Impact of New Accounting Standard IFRS 16

This assignment delves into the implications of the revised International Financial Reporting Standard (IFRS) 16 for lease accounting. It examines potential challenges companies might face in implementing this new standard, considering factors like increased workload, the need for system updates, and potential resistance from stakeholders. Conversely, the assignment highlights the positive aspects of IFRS 16, such as improved transparency in financial reporting, better informed investment decisions due to greater visibility on lease obligations, and a more accurate reflection of a company's overall financial position.

Running head: ADVANCE FINANCE ACCOUNTING
Advance finance accounting
Name of the student
Name of the university
Author note

1ADVANCE FINANCE ACCOUNTING
Table of Contents
Assessment task Part A..............................................................................................................2
(i) Assets tested for impairment...........................................................................................2
(ii) Method of conducting impairment test........................................................................3
(iii) Impairment expenditures.............................................................................................3
(iv) Assumptions and estimates used by the company for conducting impairment test....4
(v) Subjectivity involved in the process of impairment testing........................................5
(vi) Interesting, surprising, difficult or confusing part to understand impairment testing. 5
(vii) New insights regarding conducting the impairment....................................................6
(viii) Fair value measurement...............................................................................................6
Assessment task Part B..............................................................................................................7
(i) Reason why the former accounting standards does not reflect the economic reality.....7
(ii) Reasons why under the previous accounting standards the lease liabilities of the
reporting entities in the balance sheet were 66 times more than the reported debts under the
balance sheet..........................................................................................................................7
(iii) Reasons why the Chairperson of IASB is in the view that under the previous
accounting standard no level playing field was there among some airline entities...............8
(iv) Reasons why the Chairperson is in the view that the new standard will not be
popular with everyone............................................................................................................8
(v) Possibilities that the new visibility with regard to all the leases will result into better
informed decision for investment...........................................................................................9
Reference..............................................................................................................................10

2ADVANCE FINANCE ACCOUNTING
Assessment task Part A
The main objective of this report is to focus on the impairment criteria and
assumptions used by Bradken Limited for conducting the impairment tests on the assets. The
report will also focus on the impairment testing procedures used by the company and the
subjectivity involved in the procedure. To comment on these the annual report of the
company for the year ended 30th June 2016. Bradken Limited is the leading manufacturer in
the world for various capital and consumables products for the global market and delivers
wide range of fabricated and cast products through four divisions focussed in the market
divisions and independent branded business that includes transport and mining, processing of
mineral, fixed plant, services related to cast metal and engineered products (Bradken.com
2018). The company uses their wide experience for developing the innovative products for
freight rail, mining, steel making, power generation, transport, gas and oil, cement and
various other industries.
An impaired asset is the asset of the company having the market value that is less than
the carrying value of the asset. Assets that are likely to get impaired are the tangible fixed
assets like plant, property, equipment and the intangible assets like accounts receivable and
goodwill (Amiraslani, Iatridis and Pope 2013). After adjusting the carrying value of the
impaired asset the loss is recorded in the income statement of the company. After writing off
impairment, asset will have a reduced carrying cost as the adjustments will be recognized as
loss and will reduce the value of the asset.
(i) Assets tested for impairment
As per the annual report of the company for the year ended 30th June 2016, the
company tested the following assets for impairment –

3ADVANCE FINANCE ACCOUNTING
 Goodwill and intangible assets of are not amortised, however, it is tested for
impairment annually of frequently that is more than once in a year if changes in the
circumstances or any events indicates that it may be impaired and it is carried in
financial statement at cost reduced by accumulated losses on account of impairment
(Rennekamp, Rupar and Seybert 2014). Other assets like plant, equipment and
property, inventories are tested for impairment when there is an indication that the
carrying amount of the asset may not be recoverable.
(ii) Impairment test procedure
Apart from the intangible assets and goodwill, other assets are tested for impairment
when the indication is there that the carrying amount of the asset may not be recoverable.
However for intangible assets and goodwill that are not amortised are tested for impairment
annually of frequently that is more than once in a year if changes in the circumstances or any
events indicates that it may be impaired. Further, the goodwill is allocated to cash generating
unit for carrying out the impairment testing (Cotter 2012). The non-financial assets except the
goodwill that suffered the impairment are analysed for the possible reversal of the
impairment at the each date of reporting. For impairment assessment the assets are grouped at
lowest levels of separately recognisable cash inflows and are widely independent of cash
inflows from the other assets or the group of the assets that is the cash generating units.
(iii) Impairment expenditures
The company recorded impairment expenses for the year ended 30th June 2016 as follows –
 Intangible assets and goodwill – during the period the company recorded total
impairment amounting to $ 64.1 million on intangible assets and goodwill, out of
which $ 49 million was recorded against goodwill, $ 12.8 million were recorded
against the customers list and $ 2.3 million were recorded against the licenses.

4ADVANCE FINANCE ACCOUNTING
 Plant, property and equipment - during the period the company recorded total
impairment amounting to $ 163.2 million for fixed assets, out of which $ 108 million
was recorded against transport and mining, $ 4.4 million were recorded against
mineral processing division and $ 50.8 million were recorded against the segments of
engineered products.
(iv) Assumptions and estimates used by the company for conducting impairment
test
Bradken Limited makes various assumptions and estimates as they are concerned
regarding the future. The outcomes of the accounting estimates by definition will be equal to
the associated actual outcomes (Andrews 2012). The assumptions and estimates that have
considerable risks that it can lead to material adjustments to the assets carrying value within
next accounting year are discussed and disclosed through the notes to accounts where these
kinds of judgements are required. Owing to the continuous adverse condition of the market
and continuous downturn of the market for the assessment of recoverable amount for
goodwill and the other intangible assets of the company’s cash generating units was
conducted (Ramanna and Watts 2012). The recoverable amount of CGU is computed on the
basis of the calculation of value-in-use. Further, these calculations use the projections of cash
flows on the basis of the financial forecast that is prepared by the management for last 5
years.

5ADVANCE FINANCE ACCOUNTING
For calculation of value-in-use the key assumptions are as follows –
 Discount rates
 Growth rates using the extrapolate flows of cash beyond the period of forecast
 EBITDA/Sales margin
(v) Subjectivity involved in the process of impairment testing
As per IAS 36 on Impairment of assets it is perceived that it is the atypical standard in
IFRS and it demands the subjective interpretation and its can be adaptable with regard to the
managerial requirements and it does not limit the creative accounting. It was found from the
annual report of Bradken Limited that there involved considerable subjectivity while the
management carrying out the process for impairment test as the management had the
opportunity of exploiting their discretion and may carried out the goodwill impairment test
opportunistically (Amiraslani, Iatridis and Pope 2013). This can be proved with help of the
fact that goodwill allocation to the CGU and computation of recoverable amount when no
availability of active prices are there for goodwill is subject to the fact of discretion.
(vi) Confusing and difficult part of impairment
Based on the analysis, it is recognized that the difficult and confusing part of
impairment is that the indication of impairment. Through, the indications depend on the
internal as well as external signal that the asset may be impaired; the frequency of conducting

6ADVANCE FINANCE ACCOUNTING
the test for intangible assets and goodwill is entirely depends on the management’s discretion.
Therefore, chances are there that the management will carry out the test opportunistically
while there is a downturn in the value.
(vii) New insights regarding conducting the impairment
Impairment loss is the difference between the carrying amount of the asset and the
recoverable amount of the asset. The recoverable amount considered as higher among the
value-in –use and the fair value of the asset reduced by disposal cost. Fair value is determined
through the sales agreement or the value of the asset in active market under which the asset is
traded or the availability of best information to reveal the amount at which the company can
sell the asset. Further, the value in use in accordance with IAS 36 is the present value of
future cash flows that is expected to be received from the CGU or the asset.
(viii) Fair value measurement
As per IFRS 13 fair value is determined through –
 value of the asset in active market under which the asset is traded
 sales agreement
 availability of best information to reveal the amount at which the company can sell
the asset

7ADVANCE FINANCE ACCOUNTING
Assessment task Part B
(i) Reason why the former accounting standards does not reflect the economic
reality
Nearly 1 out of 2 companies that use US GAAP or IFRS are affected by the changes
in accounting. As per the current status, companies under US GAAP or IFRS have
commitments and leased assets amounting to almost 3.3 trillion, out of which 85% are not
reported in the balance sheet as they are treated as operating leases (Ifrs.org 2018). For
compensating this, the investors generally include the estimates that are inconsistent,
inaccurate and incomparable computations. Therefore, it is stated that the former accounting
standards does not reflect the true economic reality.
(ii) Mismatch in lease liability and reported debts
As per the previous accounting standards, most of the companies reported 85% of
their leases recognised the amount under operating leases and did not presented those under
the balance sheet. Though the operating leases were not recorded under balance sheet,
actually they created real liabilities (Lee and Hooy 2012). Therefore, during the period of
financial crisis few major retail companies went bankrupt as they could not adjust the updated
economic reality quickly. Further, they had considerable amount of commitments with regard
to the long-term operating leases while their balance sheets were deceptively lean. Therefore,
lease liabilities were 66 times more than the debt of balance sheet.

8ADVANCE FINANCE ACCOUNTING
(iii) Reasons why the Chairperson of IASB is in the view that under the previous
accounting standard no level playing field was there among some airline
entities
The former systems of accounting for lease results into lack of comparability. The
airline industries accounts most of their leases as operating leases and do not record it under
the balance sheet. Therefore, an airline company that leases almost all their aircraft fleet
seems very dissimilar from their competitor who purchase almost all their aircraft fleets even
though in reality the financial obligations of both type of airline companies are very similar.
Therefore, level playing field does not exist among these airline companies. With the
introduction of new standard all the leases will accounted as assets and the lessees will
account is as liability (Fitó, Moya and Orgaz 2013). Therefore, it is expected that the problem
will be resolved.
(iv) Reasons why the Chairperson is in the view that the new standard will not be
popular with everyone
The changes in the standard will are expected to have impact on almost half of the
listed companies and are not expected to be popular with all the companies. The reason
behind this is that the changes are always controversial and can lead to warning effects with
regard to adverse economic circumstances and costs associated with the system changes.
Further, the companies must be ready to accept the considerable changes in income statement
as well as the balance sheet due the changes in the new standard (Marshall 2016). Moreover,
the changes may have bigger commercial impacts. For instance, various contractual
arrangements and banking covenants tied with the financial statements of the company like
profit targets for arranging the bonus payment to the employees or debt to equity ratio may
required to get revised prior to implementation of the new standard. Further, all the
departments of the business have to understand the impact of changes that includes the

9ADVANCE FINANCE ACCOUNTING
finance, IT, treasury, human resource, asset procurement and investor relation department.
All these reasons will lead to unpopularity of the new accounting standard.
(v) Possibilities that the new visibility with regard to all the leases will result into
better informed decision for investment
As per the former accounting standard as most of the companies were treating the
operating leases as off balance sheet items the users of financial statement or investors do not
have entire picture of company’s financial position and therefore they were not able to
compare the companies that leases assets with the companies that buy assets (Jennings and
Marques 2012). However, the new standard is expected to update the IFRS 16 and it is
expected that it will widely outweigh the costs which in turn will result into better informed
decisions for investment and will reflect the lease – versus – buy decisions in better way by
the management.

10ADVANCE FINANCE ACCOUNTING
Reference
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset
impairment. London: Cass Business School.
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test
for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research
(CeFARR).
Andrews, R., 2012. Fair Value, earnings management and asset impairment: The impact of a
change in the regulatory environment. Procedia Economics and Finance, 2, pp.16-25.
Bradken.com., 2018. Bradken. [online] Available at: http://bradken.com/ [Accessed 4 Jan.
2018].
Cotter, D., 2012. Advanced financial reporting: A complete guide to IFRS. Financial
Times/Prentice Hall.
Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease
capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista
Española de Financiación y Contabilidad, 42(159), pp.341-369.
Ifrs.org., 2018. IFRS. [online] Available at: http://www.ifrs.org/ [Accessed 4 Jan. 2018].
Jennings, R. and Marques, A., 2012. Amortized cost for operating lease assets. Accounting
Horizons, 27(1), pp.51-74.
Lee, C.H. and Hooy, C.W., 2012. Determinants of systematic financial risk exposures of
airlines in North America, Europe and Asia. Journal of Air Transport Management, 24,
pp.31-35.
Marshall, D., 2016. Accounting: What the numbers mean. McGraw-Hill Higher Education.

11ADVANCE FINANCE ACCOUNTING
Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in required
goodwill impairment. Review of Accounting Studies, 17(4), pp.749-780.
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset
impairment reversibility and cognitive dissonance on future investment. The Accounting
Review, 90(2), pp.739-759.