HA 3011 Advanced Financial Accounting Report

This report delves into the financial accounting operations of Qantas Airways Limited, focusing on impairment testing of assets. It also explores the implications of the new lease accounting standard proposed by IASB.

HA 3011 Advanced Financial Accounting
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Contents
Introduction:...............................................................................................................................3
Part A:........................................................................................................................................4
1..............................................................................................................................................4
2..............................................................................................................................................5
3..............................................................................................................................................6
4..............................................................................................................................................7
5..............................................................................................................................................8
6..............................................................................................................................................9
7............................................................................................................................................10
8............................................................................................................................................11
Part B:.......................................................................................................................................12
1............................................................................................................................................12
2............................................................................................................................................13
3............................................................................................................................................14
4............................................................................................................................................15
5............................................................................................................................................16
Conclusion:..............................................................................................................................17
Bibliography.............................................................................................................................18
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Introduction:
The report is made for getting a brief understanding of the financial accounting operations
conducted in the enterprise and analysing the treatment of impairment of assets of the
company. In order to achieve this purpose, Qantas Airways Limited has been taken as the
company which is an Australian airline company and has been considered to be the largest by
fleet size in Australia. The airline provides various services in the air travel providing
international and domestic travels across the world. The criteria adopted by the company in
impairing its assets and the analysis of the treatment in light of various estimations and
assumptions made by the company will be evaluated for corrective purposes. In the second
part of the report, an understanding will be obtained about the various comments received by
the chairman of IASB in order to adopt the new lease standard in the corporate framework of
company. This will give a brief understanding of the various concepts and fundamentals
issues related to financial accounting in the business environment.
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Part A:
1.
From your firm’s annual report find out the assets that your firm has tested for
impairment
As per the annual report of the company, Qantas Airways Limited presented for the year
2017 it can be established that the impairment has been conducted on the financial as well as
nonfinancial assets of the company forming part of the balance sheet of the company for the
year 2017 (Qantas, 2017). The information about these assets is presented below:
Tangible assets of the company – The impairment testing has been performed for the
various assets covering buildings and leasehold improvements, plant and equipment of the
company, passenger aircrafts and engines, freight aircrafts and engines and the spare parts of
the aircraft. This impairment has been performed after considering the carrying value of these
assets.
(Source: Qantas 2017)
Intangible assets of the company – The impairment testing has been made on intangible
assets of the company which includes the following:
 Goodwill – The carrying value is stated at cost less accumulated losses of impairment.
 Airport landing slots
 Software’s
 Trademarks
 Brand name
 Customer contracts and relationships
 Contract intangible assets (Lubbe, Modack, & Watson, 2014).
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2.
How did your firm conduct the impairment testing?
The impairment testing in the company has been conducted after identifying the cash
generating unit which can generate cash for the future years of the company and capable of
being recognized as the income producing unit of the company. The identification of this
cash generating unit of the company requires judgment to be made regarding how managers
consider the operations of Qantas Group and the decisions to be made about the acquisition
of assets has been made by the management (Hoyle, Schaefer, & Doupnik, 2015). The
management of the company has identified a lowest identifiable group of cash generating unit
which can generate cash flows being Qantas International, Qantas Domestic, Qantas Freight,
Qantas Loyalty and the Jet star Group CGUs
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3.
Has your firm recorded any impairment expenditures during the period?
By referring to the financial statement of the companies and its notes it can observe that the
other expenses of the company include impairment loss has recognized on fixed assets i.e.
property, plant and equipment and intangible assets and investments of the company (Lubbe,
Modack, & Watson, 2014). The concerned amount is $18 million for the year 2017.
(Source: Qantas 2017)
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4.
Identify the key estimates and assumptions used by your firm in conducting the
impairment testing.
The various assumptions and estimations are explained below:
Determination of value in use – The value in use recognized for the cash-generating unit
has-been calculated by discounted cash flow which can be obtained from continuous use of
the assets of the company and following assumptions has been made for the same:
 The cash flows were forecasted considering the approved projected plan of the
company. Cash flows to decide a terminal value were extrapolated while using a constant
development rate of 2.5% p.a. which does not surpass the long-term average growth rate
for the industry. The cash outflows of the company which includes the purchase of
aircraft and other tangible assets do not include any of the capital expenditure which will
enhance the existing performance of the assets and the cash flows (Carlin & Finch, 2011).
 Discounting rate – The discounting rate which has been considered for discounting
the cash flows of the cash generating unit has been considered to be 10% as pre-tax
discount rate. The same has been calculated after considering the market structure and the
weighted average cost of capital of the company. The discount rate is based on the risk-
free rate for 10-year Australian Government Bonds accustomed to a risk premium for
reflecting both the increased risk of investing in equities and the risk of the specific CGU.
Recognition and measurement – The intangible assets, as well as tangible assets of the
company, has been recognized at the carrying value less accumulated depreciation and other
accumulated impairment losses which are separate fro separate assets f the company.
Useful lives of the assets – The determination of the useful lives of the assets is based on the
management interpretation and judgment and the same has been determined after considering
the various policies and standards (Logeswary & Velnampy, 2014).
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5.
Do you find any sort of subjectivity involved in the impairment testing process? How
can this subjectivity influence the outcome of the impairment testing?
Yes by analysing the current treatment of the impairment loss to be recognized by the
company in its financial statements it can be observed that the management has to make
certain kinds of assumptions an estimations which are based on the perception of the
management about the future growth rate and performance of the company in respect of
market factors and therefore there is lot of subjectivity involved in impairment process of the
company (Lubbe, Modack, & Watson, 2014).
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6.
What do you find interesting, confusing, surprising or difficult to understand about the
impairment testing?
It is interesting to note the recognition and measurement of various intangible assets of the
company which have been carried at the historical values less accumulated impairment loss.
The useful lives of these assets and the depreciation rates applicable to these assets have been
carefully adopted by the company but there exists some confusion regarding their accuracy
and correctness (Hoyle, Schaefer, & Doupnik, 2015).
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7.
What new insights, if any, have you gained about how companies conduct impairment
testing?
The phenomenon which can be established form the analysis of the impairment testing
conducted by modern companies is that the companies are adopting innovative of accounting
and adopting various standards for recognizing the correct and accurate value of the assets of
company. In order to fulfil these criteria, a new concept of considering the cash generating
unit has emerged which allows the more transparent view to be adopted for impairment
treatment of the company (Khokan Bepari, Rahman, & Taher Mollik, 2014).
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8.
Based on your assignment, comment on the “fair value measurement”.
Fair value measurement in impairment testing is of critical importance as the estimation of
this value helps in obtaining the recoverable amount of the concerned asset of company
which will form part of the cash generating unit. The fair value refers to the amount to be
obtained by the seller of the asset by selling or transferring the same to an independent buyer
in the market. In other words, it can be referred to the sale value of the asset in the market
way-out any biased conditions. The recognition of same is significant as it can impact the
impairment loss to be recognized by the company (Carlin & Finch, 2011).
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Part B:
Introduction:
IASB is planning to change the current lease accounting standard and its applicability in the
valuing companies fixed assets and liabilities. The current lease accounting standard allows
organisations to presents good financial figures and presents a more lucrative statement to
investors. Thus, IASB has sorted some changes in it and that is reflected in the following
answers.
1.
Explain why the chairperson of the IASB believes that the former accounting standard
for leases did ‘not reflect economic reality’?
The article presents that there were large big retail chains that had large and long operating
leases (debts) but easily presents clean financial statements with no such high debts. Such
practice does not present true economic reality and financial situations of companies. Thus,
the chairman has presented its views that the financial statement (specifically statement of
financial position) does not present true economic reality (DiSalvio, 2014).
The companies in the past were recognizing all the leases as operating leases which resulted
in a wrong presentation of the financial position of company as not all the dents considering
the financial lease liability of the company has been represented in the company’s financial
statements.
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2.
Explain the reason why, under the former accounting standard, reporting entities' ‘off-
balance sheet lease liabilities were up to 66 times greater than the debt reported on their
balance sheet.
Under the former accounting lease standard, the financial leases were shown in balance sheet
with the leased assets amount on the asset side and repayments obligations in the liability side
of the financial position. But in case of operating lease, the lease is not presented in the
balance sheet and the company does not present any form of liability as debt in their
statement of financial position (Rossi III, 2016).
This caused a significant increase in the actual liabilities of many companies all around the
world but as off-balance sheet. Due to the same reason even when the companies have
significant amount of off-balance sheet liabilities the balance sheet represented a lean view.
The same aspect resulted in the situation where off-balance sheet liabilities were in excess of
66 percent of the actual liabilities of the companies.
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3.
Why does the Chairperson of the IASB argue that under the former accounting
standard for leases there was ‘no level playing field’ between some airlines companies?
It has been observed that while adopting the old standard of leasing by the companies
operating in airline sector no comparison feature was availed in which various companies in
the airline sector were compared separately on the basis of their liabilities reported in the
balance sheet. The same has been recognized frequently in the companies where airline fleets
have been obtained from outside market in comparison to the companies operating on their
own. The same resulted in lack of comparability and enhanced future of accounting in airline
companies (DiSalvio, 2014).
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4.
Why do you think the Chairperson of the IASB said that the new accounting standard
for leases ‘will not be popular with everyone’? What would cause this unpopularity?
The new accounting standard will bring unpredictable changes in the cost feature and the
reporting format of the company which will significantly impact the economic decisions of
the investors. The companies form a long period have been concerned about the cost and the
economic liability concerned with the adoption of new accounting standard and this standard
would have bought a significant increase in the economic liability to be reported by the
company (Khokan Bepari, Rahman, & Taher Mollik, 2014).
This would surely cause unrest among companies who consider lease as one of their popular
source of financing. The lease has always been one of the most favorable sources of
financing. Companies do not have to invest initial capital outflow and also, there is no
presentation of liability on the balance sheet. Thus, operating lease has become one of the
most favorable and any changes in current provision of lease accounting standard would
cause restraint among existing industries such as airlines industry, retail sector and shipping
industry. Thus, the new change would cause unpopularity among businessman and
corporations.
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5.
What are some of the possible reasons why the chairperson of the IASB would say "the
new visibility of all leases will lead to better-informed investment decisions by investors
and to more balanced lease versus buy decisions by management?
It has been seen that the investors and the creditors in the market look for the more
transparent and accurate presentation of the financial performance and position of the
company. The visibility of new leases will allow the investors to have a more transparent
view of the financial position and it will indirectly impact the economic scenario prevailing
the economy. The analysis of the ability of the company to realty all its obligations in
connection with the lease agreements and liabilities can be evaluated in respect of the assets
available with the company and the financial ratios to be calculated (Yu & Xu, 2014).
With the new provisions management would not just take up lease provisions without
considering the options of buy versus lease management. Since, both the options are played at
same level, there would be no much difference in valuation and leased amount and company
would put in more efforts in preparing management reports for buy versus lease management.
A thorough preparation of management report would allow effective decision making. Thus,
management will make informed decisions and thus, investors can take more relevant and
reliable decisions regarding making investments.
Conclusion:
This has come to the conclusion that IASB has considered the drawbacks in the current lease
provisions and has also improvised the accounting standard for better evaluation and
comparison among different organisations.
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Conclusion:
The above report leads to the conclusion that the financial accounting in modern era has been
conducted and implemented in a more innovative and modernised way. The impairment
treatment of the company is appropriate in respect of the new accounting standard and all the
assumptions and estimations have been made after proper care and diligence. The comments
about the new accounting standard given by the chairman of IASB are in conformity with the
transparency involved in adopting new accounting standard and making presentation of
financial position accurate and correct.
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Bibliography
Carlin, T. M., & Finch, N. (2011). Goodwill impairment testing under IFRS: a false
impossible shore? Pacific Accounting Review, 368-392.
Qantas. (2017). Annual Report 2017. Retrieved 2018, from
http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tp
gyw/file/annual-reports/2017AnnualReport.pdf
DiSalvio, J. &. (2014). Lease accounting change: it's not over yet. Review of Business, 16.
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.
Khokan Bepari, M., Rahman, S., & Taher Mollik, A. (2014). Firms' compliance with the
disclosure requirements of IFRS for goodwill impairment testing: Effect of the global
financial crisis and other firm characteristics. Journal of Accounting &
Organizational Change, 116-149.
Logeswary, S., & Velnampy, T. (2014). Impact of Impairment Loss on Profitability and
Capital Structure of Listed Manufacturing Companies in Sri Lanka.
Lubbe, I., Modack, G., & Watson, A. (2014). Financial Accounting GAAP Principles. OUP
Catalogue.44444444gt
Rossi III, J. D. (2016, August 1). THE NEW LEASING STANDARD. Retrieved January 2018,
09, from Strategic Finance: http://sfmagazine.com/post-entry/august-2016-the-new-
leasing-standard/
Yu, C., & Xu, J. (2014). Information Technology and Applications: Proceedings of the 2014
International Conference on Information technology and Applications. Xian: CRC
Press.
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