University Financial Accounting Report: Ausenco Impairment Analysis

This report delves into advanced financial accounting principles, focusing on asset impairment and lease accounting, using Ausenco as a case study. It examines impairment testing methodologies, the impact of IFRS 16 on lease liabilities, and the reasons behind the standard. The report explores key estimates, assumptions, and the subjectivity involved in impairment testing, along with the utility of impairment tests according to IAS 36. It analyzes the implications of off-balance sheet lease liabilities and the challenges in achieving a level playing field in the airline industry. The report also covers the importance of fair value measurement and the challenges in reflecting the state of the economy with lease accounting. It provides a comprehensive overview of financial reporting, offering valuable insights into the practical application of accounting standards and their impact on financial statements.

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Advanced Financial Accounting
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PART A
Introduction
Ausenco.com
Ausenco is an engineering company that was founded in Brisbane, Australia in the year 1991 by
the current CEO and managing director Zimi Meka and Bob Thorpe one of the board members in
the company. It was listed in the year 2006 in the Australian stock exchange, ASX. It has
multiple subsidiaries which are working also in both South and North America. Ausenco began
expanding in 2008 by acquiring other companies to enhance their services in pipeline systems
and vector engineering. It also invested in coal handling processing plants (Beechy et al., 2014).
However, the company has tested several assets for impairment since their acquisition. As of end
of financial year 2015, the company reported revenue of $179.15 million, a gross profit of $
152.337 million, a negative operating income of $-52.971 million, a net loss of 62.717 million
and a negative diluted earning per share of 0.36
Within your firm’s latest annual report, find
1. Assets meant for impairment in the company
Impairment: what is meant by impairment of an asset?
The term "impairment" does not indicate anything other than a devaluation, that is to say, that the
current value of an asset no longer corresponds to the book value (value of the asset registered in
the books), which generates an error in the balance sheet, If the value of an asset rises too much,

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the benefits and the losses derived could be erroneous. In principle, both assets and liabilities of a
balance can deteriorate.
There are several assets that have been tested for impairment. This Standard should be applied
in accounting for impairments of any asset class, except for the following:
(a) Assets that may arise from contracts on construction
(b) There is also impairment of deferred assets tax
(c) Employee benefits cost assets can be impaired
(d) Financial instruments as disclosed in the scope of IAS 32
(e) Property investment measured at fair value
(f) Impairment on lists of subsidiaries owned by the company
(g) Joint venture
2. How the company conducts its impairment testing
Impairment test: what is it and when does it apply?
The value of a company's assets is not engraved in stone. Financial crises, natural catastrophes or
market fluctuations can cause unforeseen devaluations of their value. As soon as an indication of
such loss of value of the assets included in the balance sheet is detected, it is time to carry out an
impairment test or asset impairment test (Lewis, 2011). Thanks to this valuation possible errors
in the balance are corrected and the real value of the company is judged more adequately.

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Index
Impairment: what is meant by impairment of an asset?
What is the utility of an impairment test?
How to make a goodwill impairment test:
Although there are territorial differences that affect the accounting of companies, IFRS
(International Financial Reporting Standards) establish IAS 36 at the supranational level, with
IAS 36 as its Spanish equivalent, as the standard that defines asset impairment and its
calculation. Only those values that are already regulated by other standards, such as, for example,
inventories, financial instruments or real estate investments are excluded from it.
The amount in the books of the assets is greater than its value in the stock market
Intangible assets with an unlimited useful life or that cannot yet be used and goodwill, on the
other hand, must be subjected to this impairment test every year, although the date can be freely
chosen. Of course, in the consecutive years the chosen date must be maintained the first time.
3.Has the company recorded any impairment within the financial fear
NO.
Losses due to deterioration of the value of the patrimonial elements
In accounting terms, there will be an impairment loss on an item of PPE or assets when its book
value exceeds its amount recoverable, understood as the greater of its fair value less selling costs
and its value that is currently in use (Kothari and Barone, 2011).

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In any loss of impairment, the accounting entry principle applies, which means that any
unaccounted loss, in general, cannot be tax deductible in any case.
That the period of six months from the expiration of the obligation has elapsed.
That the debtor is declared in a competitive situation.
That the debtor is prosecuted for a crime of raising property.
That the credit has been claimed judicially or on the same has arisen litigation whose resolution
depends on its collection.
However, even if any of the above circumstances are met, the losses will not be deductible with
respect to those listed below, unless they are the subject of an arbitration or judicial proceeding
regarding their existence or amount:
Those owed or secured by entities under public law.
Those secured by credit institutions or reciprocal guarantee societies.
Those that are guaranteed by real rights, pact of reservation of ownership and right of retention,
except in cases of loss or debasement of the guarantee.
Those guaranteed by a credit insurance or surety contract.
Those that have been subject to renewal or express extension.
4. Key estimates and assumptions in impairment of assets

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Define the rule for the calculation and recognition of losses due to deterioration of assets and
their reversal.
Establish rules for the presentation and disclosure of assets whose value has deteriorated or its
deterioration has been reversed.
Long-term assets They are those that remain in the long term, necessary for the operation of an
entity from which the generation of future economic benefits is expected or that acquired for
these purposes its disposition is decided (Harrington, Nunes and Roland, 2010).
Operating assets. They are long-lived assets that directly generate cash flows.
Signs of deterioration
Some of the signs of the possible deterioration of long-lived assets in use are:
Significant decrease in the market value of an asset.
Significant reduction in the use of installed capacity.
Loss of market of products or services provided by the entity.
Technological changes.
Physical damages.
Suspension or cancellation of a franchise, license, etcetera.
(v) Subjectivity involved in the impairment testing process?
Operating losses or negative cash flows in the period, combined with a loss history or projections
that confirm the trend of continuous losses associated with a cash-generating unit.

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Gross loss in the entity or in one of its significant components.
Depreciation and amortization charged to results that, in percentage terms in relation to income,
are substantially higher than those of previous years.
In addition to the above indications for the purpose of identifying whether a permanent
investment, including its goodwill, is subject to the evaluation of potential loss.
What is the utility of an impairment test?
At the international level, the IFRS or the IFRS (International Financial Reporting Standards) are
the norms that regulate the application of the impairment test, which consists of a forced
impairment test and with which it is a matter of knowing the real value of the assets assets. With
this information, a reliable statement about the current status of the assets can be issued, which is
especially significant for investors (Harrington, Nunes and Roland, 2010). According to IAS 36,
it is necessary to carry out an impairment test whenever an indication of depreciation is detected
in an asset that could come from internal or external evidence (internal and external sources in
IAS 36). Internal sources could be, for example:
Unfavorable changes in the financial and market environment
Increase in market interest rates
(vi) Interesting and confusing bits in impairment testing

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Most of the assets of a company, such as machinery, automobiles or computer equipment, are
subject to deterioration due to use. For this type of goods, a systematic amortization is
established in which the bookkeepers amortize the fixed assets regularly from the moment they
start operating until they are sold, lost or scrapped. Apart from this constant depreciation, the
accounting also foresees those cases in which the assets, although amortized according to the
established plan, may also be affected by unexpected losses of value, or those with an indefinite
useful life (which should not be amortize in fixed terms). In both cases, a deterioration test must
be carried out (Harrington, Nunes and Roland, 2010).
(vii) Insights on how companies conduct impairment testing?
Deterioration. Existing condition when the future economic benefits, that is, their recovery value,
of the "long-term assets" in use or disposition are lower than their "net book value".
Recovery value. It is the highest between the "use value" and the "net sale price" a "cash
generating unit".
Long-term assets in use
In the presence of any of the signs of impairment of a long-lived asset in use, entities must
determine the possible loss due to deterioration, unless they have evidence that such indications
are temporary. For this purpose, the recovery value of the cash generating unit will be
determined.
Sale price minus termination and sale costs

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(viii) fair value measurement
This Standard is applicable to assets that are accounted for at their revalued value (fair value)
following other International Accounting Standards, as is the case with the alternative treatment
permitted by IAS 16 Property, Plant and Equipment. However, determining whether a previously
revalued asset may have deteriorated, due to unexpected causes, depends on the criteria used to
determine the fair value:
PART B
Requirements
(i) Reasons why the IASB chairman thinks that leases do not reflect the state of the
economy
The (IASB) issued a new accounting standard on leases called IFRS 16, which will be applicable
as of January 1, 2019. This standard applies to all leases, including those of the right to use
subleases, with certain exceptions. The chairperson of the IASB said that this new accounting
regulation will generate a significant impact on the entities, since now the lessees must reflect in
their statements of financial position the effect of the lease contracts that are in force (Hitchner,
Hyden and Mard, 2013).

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The IASB conducted a study in January 2016 in which it concluded, on a sample of 1,022 listed
companies worldwide, that the current estimated value of future payments of current leases that
are not shown in the statements of financial position ( operating leases) would represent 5.4
percent of the total assets already registered in those companies. The study shows how this
percentage varies by sectors, for example, for airlines and retail (retail) is four times this average
(about 20 percent).
IFRS 16 substantially maintains the accounting requirements of the lessor established by IAS 17
Leases and requires the lessor to classify the lease as operating or financial.
You can also read: Evaluate efforts and improve processes
ii) Off balance sheet lease liabilities
The general objective of IFRS 16 is for entities to provide information that allows financial
statements users to evaluate the leases effect on the financial situation, result and lessee
cashflow. The Standard extends considerably the current information requirements on leases.

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In order to respond to the concerns expressed by many companies regarding the cost / benefit of
applying IFRS 16 to certain rental agreements, the IASB has included some simplification,
allowing accounting for short-term leases and leases of low-value assets directly as an expense,
usually on a straight-line basis over the term of the lease (that is, continue with the accounting as
current operating leases).
With the implementation of the Standard, the lessee must recognize on the lease start date a right
to use the asset and a lease liability (Hitchner, Hyden and Mard, 2013).
You might also be interested: Entities must address changes in IFRS
The cost of the right to use the assets will include the amount of the initial value of the lease
liability (as described below), any payment paid to the lessor in advance, the initial direct costs
incurred and an estimate of the costs to be incurred for the dismantling or restoration of assets.
(iii) Reasons for lack of a level playing field’ between some airlines companies?
The entities must value the lease liabilities at the current value of their lease payments,
discounted using the interest rate implicit in the lease, if said interest rate can be easily
determined, otherwise use the incremental interest rate of their loans.

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The lease liabilities must include, in addition to the fixed installments minus any incentive to
receive, the variable installments that depend on an index or interest rate, payments to be made
for residual value guarantees, the exercise price of the purchase option (when there is certainty to
exercise it), and penalty payments for terminating the lease.
(iv) What would cause this unpopularity according to the chairman?
We invite you to evaluate the potential impact of the Standard on your company's financial
statements, in addition to the effects on key indicators and metrics of your business, and the
impacts that derive from them for contracts, such as covenant clauses in debt contracts,
management remuneration contracts, etc., and even in credit risk and interest rates of financing
(Hitchner, Hyden and Mard, 2013).
1. Entry into force of the standard.
The entry into force of the Standard for the years beginning on or after January 1, 2019,
contemplates a certain time horizon ahead because the IASB understands that a broad transition
period is necessary, both because of the magnitude of the changes and because of the the
application the previous year (January 1, 2018) of the new IFRS 9.