Analysis of Accounting Standards and Regulation on Asset Impairment

This report provides a comprehensive analysis of accounting standards and regulations concerning asset impairment, with a specific focus on AASB 136. The report examines the requirements for evidence in testing for impairment, detailing both internal and external sources of information, and uses the case of Myer Holdings Ltd to illustrate these concepts. It outlines the process for determining asset impairment, including the calculation of recoverable amounts (value in use and fair value less costs of disposal) and impairment loss, and discusses the treatment of revalued assets and cash-generating units (CGUs). The report also addresses the required information for impairment determination, such as cash flow projections and economic data, and highlights the flexibility afforded to management in making assumptions and estimations. It concludes by emphasizing the importance of adhering to AASB 136 to ensure accurate and reliable financial reporting. The report also provides details of the required information and the flexibility given to the management for the determination of impairment test.

Running head: ACCOUNTING STANDARDS AND REGULATION
Accounting standards and regulation
Name of the student
Name of the university
Author note

1ACCOUNTING STANDARDS AND REGULATION
Table of Contents
Part A.........................................................................................................................................2
Requirement of evidence with regard to testing of impairment.................................................2
Part B..........................................................................................................................................3
Determination of process for asset impairment.........................................................................3
Part C..........................................................................................................................................4
Required information for determination of impairment.............................................................4
Part D.........................................................................................................................................4
Management’s flexibility in impairment determination............................................................4
Reference....................................................................................................................................5

2ACCOUNTING STANDARDS AND REGULATION
Part A
Requirement of evidence with regard to testing of impairment
The AASB 136 on impairment of assets seeks that the asset of any organization shall
not be recorded in the financial statement at the value which is more than the carrying value.
As per Para 10 of the standard, the assets whether it is tangible or intangible and the goodwill
must be tested for impairment at least once in a year. Further, Para 12 of the standard states
the external as well as internal source of information that can indicate the fact that whether
the asset shall be tested for impairment or not (Aasb.gov.au 2017).
If the internal sources of information are taken into consideration for determining the
test of impairment, asset will be taken into consideration as the major indicator for AASB
136. Looking into the financial performance of Myer Holdings Ltd, it is recognized that the
operating revenues of the company is in decreasing trend. The operating revenue of the
company was highest during 2009 and amounted to $ 32,65,000,000 and after that it started
declining and reached $ 27,26,005,000 during 2012. Further, looking at the balance sheet of
the company, it is identified that the non-current intangible assets of the company was highest
during 2009 and amounted to $ 909,000,000. However, during 2010 there was significant
decrease in the value of intangible and it reached to $ 571,486,000 and the trend was
decreasing. Moreover, the net profit margin of the company of the company was also in
decreasing trend (Investor.myer.com.au 2017).
On the contrary, if the external information sources are considered, it is identified that
Myer is planning to restructure their store in Frankston to compete with Amazon. It was
found that Myer was heading towards significant changes with regard to economic and
technological environment from Amazon’s entry. As Amazon sells their entire product
through online, enabling the customers to shop from any corner of the world, the physical
stores of Myer were losing considerable part of their customers. These all facts pushed Myer
to change their strategies and look of their stores as well as the uniform of the store staffs
(Investor.myer.com.au 2017).

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Part B
Determination of process for asset impairment
Once the evidence is established with regard to the impairment the asset is tested for
impairment. The asset is impaired when the carrying value of the asset is more than its
recoverable amount. The recoverable amount is the higher among the value in use and fair
value of the asset reduced by disposal cost. The impairment loss is identified as the expense
under the profit and loss account (Christensen et al. 2015). Further, if the asset is a revalued
asset, the amount of impairment loss is recorded as against the earlier identified revaluation
gain of the asset. Further, if indication is there that a particular asset may get impaired, the
recoverable amount or the cash generating unit (CGU) of the asset is determined. On the
other hand, if it is not possible to forecast the recoverable amount of individual asset, the
recoverable amount for the CGU under which the asset is included shall be determined.
Recoverable value for individual asset is not possible if –
 The value in use of the asset cannot be forecasted to close of the FVLCS
 Assets do not create any cash inflow that widely is independent from other assets.
If Myer Holdings Ltd is considered, the goodwill generated from business acquisition
cannot be recognized with separate CGU. Therefore, the goodwill will be allocated for the
entire business (Miller and Power 2013). The company uses the cash flow forecasting for 5
years and for more than 5 years terminal growth rate is used. For the impairment calculation
following assumption are taken into consideration –
 Rate of terminal growth to be assumed as 2.5%
 Rate of operating gross margin to be assumed as 39.5%
 The pre-tax rate of discount to be assumed as 14.4%
The management of Myer Holdings Ltd compare the carrying value of the asset or the
carrying value of the CGU with the budgeted one. If it is found that there is any indication of
impairment, the recoverable amount and value in use for the particular asset is measured
immediately (Linnenluecke et al. 2015). Further, Myer examines each of their stores
separately for the purpose of impairment test. Further, the fair value for the asset will be
calculated as the amount that can be achieved through the sale of the asset in the arm’s length
price among the willing and knowledgeable parties and from that the disposal cost of the

4ACCOUNTING STANDARDS AND REGULATION
asset shall be reduced. The value of the asset shall be taken from the balance sheet and after
that the estimated sale value shall be calculated.
Part C
Required information for determination of impairment
Para 30, under the AASB 136, states that the value in use of asset is crucial for
determining the asset’s liquidity status. For estimation, the recoverable amount of any asset is
higher among fair value less disposable cost and value in use. Further, the impairment loss
for the past period shall be adjusted in the subsequent period, if there is any alteration with
regard to the asset. Further, the requirement of information is required as follows –
 Information shall be obtained for the rate of average growth for the cash flow
 Various economic data are required for making the assumptions
 Information related to the market under which the company is operating is required
 Information is required for the justification of the budget (Oulasvirta 2014)
 Information is required for determining the industry growth rate
Further, the company uses the discounted cash flow approach for forecasting the cash
flow for 5 years and for more than 5 years terminal growth rate is used. The value in use is
the present value of future cash flows projected to be gained from the CGU or the asset.
Finally, the recoverable amount is the higher value among the fair value and value in use.
Part D
Management’s flexibility in impairment determination
ASIC does not require that the management shall be experts with regard to the
accounting knowledge. However, they can always seek assistance from the knowledgeable
person. The management shall look into the matter deeply where the forecasting does not
match with the actual figures. Further, the information shall be reviewed and presented
clearly so that it can be used by the users (Wang 2014).
The main concern with the identification of correlation among the opportunistic
motivations and asset impairment is the management for their own benefit may not recognize

5ACCOUNTING STANDARDS AND REGULATION
the impairment and show the assets in the financial statement at higher values. It is also a
matter of concern to analyze that to what extent the impairment of asset is consistent with the
releveant requirement of the regulation. Therefore, the main focus is whether the financial
statement is prepared in compliance with the AASB 136 or not and whether the company is
recognizing the impairment of assets as per AASB 136 (Bond, Govendir and Wells 2017).
The management’s flexibility is the management’s ability with regard to making the
assumptions and estimations. As per Para 30 of AASB 136 the calculation of value in use
requires the calculation of future cash flows. Further, Para 24 of AASB 136 states the way
through which the recoverable amount of the intangible assets are measured by the
management. While the future cash flows are measured, the management is flexible enough
for establishing the proper assumptions (Gackstatter and Möller 2016). Further, the projected
cash flows for the future is calculated based on the assessment made by the management
taking into consideration the expected economic condition for the future. Therefore, it can be
said that the management is flexible enough for the determination of impairment test.

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Reference
Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) - Home. [online]
Available at: http://www.aasb.gov.au/ [Accessed 26 Aug. 2017].
Bond, D., Govendir, B. and Wells, P. (2017). An evaluation of asset impairment decisions by
Australian firms and whether this was impacted by AASB 136. Australia: Accounting
Discipline Group, University of Technology Sydney.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What
determines accounting quality changes around IFRS adoption?. European Accounting
Review, 24(1), pp.31-61.
Gackstatter, T. and Möller, K., 2016. Triggering Events in Asset Impairment Accounting-a
Case Study in the Automotive Industry.
Investor.myer.com.au. 2017. Myer Investor Relations. [online] Available at:
http://investor.myer.com.au/Investor-Centre/ [Accessed 26 Aug. 2017].
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.
Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting
accounting research and organization theory. Academy of Management Annals, 7(1), pp.557-
605.
Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public
Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on
Accounting, 25(3), pp.272-285.
Wang, C., 2014. Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting Research, 52(4),
pp.955-992.