Dawson Ltd Impairment Analysis Report: Corporate Accounting Insights

This report provides an executive summary and detailed analysis of impairment in corporate accounting, specifically focusing on Dawson Ltd's financial statements and its recent adoption of international accounting standards. The report defines impairment as the condition where the recoverable value of fixed assets, including goodwill, falls below their book value. It explores the implications of impairment testing, the role of cash-generating units (CGUs), and the complexities in determining recoverable amounts and fair values. The report highlights that goodwill cannot be split from other assets acquired by the parent company and the importance of testing assets for impairment to ensure accuracy in financial reporting. It also discusses the importance of public offerings as a means of raising funds for companies with good credibility. The report references various accounting standards and provides insights into the valuation of assets and the allocation of impairment losses, ultimately aiming to ensure that financial statements accurately reflect a company's financial position. The report also includes an analysis of Woolworths' financial statements and the recording of PPE at cost minus impairment losses and accumulated amortization.

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Corporate Accounting

Impairment
Executive Summary
Impairment can be defined as the recoverable value that is in terms of fixed assets that
includes goodwill that ranks below the book value. In this report, Dawson Ltd is considered
having an impairment test. It has recently adopted the international accounting standards. The
company has decided to raise funds and hence the research mainly focuses on the company
with the impairment mechanism.
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Impairment
Contents
Introduction...........................................................................................................................................3
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7
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Impairment
Introduction
Impairment is a condition which all fixed assets including goodwill have to undergo. It
happens when the recoverable amount of an asset reduces as compared to its carrying
amount. Impairment affects all tangible and intangible fixed assets and goodwill. However, it
has a few exceptions. It does not apply to inventories since the valuation of inventories is
covered by another standard (Kieso et. al, 2010). For similar reasons, the followings are
excluded from being tested for impairment, and their valuations:
a) Assets arising out of construction contracts
b) Deferred tax assets
c) any non-current asset
d) Financial instruments which are a part of the assets
e) Nature made or biological assets.
f) Assets arising out of insurance contracts, including contractual expenses which need to
be amortized.
g) Investment property which needs to be valued at its fair price
h) Any employee benefits asset
3. The financial statements of a company go into the hands of every person who can be
interested in the affairs of business. The stakeholders, investors, customers, legal and
statutory bodies. Everyone seems to get their hands on the financial statements. It is
important to ensure that everything presented in there shows a true picture of the position if
the company. Cash Generating units are the smallest group of assets clubbed together, in
order to test for impairment. At times, it is difficult to determine the recoverable value of a
single asset, and thus, such assets, whose recoverable value cannot be ascertained
independently are clubbed into units. However, this clubbing of assets into one group cannot
be done as per the whims of the management. A CGU should be the smallest possible group
of assets which can generate cash flows independently (Shoaf & Zaldivar, 2005). Assets
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Impairment
which are capable of generating cash flows independently are not grouped into CGUs. The
standard, therefore, does not mandate that assets should be valued in groups or CGUs and
cannot be valued individually. It’s done only when individual assets are not capable of cash
generations independently, ‘smallest’, ‘cash flow generation’, and ‘independently’ being the
keywords here. Details of the recoverable amount and fair value of the asset and all details of
goodwill, its impairment, charge to CGUs and allocation of the losses are also presented.
4. Determining Cash Generating Units is no easy task. It needs a lot of judgment and
skills. So under mentioned are the things to be paid attention to which determining a Cash
Generating Unit.
a) Firstly, the existence of any indication of impairment should be checked.
b) The carrying amount and recoverable amount should be calculated and checked if
impairment exists.
c) As far as intangibles are concerned, if they are not yet available for use, their
recoverable amount and carrying amount should be compared to check for impairment
annually. Similar should be the case for intangibles with indefinite useful lives (McKaig,
2011).
d) Carefully grouping assets belonging to similar cash generating units.
e) Computation of recoverable amount of a CGU is another risky venture,
f) Different CGUs belong to different cash generating patterns. Classifying an asset into
which of these is where utmost care needs to be taken (Peirson et. al, 2015).
5. Now taking a case where Goodwill in the annual report of Woolworths forms a part of
the financial statement of a company. If impairment is tested for the same, and the
recoverable value is higher than the carrying value, there is no impairment. But, we should
also seek the fact that the goodwill so tested for, is acquired goodwill (McKaig, 2011). And
the assets also show acquired profit. The recoverable amounts of the two companies can
offset the diminution of one another and show a fabricated recoverable value if they are
clubbed into CGUs. For individual assets, they still do not hold good. Hence, the existence of
goodwill can at times be misleading to the impairment test.
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6. The impairment loss is computed by comparing the carrying amount an asset’s
recoverable amount. This recoverable amount is computed by determining the best fair value
of the asset, which is the value the asset would fetch if sold in the open market today. Now,
this fair value is often construed to be the present value of the future cash flows of the asset,
which ignores all other future possibilities (Hamilton et. al, 2011). Determining the cash
flows of the future and the calculations are more theoretical than practically viable. Whether
the impairment losses for each item, if charged to the statement of profit and loss, to be
disclosed along with the item of the comprehensive income statement to which they have
been charged (Kieso et. al, 2010). When it comes to Woolworths, the PPE of it is recorded at
cost minus the impairment losses and amortization that is accumulated. From the annual
report, it can be witnessed that the PPE recording of companies varies from one company to
another but the depreciation tend to be the same (Woolworths limited, 2017).
(Woolworths, 2017)
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(Woolworth, 2017)
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Conclusion
When it comes to impairment, the assets are tested and calculated for the process of
impairment. Goodwill cannot be spitted for from other assets that are acquired by the parent
company. Even the goodwill that is impaired is always purchased as impairment. Any asset,
which is presented at a value it cannot fetch when sold in the statement date, is regarded as
false. Hence, assets need to be tested for impairment to ensure that the asset can fetch at least
what is being presented in the books of accounts. For companies having good credibility, and
long-term business prospects, and market acceptability, they should always go for a Public
Offering of shares. IPOs and FPOs are the best way to raise funds. There are no servicing
costs attached to them. Neither is there any extra hidden costs attached, unlike debts.
However, care should be taken to ensure that the money will not be lost. Due diligence and
clearance report from rating agencies are the green signals, which indicate that the company
can go for a public offering of shares
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References
Hamilton, K., Hyland, B. and Dodd, J. L. (2011). Impairment: IASB-FASB Comparison.
Drake Management Review. [online]. 1(1), 55–67. Retrieved from:
https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee9cc6632159d8a.pdf
[Accessed 24 May 2018]
Shoaf, V. & Zaldivar, I.P. (2005). Goodwill impairment: convergence not yet achieved.
Retrieved from:
http://www.freepatentsonline.com/article/Review-Business/133756140.html
[Accessed 24 May 2018]
McKaig, T. (2011). Understanding Impairment Accounting: What It Is and When It Is Used.
Retrieved from:
http://www.financepractitioner.com/accountancy-checklists/understanding-
impairment-accounting-what-it-is-and-when-it-is-used [Accessed 24 May 2018]
Peirson, G, Brown, R., Easton, S, Howard, P. & Pinder, S. (2015) Business Finance, 12th
ed. North Ryde: McGraw-Hill Australia.
Kieso, D., Weygandt, J., Warfield, T; Young, N. & Wiecek, I . (2010). Intermediate
accounting. Toronto: John Wiley & Sons Canada.
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
NJ: Wiley
Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online]
Available from:
http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf
[Accessed 24 May 2018]
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