Revaluation and Impairment Testing of Non Current Assets

This document discusses the methods of valuation for non current assets, including the fair value method and revaluation model. It explores the benefits and drawbacks of each method and explains the need for impairment testing. The document also provides insights into how assets are measured at fair value and the disclosures related to fair value measurement and impairment of assets. It discusses the guidelines of the Australian Accounting Standards Board and the company's compliance with IFRS and AASB.

Running head: REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT
ASSETS

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
2
Table of contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................4
References......................................................................................................................................10

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
3
Question 1
In order to analyze the proposal given by the director it is important to analyze the two methods
of valuation which will be done to value the assets of the company. Benefits and drawbacks of
both fair value method and revaluation model will be analyzed to determine which method is
better and suitable for the financial reporting of the firm.
Fixed assets are the assets which are both tangible and intangible in nature. They are long term
assets of the firm which either depreciate or appreciate with time. Some fixed asset appreciates
and some depreciate due to its obsolescence with time (Hodgson & Russell, 2014). As seen in
the case board of directors of Simba Limited have proposed to go for the revaluation model of
valuation for their fixed assets. Under the Australian Accounting Standard Board there are
guidelines and method of revaluations which is stated under para 39 and 40 of AASB 116. This
states that when the value of asset of a firm increases or decreases it should be recognized as
comprehensive income and expense of the company respectively. It is to be mentioned that the
following should be added or should be charged to the income and expense account of the
company. On the other hand under para 36 of AASB 116 Fair value valuation of an asset can be
done by two methods which are market and cost method. Under market method market value of
asset is taken into consideration whereas under cost method cost value of asset at time of
purchase is considered to be its value. Hence in accordance to the director taking fair value
method would only be beneficial when market method is taken as cost method will show lower
amount of the asset which is appreciating whereas revaluation model will show a more realistic
value of the asset held by the company (Hu, Percy & Yao, 2015).

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
4
Question 2
In the current statement there has been focus on impairment of assets as the statement described
the impairment of assets are majorly carried under the assets valued under the cost method. The
statement then states that assets valued under revaluation model are not prone to impairment and
hence impairment testing are not carried out on such assets. Impairment testing under AASB 136
is a test which is conducted over a company’s asset to determine on whether the asset are
overstated or not (Bond, Govendir & Wells, 2016). Impaired asset means that the value of asset
is greater than its recoverable amount. Now after knowing this it can be said that valuation of
asset value under cost method means that the asset will be valued at their cost price which was
there at the time of the purchase. In this sense the value will not get affected by depreciation or
appreciation over the time till which the asset is sold or breakdown to scrap value. In this manner
the chance of value being impaired is high because adjustments in relation to changes are not
done to the value of the assets. On the other hand under the revaluation model revaluation of
asset are done by considering the appreciation and depreciation of the asset value in an periodic
time. Hence under this model impairment of asset cannot happen as the asset are revalued which
has low chances of being over or under stated. Thus, there is no need for impairment testing for
asset valued under the revaluation model but there is need of impairment testing on asset valued
by cost method as they are majorly prone to impairment (Linnenluecke, Birt, Lyon & Sidhu,
2015).
Question 3
Assets carried at fair Value
As seen in the annual report of the firm t has been observed that Financial assets of the firm are
measured at Fair Value. Investment on listed and unlisted securities which is held by Medibank

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
5
are classified as financial assets. It has been seen that all of these assets such as long term and
short term investment done in securities are known to measures at fair value. It is to be said that
through the use of fair value measurement the company has valued their investment in listed and
unlisted securities which are marked as per the market value.
Disclosures related to fair value measurement
In the consolidated statement of financial position it can be seen that disclosures in relation to
financial asset has been made under the heading of current assets. The value which has been
measured at the year end of 2017 is $ 2038.1 million whereas in the year 2018 the following was
measured at $ 2276.5 million. Further disclosures and process used for the measurement of
financial asset are observed in notes to account section of the annual report the note number 7B
discloses the method and measurement procedure which has been used for the fair value
measurement of the financial assets (Medibank, 2019).
In note 7 of Notes to accounts within the annual report disclosures regarding the measurement of
financial asset has been mentioned. It can be seen that financial asset such as investment in listed
and unlisted equities are measured through the process of fair value measurement. It has also
been seen that the transaction cost in relation to the financial asset of the firm is charged as
expense within the consolidated statement of comprehensive income. The financial asset are
mainly valued and are measured by the use of fair value measurement. The net gains and losses
which are recognized through these investments are reported under the heading of net invested
income within the consolidated statement of comprehensive income (Medibank, 2019).
Further it has been seen that the annual report states that Fair value measurement which has been
used for the measurement of these financial assets may be subjective in nature this is because
investment done are majorly categorized within the hierarchy depending on their respective level

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
6
of subjectivity involved. It is further evaluated in note 7 that the fair value of level 2 instrument
are measured by usage of different valuations methods in which assumptions of value are made
based on current market situations which exist at the end of the reporting period. These models
of value include elements like yield curve calculations, vendor development independent models
and quoted market price (Medibank, 2019).
It has also been seen that fair value hierarchy has been used by the firm in which levels have
been divided in this level 1 comprise of quoted market price, level 2 comprise of input other that
quoted market price whereas level 3 was for input for asset and liabilities which were not
observable by market data. The table presented below shows the fair value method used by the
firm which is done on recurring basis:
Figure 1: Fair value measurement
(Source: Medibank, 2019)
It can be said that all of the fair value measurement is not done on a non recurring basis other
than financial asset like investment no other financial instrument such as trade payables and

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
7
receivable were not calculated by using fair value measurement. This is because they have a
short term nature and the carrying amount of these financial instruments are very appropriate to
the far values. In accordance of IFRS 13 and AASB 13 it is seen that fair value measurement and
reporting is to be done under one of the 2 methods market or cost approach. The company in this
case has followed the market approach in which market conditions and situations are considered
as an important variable for fair value measurement. It is also seen that the disclosures made by
the firm in the annual report meets the guidelines laid by IFRS 13 by mentioning the financial
instruments not taken in fair value measurement and fair value measurement method used by the
firm in valuing investment of different levels. Usage of recurring basis complies with guidelines
of AASB 13 and this shows that the company has complied to disclosure as well as compliance
requirements of both IFRS and AASB (Australian Accounting Standards Board, 2015).
Asset tested for impairment
In the annual report of the company it was identified that Goodwill which is an intangible asset
was put to impairment testing within the accounting procedure of the firm. In accordance to
financial report of the firm Goodwill and other intangible asset which has indefinite useful life
and are not a subject to amortization were tested using the impairment testing to check on
whether or not they are under or overstated. Impairment loss or gain has been reported in the
financial statements of the company. Hence it can be said that Goodwill has been put through
impairment testing in the current annual report disclosure related to which information has been
presented in the annual report of the firm.
Disclosures related to impairment of assets
In accordance to the annual report of the firm it can be said that Goodwill and other intangible
assets have been recorded and classified for the impairment testing process. It is important to

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
8
consider that the annual report has given reason of such selection of intangible asset for their
impairment testing. The company chose intangible asset due to their indefinite useful life which
they have and are not subject any type of amortization in future space of time. As stated earlier
that an impairment testing is done to recognize carrying amount of asset which exceed her actual
recoverable amounts.
In the annual report it has been mentioned in notes to account within notes 12 that there were
some key assumptions and inputs which were taken by the firm to conduct the impairment
testing over goodwill. It has been mentioned that in order to conduct the test all of the intangible
asset are taken in groups which are identified as cash generating units. Goodwill are allocated to
each CGU at an expected rate of benefit which is created by the synergy of each combinations.
The table below shows the allocation of Goodwill to each CGU units which is as follows:
Figure 2: Goodwill allocation to CGU
(Source: Medibank, 2019)
As seen above it has been mentioned that a symmetric growth rate and discount rate has been
applied within the impairment testing to make sure all of the bases are equally maintained in
identification of carrying amounts. It can be seen in note 12(b) of the annual report there is an
effective disclosure in relation to the abbreviation. The table here shows the assumptions and
input taken by the company while taking a particular growth rate and discount rate. In
accordance to the annual report the growth rate which has been disclosed in the table is the

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
9
weighted average growth rate which is used to extrapolate flow of cash after certain period of
time.
It is to be mentioned that through the use of this impairment testing the impairment test over
asset in relation to goodwill has been done in a very effective and coherent manner. The
company has followed AASB 138 which defines the properties of intangible asset within a firm
and on how the following are to be treated. It is also important to consider that the company has
followed the guideline to make sure and demonstrate the properties of these intangible assets
before they were put to the impairment testing. It is to be mentioned that through use of AASB
136 the company has also conducted the impairment test to know on whether the carrying
amounts of asset are higher than their recoverable amount. This shows the disclosures made in
regard of the impairment testing are legitimate and that the firm has successfully carried out
impairment testing on its subjected assets (Bond, Govendir & Wells, 2016).

REVALUATION AND IMPAIRMENT TESTING OF NON CURRENT ASSETS
10
References
Australian Accounting Standards Board. (2015). AASB 13: Fair Value Measurement.
Melbourne: Author.
Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), 259-
288.
Hodgson, A., & Russell, M. (2014). Comprehending comprehensive income. Australian
Accounting Review, 24(2), 100-110.
Hu, F., Percy, M., & Yao, D. (2015). Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), 930-939.
Linnenluecke, M. K., Birt, J., Lyon, J., & Sidhu, B. K. (2015). Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), 911-929.
Medibank, A. (2019). [online] Medibank.com.au. Available at:
https://www.medibank.com.au/content/dam/retail/about-assets/pdfs/investor-centre/
annual-reports/Medibank_Annual_Report_2018.pdf [Accessed 28 Mar. 2019].