Advanced Financial Accounting: Impairment, Leases and Bank Analysis

This report delves into advanced financial accounting, focusing on impairment testing and lease accounting, using Commonwealth Bank of Australia as a case study. Part A examines the bank's impairment testing procedures, covering goodwill allocation, recoverable amount determination, and loan impairment expenses, as well as the subjectivity involved in the process. Part B analyzes lease accounting under IAS 17, highlighting its limitations in providing a true and fair view, particularly the classification of leases. It discusses the objectives of financial reporting, controversies surrounding operating and financing leases, and the impact of the new lease accounting standard, IFRS 16. The report assesses the flaws of the new standard and its potential benefits, such as improved comparability and transparency in financial statements, and the impact on decision-making related to leasing versus buying assets.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the university
Name of the student
Authors note

1
ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Part A:..............................................................................................................................................3
Requirement i).................................................................................................................................3
Requirement ii)................................................................................................................................3
Requirement iii)...............................................................................................................................3
Requirement iv)...............................................................................................................................3
Requirement v)................................................................................................................................3
Requirement vi)...............................................................................................................................3
Requirement vii)..............................................................................................................................3
Requirement viii).............................................................................................................................3
Part B:..............................................................................................................................................4
Requirement i).................................................................................................................................4
Requirement ii)................................................................................................................................4
Requirement iii)...............................................................................................................................4
Requirement iv)...............................................................................................................................4
Requirement v)................................................................................................................................4

2
ADVANCED FINANCIAL ACCOUNTING
Part A:
Requirement i)
Impairment testing is conducted by Common wealth bank of Australia on annual basis
whenever there is indication that assets recoverable amount are lower than their carrying value.
Organization has assessed impairment testing related to intangible assets such as goodwill and
brand name. For the purpose of impairment testing, allocation of goodwill is done to the cash-
generating unit for comparing it to recoverable amount. Determination of recoverable amount is
done based on fair value by deducting cost to sells (Commbank.com.au 2018). Moreover, assets
with indefinite useful lives are tested for impairment.
Requirement ii)
For conducting the impairment testing, organization allocated the goodwill to cash
generating unit and does the computation of recoverable amount. Publicly available earnings
multiples form the basis of calculation of recoverable amount. For determining the assessment of
goodwill and other assets, recoverable amount of such assets are compared with carrying amount
of individual cash generating unit or group of cash generating unit. Some of the indicators for
impairment are as for equity securities that are classified as assets available for sale. An
indication of impairment of any investment leads to testing of entire carrying amount of
investment in any associate or joint venture by comparing the carrying amount with its
recoverable amount (Commbank.com.au 2018).

3
ADVANCED FINANCIAL ACCOUNTING
Requirement iii)
Commonwealth bank of Australia has recorded loan impairment expenses in both the
financial year hat is 2017 and 2016 of amount $ 1095 million and $ 1256 million respectively.
These figures depict that impairment expenses on loan have reduced in the current year
indicating that there was 13% decrease in the expenses amount (Commbank.com.au 2018). The
reason is attributable to the lower provisional banking in market and institutional and private
banking.
Requirement iv)
For determining the impairment of assets, organization relies on computation of
recoverable amount using earnings multiple that is applicable to bank. Data on earning multiple
are sourced from market and publicly available data. Assumption is made regarding price
earning multiple that is observed from the business. Group conducts the revaluation of
assumptions when there is any provision for change. Valuation techniques of assets are based on
market value and are based on assumptions formed on market conditions (Commbank.com.au
2018).

4
ADVANCED FINANCIAL ACCOUNTING
Requirement v)
Process of impairment testing of Common wealth bank of Australia does not involve any
considerable subjectivity as depicted from the analysis of financial report. The methodology of
impairment testing is considerably influenced by involvement of subjectivity in the estimates and
assumptions made by management of group. When subjectivity is considered, there then exists
possibility of recoverable value being highly sensitive (Osei 2017). If the management of
organization is acting opportunistically, then there can be manipulation in assets recoverable
amount. Value in use computation, determinants of cash flows and value generated and there is a
possibility that there will be substantial fluctuation in the assumed value because other external
factors rather than exercising subjectivity (Commbank.com.au 2018).
Requirement vi)
After conducting detailed analysis of annual report of Common wealth bank of Australia
concerning impairment, it has been ascertained that the procedure adopted for impairment testing
is a bit confusing. There has not been a segmented presentation of impairment and information
considering the impairment of various is presented in a segregated way.
Requirement vii)
It has been ascertained from the evaluation of financial report of banking group that
organizations make provision related to impairment of all financial assets. Receivables and loans
are assessed collectively for impairment is done on collectively basis. Bank has employed
expected credit loss model as per AASB 9 that has lead to replacement of existing incurred loss
model (Commbank.com.au 2018). Impairment provisions are raised for the amount that is
adequate to cover losses related to credit and when there is any existence of objective evidence.

5
ADVANCED FINANCIAL ACCOUNTING
Requirement viii)
Bank has employed an approach of fair value measurement for measurement of financial
liabilities and assets through income statement. Financial instruments, derivative instruments and
all investments that are available for sale are measured at fair value. One of the best indicators of
financial instruments that are recognized initially and the fair value is also estimated in
computation of impairment of assets. Trading assets are asses using fair value that take into
account credit risks (Commbank.com.au 2018).
.
Part B:
Requirement i)
Under the lease standard IAS 17, investors assessing the financial position of
organization concerning leases will not be able to get true and fair view presentation. This is

6
ADVANCED FINANCIAL ACCOUNTING
because of the critics associated with the existing standard as it makes the classification between
financing and operating leases. Balance sheet profiles of companies do not reflect the actual
amount of debt that company currently owes (Edeigba and Amenkhienan 2017). It is so because
this standard does not obliges company to disclose operating lease in their balance sheet and
most of them select to treat lease as operating lease rather than financing lease. Therefore, the
existing lease standard does not reflect economic reality. It has been estimated by the accounting
standard that is IASB out of total amount of commitment attributable to leases of worth 3.3
million, only 25% of lease appear on balance sheet (Sandblom and Strandberg 2015).
Requirement ii)
One of the objectives of presentation of financial report is to provide users with the
information that helps in making economic decision. Under the existing standard, there is
possibility that there will be unfaithful classification of leasing transactions. Investors are
required to make rough estimation and calculations for computing lease commitment and brining
them on balance sheets. Operating lease is also a type of liabilities but they are not represented
on balance sheet but in actual sense, there is a liability that is more than total amount debt
reported (Demir and Bas 2017). This explains why the debt reported on balance sheet is 66 times
less than off balance sheet liabilities.
Requirement iii)
Controversy associated with existing standard regarding the leases classification into
operating and financing lease explains why there is no level playing field between some airline
companies. Airline companies either leases most of their aircraft fleets or they finance that is buy
the fleets. It would indicate that the financial position of such organizations is different, but in

7
ADVANCED FINANCIAL ACCOUNTING
reality, there might not be any difference in their financial position and they are identical (Nobes
2015).
Requirement iv)
Various flaws associated with the new lease accounting standard are responsible for
making it unpopular among everyone. New standard would be focusing on capitalization of
operating lease that would increase the balance sheets and debt structure of companies.
Companies in receiving credit have also raised concerns and there is a possibility of violation of
debt covenants. Adoption of standard will lead to hundred percent of balance sheets and this will
require them to renegotiate debt covenants and exclusion of lease agreements. There would be
increased administrative burden on part of management and increased cost of reporting that is
making companies hesitant to adopt this standard (Czajor and Michalak 2017). There will be
alterations in the system of control process, increased consultation fees, educational efforts and
process of IT. Moreover, organizations are required to make an estimation of detail relating to
right to lease liabilities and assets.
Requirement v)
Implementation of new standard will help in facilitating the comparison between the
financial statements of different companies. This standard will help in addressing the unfaithful
presentation of lease accounting. Investors will not be required to make any rough computation
and estimation of bringing back leases into balance sheets. Investors will be informed in a better
way because of transparency of information relating to leases. Accounting model of organization
will be altered and will benefit organizations in providing detailed information concerning leases
and therefore investors will be informed and take into account the benefits that would arrive

8
ADVANCED FINANCIAL ACCOUNTING
(Morales and Zamora 2018). Decision relating to leased will improved and allocation of capital
will improve. Therefore, organization adopting this standard will lead to a more balanced lease
versus buy decisions on part of management.

9
ADVANCED FINANCIAL ACCOUNTING
References list:
Commbank.com.au. (2018). [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/annual_report_2017_14_aug_2017.pdf [Accessed 23 Jan. 2018].
Czajor, P. and Michalak, M., 2017. Operating Lease Capitalization-Reasons and its Impact on
Financial Ratios of WIG30 and sWIG80 Companies. Przedsiębiorczość i Zarządzanie, 18(1, cz.
1 Practical and Theoretical Issues in Contemporary Financial Management), pp.23-36.
Demir, Z. and Bas, E., 2017. THE EFFECT OF TAS 17 “LEASING” STANDARD AND
IMPLEMENTATION OF THE NEW IFRS 16 “LEASES” STANDARD ON THE AIRLINE
COMPANIES. PressAcademia Procedia, 3(1), pp.153-173.
Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate
Transparency and Accountability: Evidence from New Zealand. Australasian Accounting,
Business and Finance Journal, 11(3), pp.3-19.
Karwowski, M., 2016. The risk in using financial reports in the study of airline business
models. Journal of Air Transport Management, 55, pp.185-192.
Morales-Díaz, J. and Zamora-Ramírez, C., 2018. IFRS 16 (leases) implementation: Impact of
entities' decisions on financial statements. Aestimatio, (17), pp.60-97.
Nobes, C., 2015. IFRS Ten Years on: Has the IASB Imposed Extensive Use of Fair Value? Has
the EU Learnt to Love IFRS? And Does the Use of Fair Value make IFRS Illegal in the
EU?. Accounting in Europe, 12(2), pp.153-170.
Osei, E., 2017. THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), AND THE
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) SINGS SIMILAR TUNE:

10
ADVANCED FINANCIAL ACCOUNTING
COMPARING THE ACCOUNTING TREATMENT OF NEW IFRS 16 WITH THE IAS 17,
AND THE NEW FASB MODEL ON LEASES. Journal of Theoretical Accounting
Research, 13(1).
Sacarin, M., 2017. IFRS 16 “Leases”–consequences on the financial statements and financial
indicators. The Audit Financiar journal, 15(145), pp.114-114.
Sandblom, P. and Strandberg, A., 2015. The Value Relevance of the Proposed New Leasing
Standard. An event study of the European Stock Markets’ Reaction to the proposed replacement
of IAS17.
You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline
Companies (Doctoral dissertation, Auckland University of Technology).