property declines ii) Increase in the market rate or prevailing rate of interest iii) Changes in the technology, economy structure, laws rules and regulations.
3CORPORATE REPORTING iv) Asset as a part of restructure that is held for the purpose of disposal v) Physical Damages or Obsolescence that would be resulting in the changes in the value of the assets (Ey.com 2019). The key requirements of the IAS 38 can be well illustrated in the Diagram presented below: ď‚·If there is any slight indication for the asset can be well impaired, the amount recoverable that would be well compared with the help of the carrying value of the assets. ď‚·The recoverable amount for the company can be well compared with the help of the carrying value and accordingly the company can take its decision accordingly. ď‚·It is important as stated in the Applicable IFRS and IAS 36 that any impairment charges made by the company should be well accompanied with notes justifying the changes in the values of assets and the reasons behind the changes in the assets of the company (Ifrs.org 2019).
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4CORPORATE REPORTING 2) The appropriate IFRS standard that would be applicable for the company in the view and aspect of the recognition of the impairment of assets will be in the form of“IAS 36 Impairment of Assets”that clearly states that any assets reported by a company must not be carried on with a value that is greater than the recoverable amount or through the usage of assets (Iasplus.com 2019). It is important to note that from the above statement and justifications provided in the given set of case study where XYZ Ltd extract oils and accordingly owns a drilling platform. The reported carrying value of the platform in the financial statement of the company was around£5 million and the associated cash flow that the company expects to earn if the platform is sold will be around£4.8 million for the company. However, it is important to note that the
5CORPORATE REPORTING recoverable amount of the value that would be generated by the company with the help of present value model for the analysis will be around£5.4 million. At the same time it is important to note that from the above definition stated in theIFRS and IAS 36can be well linked with the company’s current situation where company can revalue the asset at£5.4 million and no impairment loss will be reflected in the books of account for the company. Thus, at every assessment date of the financials of the company when the assets of the company are compared or reviewed, which is required by the applicableIFRS and IAS 36, then in that case the platform would be revalued at£5.4 million and the associated gain which is around£0.6million(£5.4million-£4.8million)wouldberecognizedintheOther ComprehensiveIncomewhichiswellapplicablewiththeIAS16,PropertyPlantand Equipmentstandard”.Thestandardclearlystatesthatanyrevaluationassociatedwith equipment’s or plants should be recognized in the OCI and the associated value would be associating in the equity balance of the company. It should be noted, that since the company, did not had any fall in the value of the assets for the undertaken time period no impairment losses will be shown by the company for the trend period analyzed. On the other hand, provision for dismantling and extraction would be treated as a capital expenditure by the company which will be well depreciated over the useful life of the assets. 3) The review of the impairment of asset is done by the company based on the asset value and characteristics that are eligible for the purpose of impairment. During the impairment review process it is important that both the external and internal source of indications taken into account such as:
6CORPORATE REPORTING External Indication Sources ď‚·Decline in the overall value of the market ď‚·Changes in the interest rate prevailing in the market ď‚·If the associated stock price of a company is comparatively less than the book value of company. ď‚·Changes in technological up gradation, economy, rules & regulations. Internal Indication Sources ď‚·Asset as a key part of restructuring that is held for the purpose of disposal ď‚·If there is any reported damage or obsolescence seen in the asset affecting the cash generating ability of the company. ď‚·Poor Economic Performance than the estimated once. Advantages of Practical Implementation of the Impairment Review Process ď‚·Stakeholders especially the shareholders, analysts and investors of the company will be better informed about the fair value of the assets and the associated information in association with the assets reported. Any impairment charges that is applicable in association with the company can be well applied by the company. ď‚·Impairment charges reported by the company on a particular asset also shows the extent of nature that is applied by the company for the purpose of valuation and classification of the assets of the company. Current Criticism of Practical Implementation of the Impairment Review Process
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7CORPORATE REPORTING ď‚·Measurement of assets can be at time difficult for the companies for the purpose of measuring and valuing the assets of the company while following the procedure for impairmentprocess.Thecommonvaluationtechniquesthatisappliedbythe management of the company for the purpose of valuation of the asset is the current market value, current cost or the net realisable value approach. ď‚·Detailed guidance on the accounting for impairment of various reported assets is quite scarce, in regard to the process that should be followed or approached for the impairment process and the applicable disclosures that a company should make in the same context. Question 2 a) The acquisitions that were made by the UAE Company was Endomondo and MyFitnessPal platforms that was primarily made in the first quarter of 2015, whereby the company did the same for the purpose of creating the Connected Fit business (UA Newsroom 2019). The UAE Company has almost bought 100% stake in the Endomondo Company on 5th January 2015, which is a Denmark based Company that is in the digital connected fitness company that would be expanding the various courses of operations under the Connected Fitness Community. The proposed and the purchase price that was paid up by the UAE Company was around $85 million. An all total of $1.4 million was treated as acquisition cost which were treated as a selling, general and various other administrative expenses in the books of accounts of the company (Beck et al., 2017).The expenses were recognized during the three month time frame respectively in March 2015 and December 2014. The UAE Company on 17thMarch, 2015 acquired MyFitness Pal Company via 100% acquisition of the outstanding equity, which is a digital nutrition and fitness company. The value
8CORPORATE REPORTING of the total consideration amount for acquisition purpose was around $474.0 million. The acquisition done by the company, was followed by the increase in the long-term borrowings of the company and a usage of the revolving credit facility that the company was having (Lee 2015). b) Potential Advantages Acquisitions followed by the companies are generally an inorganic growth strategy that is followed by the company in the due course of their investment and expansion purpose that is carried on by the company. The revenue for the Connected Fitness Company increased $34.2 million, or 177.8%, to $53.4 million in the stated year2015, from the reported value of $19.2 million in 2014. The increase in the revenue base for the company can be well attributed to the subsequent acquisitions that was observed in the financial year 2015 by the company. The acquisitions done by the company helped the company increase the products and services distributions it has under the current set of business capacity (Prather-Kinsey, Boyar and Hood 2018). c) Impact of Acquisitions on Group Financial Statements was found as follows: It is crucial to note that on September 2015, the FASB also has issued an accounting standard that requires the acquiring company in the process of business combination for recognizing the adjustments in relation to provisional amount that are being identified in the due course of the undertaken measurement period.The applicable accounting standard as stated by the company is not going to materially affect the financial statements of the company (Picker et al., 2019). However, it is important to note that due to the acquisitions followed by the company in the financial year impacted various accounts of the company which are as follows:
9CORPORATE REPORTING The reported interest expenses increase by about $9.3 million to around $14.6 million in the reporting year 2015 and this was primarily due to the increase in the increase in the long term borrowings and usage of revolving credit facility used for acquisitions purpose. The provision for the stated income taxes for the company increased by about $19.9 million to around 154.1 million. The effective tax rate for the company was around 39.2% in the year 2014, which has increased considerably to around 39.9% in the year 2015. The increase in the company’s effective tax rate can be well primarily judged due to the overall increase in the non-deductible expenses of the company, which was primarily due to acquisitions followed. The operating loss in the Connected Fitness Business increased by about $40.6 million to $ 61.3 million in the year 2015 that was primarily followed due to higher investment activities followed by the business segment. d) Goodwill and intangible assets of the company that was reported or stated at the fair value estimates at the date of acquisitions and relative disclosure or benefits that the company is expected to receive from the same is well disclosed. On the other hand, it is important that, Goodwill and Indefinite lived intangible assets of the company are not accordingly amortized and will be required for testing and impairment on an annual basis. Impairment is recognized by the company when there is a material changes in the fair value and carrying value of the assets.
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10CORPORATE REPORTING The company undertakes various qualitative factors are undertaken into consideration while following the process of impairment. It is important to note that as of 31stDecember 2015, the company has not reported any kind of goodwill impairment and none of the reporting unit was found to be at a material risky position. e) Results of research can be well evaluated with the help of cash flow activities that was observed for the company for the year 2015: The cash used in investing activities increased by about $695.2 million to about $847.5 million in the year 2015, which was around $152.3 million in the year 2014. On the other hand, the cash used in investing activities of the company decreased by about $85.8 million to around $152.3 million in the year 2014 which was reported to be around $238.1 million in the year 2013.
11CORPORATE REPORTING References ACCA Global. 2019. https://www.accaglobal.com, A. 2019.Concepts of profit or loss and other comprehensiveincome|ACCAGlobal.[online]Accaglobal.com.Availableat: https://www.accaglobal.com/lk/en/student/exam-support-resources/professional-exams-study- resources/strategic-business-reporting/technical-articles/pl-concepts.html[Accessed23Sep. 2019]. Beck, A.K., Behn, B.K., Lionzo, A. and Rossignoli, F., 2017. Firm Equity Investment Decisions and US GAAP and IFRS Consolidation Control Guidelines: An Empirical Analysis.Journal of International Accounting Research,16(1), pp.37-57. Ey.com.2019.[online]Availableat: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_I mpairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed 23 Sep. 2019]. Iasplus.com.2019.IAS36—ImpairmentofAssets.[online]Availableat: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 23 Sep. 2019]. Ifrs.org.2019.IFRS.[online]Availableat:https://www.ifrs.org/issued-standards/list-of- standards/ias-36-impairment-of-assets/ [Accessed 23 Sep. 2019]. Ifrs.org.2019.IFRS.[online]Availableat:https://www.ifrs.org/issued-standards/list-of- standards/ias-36-impairment-of-assets/ [Accessed 23 Sep. 2019].
12CORPORATE REPORTING Lee,P.J.,2015.Assessmentofbusinesssubsidiaryoperationsandconsolidatedfinancial statements through a common global accounting language, IFRS vs. GAAP.International Journal of Business and Social Research,5(7), pp.61-70. Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2019.Applying IFRS standards. John Wiley & Sons. Prather-Kinsey, J., Boyar, S. and Hood, A.C., 2018. Implications for IFRS principles-based and US GAAP rules-based applications: Are accountants’ decisions affected by work location and core self-evaluations?.Journal of International Accounting, Auditing and Taxation,32, pp.61- 69. Readyratios.com.2013.ImpairmentofAssets.[online]Availableat: https://www.readyratios.com/reference/accounting/impairment_of_assets.html[Accessed23 Sep. 2019]. UANewsroom.2019.[online]Availableat: https://about.underarmour.com/investor-relations/financials [Accessed 24 Sep. 2019].