Financial Accounting Report: Cimic Group Asset Impairment Analysis

This comprehensive financial accounting report analyzes the asset impairment practices of the Cimic Group, examining goodwill, intangible assets, and impairment expenditure. The report delves into the specifics of impairment testing, including value in use computations and the subjectivity involved. It also explores the impact of AASB 9 on financial instrument classification and measurement. Furthermore, the report investigates lease accounting standards, contrasting operating and capital leases and highlighting the implications of off-balance-sheet liabilities. The analysis includes a discussion on how the application of new lease standards affects financial reporting, particularly for industries like airlines, and concludes with a critical evaluation of the new standards' impact on financial leverage and comparability.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to Task A.......................................................................................................................2
Answer to requirement 1:...........................................................................................................2
Answer to requirement 2:...........................................................................................................2
Answer to requirement 3:...........................................................................................................3
Answer to requirement 4:...........................................................................................................3
Answer to requirement 5:...........................................................................................................4
Answer to requirement 6:...........................................................................................................4
Answer to requirement 7:...........................................................................................................5
Answer to requirement 8:...........................................................................................................5
Answer to Task B:......................................................................................................................6
Answer to requirement 1:...........................................................................................................6
Answer to requirement 2:...........................................................................................................6
Answer to requirement 3:...........................................................................................................7
Answer to requirement 4:...........................................................................................................7
Answer to requirement 5:...........................................................................................................8
Reference List:...........................................................................................................................9

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Answer to Task A
Answer to requirement 1:
The current study takes into the considerations the assets impairment testing for Cimic
group. From the firm’s annual report, it is understood that the firm for the purpose of
impairment has tested goodwill. The consolidated financial report of the firm comprises of
the share of profit and loss and other comprehensive income statement following the
adjustment made for the impairment by aligning with the accounting policies of the group
(Cimic.com.au 2018). The unrealised gains derived from the transactions amid the group and
its joint ventures is eliminated till the extent of the organizations interest in the ventures. The
unrealised losses are eliminated given the transactions provides indications of impairment of
the assets that is transferred.
Answer to requirement 2:
Goodwill originating from the business combinations is taken into the considerations
in the intangible assets. Goodwill on acquisition of associates is encompassed in the equity
invested investments. Goodwill is not amortized by the Cimic Group but it is tested for the
purpose of impairment on yearly basis and more regularly given there is any sign that the
goodwill might be impaired. For the purpose of impairment goodwill is apportioned to the
cash generating units (Cimic.com.au 2018). The brand names of the organization is acquired
in the process of business combination and they are recognized separately from the goodwill.
Brand names of the Cimic Group is carried based on the fair value on the date of acquisition
following the deductions of any impairment losses or accumulated amortisation (Picker et al.
2016). Where the brand names or the goodwill of the firm is evaluated as indefinite the brand
names of the Cimic Group is not amortised but the same is used for impairment testing based
on the annual basis or whenever there are circumstances that it may be impaired.

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Answer to requirement 3:
On analysing the annual report of Cimic Group it is understood that the company has
recorded impairment expenditure of $50.0 million because of the fall in the recoverable
amount of the marine fleet which remained idle under the construction segment. During the
financial year of 2016 the company has also recorded impairment expenditure in respect of
the property, plant and equipment of $304.9 million (Cimic.com.au 2018). From the annual
report of the firm the impairment of the intangible assets expenditure stood 10.0 million. An
important consideration regarding the impairment expenditure is that the impairment
expenses of the property plant and equipment includes the impairment expenses of 50.0
million that originated from the fall in the recoverable value of the marine fleet.
Answer to requirement 4:
The Cimic Group is necessarily under the obligation of making estimations and
assumptions regarding the assets and liabilities based on the numerous factors of the
historical cost approach. The asset impairment testing of Cimic Group takes into the
considerations the assumptions of value in use computations. The carrying amount of
company assets is reviewed during each of the reporting date in order to assess whether there
is any form of indication for the impairment. Given that any form of existence is indications
prevails the recoverable amount of the asset is estimated (Lubbe, Modack and Watson 2014).
The recoverable amount of the goodwill is indefinite and the assets are reviewed during each
of the reporting period irrespective of the impairment.
The impairment loss is identified when the carrying amount of the asset goes past the
recoverable amount. The asset recoverable value is greater than the fair value after deducting
the sells amount and value in use (Banker, Basu and Byzalov 2016). The impairment losses
are identified in the statement of the profit and loss account given that the assets has been
previously revalued and under such circumstances the impairment losses is identified as the

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reversal to the extent of the earlier revaluation with extra amount is identified in the profit
and loss account.
Answer to requirement 5:
The goodwill impairment testing includes the exercise of substantial amount of
subjectivity in compliance with the present standard of accounting (Sinclair and Keller 2014).
The assessment of the annual report of the Cimic Group represents that that the recoverable
amount of the goodwill computation, allocation of goodwill to the cash generating unit is not
subjected to discretion and this reflects the facts that the impairment testing of the asset is not
carried out in the opportunistic manner. The computation of the value in use needs the
judgement of the management in making the appropriate use of the discounted rate in the
determination of the future amount of cash flow.
An important assertion in this regard is that the lower amount of subjectivity was
involved in the computation of the impairment testing (Lobo et al. 2017). The result obtained
from the impairment testing is regarded to be influenced by the indulgence of the subjectivity
with several different factors associated with the activities of the impairment testing of the
assets. An organization might witness differences in the carrying value of the assets and the
recoverable amount of the assets.
Answer to requirement 6:
In the present context the understanding of the impairment testing of the assets was
very interesting as on assessing the numerous segment of the information presented by the
company. The factor that contributed to the subject interest is that the assets are recognized
separately from the goodwill. The intangible assets are generally carried at their face value on
the date of the acquisition after deducting the impairment losses (Avallone and Quagli 2015).
More interestingly, the carrying amount of the company’s assets is reviewed during every

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reporting period in order to determine whether there are any sign of impairment. On noticing
that if there are any such sign prevails the recoverable amount of the assets is estimated. One
of the interesting factor that is learned from the analysis is that the recoverable amount of the
goodwill and indefinite assets are reviewed during every reporting period regardless of the
sign of impairment.
Answer to requirement 7:
On assessing the annual report of the firm it is understood that AASB 9 takes into the
considerations the revised guidelines on the classification and measurement of the financial
instrument (Kabir, Rahman and Su 2017). This includes the new anticipations of the credit
loss of the model for the computation of the impairment on the financial assets. The new
sights that has been gained from the analysis of the annual report it is found that the
companies have incorporated the new model of recognition of the impairment provision
based on the anticipated credit losses instead of incurring the credit losses. It is understood
that the organizations generally carry out the impairment of asset testing by taking into the
considerations the value in use computations.
Answer to requirement 8:
The presentation and preparation of the financial report of Cimic group is carried out
based on the historical cost by assuring that the financial assets are carried out in the fair
value. An in depth explanation of the fair value of the liabilities and assets associated to the
purchase considerations is provided in the separate section (Gros and Koch 2015).
Identification of the trade receivables is made based on the fair value that is subsequently and
primarily recognized at the amortized cost. The intangible assets of the firm is measured
based on the acquisition of the fair value. The company additionally assess value of assets
based on the fair value measurement. Any form of differences that is identified from the

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adjustment of the non-controlling interest and the fair value of the considerations is identified
in the equity reserve (Li and Sloan 2017).
Answer to Task B:
Answer to requirement 1:
Lessees and lesser are under the obligation of making lease classification in the form
of operating lease and capital lease in respect of the current accounting standard. Firms under
the present accounting standard are offered with the choice of stating the amount of lease
under the liabilities and assets for a brief period of time (Klimczak, Dynel and Pikos 2016).
Operating lease is not obligatory to be incorporated in the balance sheet just like the capital
lease. This enables the companies to present the lease asset and liabilities as optional in
balance sheet.
The total amount of liabilities is stated in the current financial requirement and it is
understated since the companies are not mandatorily required to present the operating lease.
They may have large amount of lease liabilities however the value the liabilities might be
eventually greater than the liabilities that is prevalent out of the balance sheet (Chen, Shroff
and Zhang 2014). Investors that are assessing the financial reports will not be able to gain
sufficient information of the firm liabilities and assets. As a result, this would enable the
investors to remain deceptive of the firm’s financial position.
Answer to requirement 2:
As per the earlier standard of lease, it became necessary to record only the capital
lease on the statement of financial position. They lacked disclosure to the users of financial
information and investors to gain the better understanding of the uncertainty surrounding the
cash flow originating from the lease (Darrough, Guler and Wang 2014). The lease standard
lacked both in terms of qualitative and quantitative aspects in offering required information

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relating to the accounting of lease in the books of accounts. As a result of this the firms were
not able to attain the desired accounting outcome on the financial statement. Insufficient
information contributed to the less realistic presentation of lease liabilities and assets
originating from lease.
Recording of operating lease was not obligatory under the current leasing standard but
these lease liabilities accompanies commitment for the organization in making payments.
This reflects that the when the organization is not presenting the leased liabilities it
underestimates the liabilities of the business (Macve 2015). Additionally, there are large
number of leased liabilities leading to noteworthy differences among the reported amount of
liabilities in the balance sheet and that existed off the balance sheet. Hence, the total amount
of debt that is reported in the balance sheet stands 66 times lower than the off balance sheet
liabilities.
Answer to requirement 3:
As evident the airlines firms have leased large amount of planes and in respect of the
earlier standard of lease they are not under the obligation of presenting it on the balance
sheet. Under the lease standard companies have classified lease with historical cost basis and
are made off the balance sheet. There is large amount of differences amid the airline
companies as they make large amount of lease for their aircraft to those that purchase the
aircrafts. It appears that the financial position of those companies is largely different in the
actual conditions with different financial obligations (Zhang and Andrew 2014). As a result
of this the investors find it difficult to determine the financial position of the airline
companies. Financial leverage and the operational activities of the airline companies provides
contrasting results. Consequently, there is no level of playing field for the airline
organizations.

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Answer to requirement 4:
The application of new standard of lease will not be considered to be popular among
every person since the new standard of lease is surrounded with numerous criticism. In the
balance sheet the leases would change considerably which would ultimately make them
reflect a leveraged situation (Dinnie 2015). This would create a greater impact on rising costs.
Lease in respect of the large amount of small assets would add increasing level of complexity
and cost of reporting. Companies is are required to update their financial system by
improving their disclosure in providing sufficient information. This would make business
incur additional cost and significantly contributes to the unpopularity of the standard.
Answer to requirement 5:
Implementation of new leasing standard would lead to more appropriate presentation
of financial information. Both the qualitative and quantitative information related to lease is
recorded in the balance sheet. Investors would obtain better understanding of the firm’s
commitment to lease (Zhang and Andrew 2014). Sufficient information relating to assets and
credit risk of the lessor would be reflected in the financial statement. Consequently, this
would help in increasing the transparency in the financial statement with more informed
information regarding the financial position of the organization.

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Reference List:
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill
impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.
Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and
Assets' Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2),
pp.41-67.
Chen, W., Shroff, P.K. and Zhang, I., 2014. Fair Value Accounting: Consequences of
Booking Market-driven Goodwill Impairment.
Cimic.com.au. (2018). Publications - CIMIC Group. [online] Available at:
https://www.cimic.com.au/investor-and-media-centre/publications/list?query=&f.Type%20of
%20Publication%7CP=annual%20reports [Accessed 21 Jan. 2018].
Darrough, M.N., Guler, L. and Wang, P., 2014. Goodwill impairment losses and CEO
compensation. Journal of Accounting, Auditing & Finance, 29(4), pp.435-463.
Dinnie, K., 2015. Nation branding: Concepts, issues, practice. Routledge.
Gros, M. and Koch, S., 2015. Goodwill Impairment Test Disclosures Under IAS 36:
Disclosure Quality and its Determinants in Europe.
Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment
Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Klimczak, K.M., Dynel, M. and Pikos, A., 2016. Goodwill impairment test disclosures under
uncertainty. Journal of Accounting and Management Information Systems, 15(4), pp.639-660.
Li, K.K. and Sloan, R.G., 2017. Has goodwill accounting gone bad?. Review of Accounting
Studies, 22(2), pp.964-1003.

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Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., 2017. The effect of joint auditor pair
composition on audit quality: Evidence from impairment tests. Contemporary Accounting
Research, 34(1), pp.118-153.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP
Catalogue.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L.,
2016. Applying international financial reporting standards. John Wiley & Sons.
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally
developed. Journal of Brand Management, 21(4), pp.286-302.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.