Financial Reporting Disclosures in the Australian Corporate Sector

This report focuses on write-downs of impairment in the corporate world of Australia, with Qantas Airways as the chosen entity. It assesses Qantas Airways' compliance with relevant disclosure requirements stated in AASB 136 and provides suggestions for enhancing the overall disclosure quality in future.

Running head: FINANCIAL REPORTING DISCLOSURES
Financial Reporting Disclosures in the Australian Corporate Sector
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Executive Summary:
The current report would focus on write-downs of impairment in the corporate world
of Australia. Hence, Qantas Airways is chosen as the corporate entity, as it is one of the
leading airline companies operating in Australia in terms of fleet size, global flights and
global destinations. It has been assessed that Qantas Airways has not complied effectively
with the relevant disclosure requirements stated in AASB 136, although it has successfully
met all the requirements under general purpose financial reporting, Finally, some suggestions
have been provided to the management of Qantas Airways for enhancing the overall
disclosure quality in future.

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Table of Contents
Introduction:...............................................................................................................................3
a. Impairment write-downs of Qantas Airways:........................................................................3
b. Key issues involved in impairment testing:...........................................................................4
c. Meeting the impairment disclosure requirements as per AASB 136 in the context of Qantas
Airways:.....................................................................................................................................5
d. Aligning the impairment disclosures of Qantas Airways with the objective of general
purpose of financial reporting:...................................................................................................7
Conclusion:................................................................................................................................8
References:.................................................................................................................................9

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Introduction:
In recent times, it is necessary for the corporate entities to deliver useful financial
information to their stakeholders so that they could undertake significant decisions. The
current report would focus on write-downs of impairment in the corporate world of Australia.
Hence, Qantas Airways is chosen as the corporate entity, as it is one of the leading airline
companies operating in Australia in terms of fleet size, global flights and global destinations
(Investor.qantas.com 2018). From the critical viewpoint, the various assets of the
organisation, which are used for impairment testing, have been pointed out and they are
assessed as well. The second portion would emphasise on explaining the various issues that
are faced at the time of impairment test. The third section would ascertain the degree to
which the annual report of the firm satisfies the requirements of impairment disclosure, as per
AASB 136. Finally, the report would lay stress on aligning the disclosures with the objectives
stated in general purpose financial reporting.
a. Impairment write-downs of Qantas Airways:
Based on the annual report of Qantas in 2017, the assets that are tested for
impairment comprise of property, plant and equipment, receivables and intangible assets like
goodwill, slots for airport landing, software, brand names and trademarks, customer contracts
or relationships and contract intangible assets (Investor.qantas.com 2018). In case of
property, plant and equipment, Qantas recognises them at cost minus accumulated
depreciation and impairment. For receivables, impairment is conducted at the time evidence
is collected that the debt could not be recovered (André, Dionysiou and Tsalavoutas 2018).
In case of goodwill and other intangible assets stated above, Qantas recognises
them at cost in the initial stage from which amortisation and impairment losses are
subtracted. All the corporate entities functioning in the market of Australia are needed to
evaluate their assets in order to determine the impairment indicators after each accounting
year and Qantas needs to identify them as well. The main reasons that the organisation
conducts its impairment testing include technological changes, intention of shutting down any
specific operation, fall in value of any asset and economic benefits associated with the assets
(Baboukardos and Rimmel 2014).

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b. Key issues involved in impairment testing:
Various complexities and significant issues are inherent in asset impairment tests,
which are described briefly as follows:
Distinction between fair value and value-in-use:
The fair value enables an independent investor to gain an insight of the amount to be
incurred for an asset. On the other hand, value-in-use denotes the generating ability of an
asset for a corporate entity. This distinction is reflected in the assumptions, which is accepted
under each model (Badia et al. 2017). For example, the costs, benefits and risk associated
with asset improvements or restructuring are included in fair value and these are not taken
into account in the statement of financial position. On the contrary, economies of scale as
well as synergies are included in value-in-use that is related to the entity and the transfer is
not made during the external asset sale. However, the case is not similar in relation to fair
value.
Cash generating units (CGUs) and segments:
The foremost issue confronting the test for impairment is to ascertain the level at
which the test is required to be conducted. This would depend on the asset tested and
dependence on other assets so that cash inflows could be derived (Pwc.com.au 2018). There
is high chance that assets like brand name, machinery and building need other assets in value
chain so that carrying values could be supported. Hence, if there is incorrect allocation, the
cash flows generated from effective business segments would support the underperforming
values of assets.
Discount rate:
There are few using capital asset pricing model and weighted average cost of capital
for deciding the discount rates in relation to value-in-use in order to carry out the impairment
test (Bertomeu and Magee 2015). This is true, if the risks of any specific cash generating unit
do not differ from the entire business. In reality, different cash generating units require

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different discount rates. The primary reasons include variations in sector risk, currency risk,
country risk and product risk and the maturity of the market, in which the units function.
c. Meeting the impairment disclosure requirements as per AASB 136 in the context of
Qantas Airways:
“Paragraph 126 (a) of AASB 136” cites that the corporate entities have to recognise
impairment loss in income statement or statement of comprehensive income (Aasb.gov.au
2018). For Qantas Airways, it has been found that the organisation has made its impairment
disclosures in the notes to financial statements under expenditure head, instead of disclosing
them in the income statement and such disclosures could be found in “Page 65 of the Annual
Report”.
Moreover, as per “Paragraph 126 (b) of AASB 136”, the amount of impairment loss
reversals needs to be disclosed in the statement of comprehensive income at the end of
financial year. For conducting the reversal of impairment loss, Qantas Airways ascertains
whether any variation to the estimates is present utilised to determine the recoverable asset
amount since the recognition of previous impairment. Due to this, the carrying value of the
asset is matched with its recoverable amount (Chen, Krishnan and Sami 2014). However,
Qantas has not disclosed its impairment loss reversal in the statement of comprehensive
income. Instead, it is included in the form of a note under other items not taken into account

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in profit before tax, which could be observed from “Page 22 of the Annual Report”. This
includes impairment reversal of $22 million for investing in Helloworld Travel Limited.
According to “Paragraph 130 (g) of AASB 136”; in case, the CGU’s recoverable
amount is identified as value-in-use; both existing and past estimates are taken into
consideration for the discount rates. For Qantas, useful assumptions are made in order to
ascertain the recoverable values of the various CGUs, as could be found in “Page 75 of the
Annual Report”.
Lastly, as per “Paragraph 80 of AASB 136”, it is necessary to allocate to a segment
of CGUs, which are probable to fetch benefits from the synergies of combination (Chen,
Shroff and Zhang 2017). The intention is similar for Qantas Airways as well, since there is
allocation of goodwill to different CGUs, which could be observed from “Page 75 of the
Annual Report”.

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It is clearly evident from the above assessment that Qantas Airways has fulfilled
accurately the allocation of goodwill to different CGUs; however, the impairment losses and
reversals of impairments are not disclosed rightly in tandem stated out in AASB 136.
d. Aligning the impairment disclosures of Qantas Airways with the objective of general
purpose of financial reporting:
In the words of Linnenluecke et al. (2015), the basic goal of general purpose financial
reporting is to supply useful information to the capital investors regarding a corporate entity.
It is clearly stated in “Paragraph 70 of the Conceptual Framework” that impairment loss is
recognised; in case, the carrying value of an asset could not be recovered. For Qantas
Airways, impairment loss is recognised as the difference between the carrying value and the
present value of projected future cash flows, which is discounted at the original effective
interest rate of the asset.
Moreover, it is stated in “Paragraph 130 of the Conceptual Framework” that cash
flows are projected from the viewpoint of the entity, instead from the market viewpoint to
perform impairment testing (Lobo et al. 2017). For Qantas, independent cash flows are not
generated and it is not possible to estimate the value-in-use to the fair value.

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Thus, it could be cited that Qantas Airways made relevant impairment disclosures to
adhere to the objective depicted under general purpose financial reporting.
For enhancing the overall quality related to disclosures of impairment, Qantas could
consider the following:
Placing considerable stress on cash flows generated from global currencies
Consideration of market capitalisation before the impairment values are calculated for
various groups of assets
Effective scrutiny of the discount rate
Once asset impairment is performed, comparison could be made with the external
market data (Van Rinsum, Maas and Stolker 2018)
Conclusion:
The above discussion clearly inherits that Qantas Airways has carried out impairment
tests on property, plant and equipment, receivables, goodwill and other intangible assets. The
problems that are encountered at the time of impairment test constitute of discount rate,
distinction between value-in-use and fair value along with CGUs and segments. However, it
has not complied effectively with the relevant disclosure requirements stated in AASB 136,
although it has successfully met all the requirements under general purpose financial
reporting, Finally, some suggestions have been provided to the management of Qantas
Airways for enhancing the overall disclosure quality in future.

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References:
Aasb.gov.au., 2018. [online] Available at:
http://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
[Accessed 23 Apr. 2018].
André, P., Dionysiou, D. and Tsalavoutas, I., 2018. Mandated disclosures under IAS 36
Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on analysts’
forecasts. Applied Economics, 50(7), pp.707-725.
Baboukardos, D. and Rimmel, G., 2014, March. Goodwill under IFRS: Relevance and
disclosures in an unfavorable environment. In Accounting Forum (Vol. 38, No. 1, pp. 1-17).
Elsevier.
Badia, M., Barth, M.E., Duro, M. and Ormazabal, G., 2017. Firm Risk and Disclosures about
Dispersion in Asset Values.
Bertomeu, J. and Magee, R.P., 2015. Mandatory disclosure and asymmetry in financial
reporting. Journal of Accounting and Economics, 59(2-3), pp.284-299.
Chen, L.H., Krishnan, J. and Sami, H., 2014. Goodwill impairment charges and analyst
forecast properties. Accounting Horizons, 29(1), pp.141-169.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking
market-driven goodwill impairment.
Investor.qantas.com., 2018. Qantas | 2017 Annual Report. [online] Available at:
http://investor.qantas.com/annual-report-2017/ [Accessed 23 Apr. 2018].
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., 2017. The effect of joint auditor pair
composition on audit quality: Evidence from impairment tests. Contemporary Accounting
Research, 34(1), pp.118-153.
Pwc.com.au., 2018. [online] Available at:
https://www.pwc.com.au/assurance/ifrs/assets/ifrsinbrief-se-15may13.pdf [Accessed 23 Apr.
2018].

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Van Rinsum, M., Maas, V.S. and Stolker, D., 2018. Disclosure checklists and auditors’
judgments of aggressive accounting. European Accounting Review, 27(2), pp.383-399.