Financial Report Analysis: Impairment of Assets at Downer EDI Ltd 2017

This report provides a comprehensive analysis of Downer EDI Ltd's financial statements, concentrating on the company's asset impairment practices as per IAS 36 for the year 2017. The report examines the impairment of assets, including goodwill, equipment, and trade receivables, and the associated impairment expenditure. It delves into the impairment testing process, key estimates, and judgments made by the company, including the use of value in use and fair value measurements. The report also discusses the subjectivity involved in the impairment process and provides insights into the company's approach to impairment. Furthermore, the report addresses questions related to lease accounting standards, comparing old and new standards and their impact on financial reporting and stakeholder information. This document, contributed by a student, is available on Desklib, a platform offering AI-based study tools.

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Executive Summary
The main purpose of this report is to analyze the financial reports of the Downer EDI limited.
The report will be analyzing the impairments of assets of the company. The report will be
focusing on the different impairment expenditure if any which the company has incurred for
Downer EDI limited for the year 2017.

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Table of Contents
Part A...............................................................................................................................................3
Introduction..................................................................................................................................3
Impairments of the Assets of Downer EDI ltd............................................................................3
Impairment Test...........................................................................................................................4
Impairment Expenditure..............................................................................................................4
Key Estimates and Judgements...................................................................................................5
Subjectivity in Impairment..........................................................................................................6
Impairment Process Analysis......................................................................................................6
Insights on Impairment................................................................................................................6
Fair value Measurement..............................................................................................................7
Part B...............................................................................................................................................7
Question 1....................................................................................................................................7
Question 2....................................................................................................................................7
Question 3....................................................................................................................................8
Question 4....................................................................................................................................8
Question 5....................................................................................................................................9
Reference.......................................................................................................................................10

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Part A
Introduction
The report will be analyzing the annual reports of Downer EDI limited and will also be
analyzing whether the company has charged any impairments on the assets of the company. The
report will be analyzing and identifying the assets on which impairments has been charged.
Overview of Downer EDI ltd
Downer Group is a company engaged in providing infrastructure and building services for public
concerns as well as private concerns. The company provides public and private, energy and
infrastructure and resources all over Australia. The company has its headquarters in Sydney,
Australia and the company was founded in 1933. The operating income of the company is
around $6.56 billion as per the recent estimates (Downer Corporate Site 2018).
Impairments of the Assets of Downer EDI ltd
Impairment of assets refers to the reduction in the value of assets by the company as per IAS 36
which deals with impairment of assets. Downer EDI ltd is following impairment policies on
intangible assets of the company. The company shows that indefinite life is possessed by
goodwill and other intangible assets and the company has the policy of testing such assets
annually for impairment purposes which the company (Kuzmina and Kozlovska 2012). The
company also has charged impairment cost on the asset of the company such as equipment,
property and plant. The others assets are also checked if there is any case of impairments on
them, whenever there is any occurrence of events or circumstance change which can suggest the
doubt in recoverability of the carrying amount. Trade receivable is another group which has been
considered for impairment. An allowance has been made for doubtful debts which is suppose to
be irrecoverable determined from the experience from the past.

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Impairment Test
The impairment of assets test of the company is done annually for intangible assets
especially goodwill. Intangible assets have indefinite life of usefulness and are tested every year
for impairment purposes (Capalbo 2013). The other assets which the company shows in the
balance sheet are impaired whenever events or situations indicate that the carrying cost of the
asset may not be recoverable. The company allocates goodwill to the cash generating units for
the purpose of impairment considering the resource allocations, natural resources, how
operations of the business are controlled and where flow of cash can be identified (Devalle and
Rizzato 2012). As per the balance sheet analysis and notes to accounts six cash generating units
have been identified which are transport, utilities, Rail, EC&M, Mining and spotless. These
groups will be subjected to impairment test and goodwill allocation is done to these units
(Khokan Bepari Rahman and Taher Mollik 2014).
Impairment Expenditure
The company has recognized impairment charges on intangible assets such as goodwill,
customers contract and relationship, brand name and acquisition and intellectual property on
development of the software. This is shown as accumulated amortization and impairment
charges. Except the figure of Goodwill impairment and amortization charges on all other
intangible assets has increased from the previous year. The impairment of the trade receivables
are also shown in the notes of accounts of the company. Thus impairment of trade receivable are
also done along with the intangible assets as per the financial statement of the business.
Key Estimates and Judgements
The first major requirement for the process of testing the impairment of assets is that the
company need to a make an accurate assumption of how much amount can be recovered from the

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Cash Generating Units (CGUs) to which allocations can be done. The group also uses the
method of value in use to determine the amount which is recoverable from the asset. Recoverable
amount is the higher figure of fair value less cost to sale and the value in use. The impairment
loss which arises then is taken in the profit and loss account as an expense. The assumptions
which are taken into considerations are that the recoverable amount of CGUs is analyzed with
the fair value of the assets which are acquired minus the cost which is incurred for sales. The fair
value is taken on the basis of the takeover offers. Downer EDI company have no such events of
takeovers which can cause impairment of the assets. The key assumption are also taken in the
value in use calculations of the company (Paugam and Ramond 2015). The company has made
assumptions on the budgeted EBITDA, long term growth rates and discount rates as well. The
projected cash flow of the company has been done on the basis of value in use calculations
which uses three years cash flow projections including 2018 budgeted estimates on the basis of
which value in use is calculated. The company also uses Budgeted EBITDA which is based on
past experience of the group assessment. The growth rate on a long term basis is based on the
future yearly growth rate till year 2021 based on GDP which are at nominal rates prevailing in
the country. In case of budgeted working capital, assumption is that it will be consistent with
historic trends giving the level of utilisation and operating activity.
Subjectivity in Impairment
The company has made a lot of key assumptions and estimates in regards to the
impairment process of intangible assets. If any of this area is mistaken or misstated than the
figure of the impaired assets will be misstated drastically. The key estimates and assumptions of
Downer EDI ltd seems a little too far stretched and might hamper the impairment process either
recording less or more impairment loss in the process.

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Impairment Process Analysis
The company uses value in use method in the calculation of recoverable amount. The whole of
this process is a bit complex as the company has to make a lot of key assumptions and estimates
which are also considered on some basis thereby raising a series of doubts on the impairment
process which is followed by the company (Shiramizu et al. 2012). The calculation area which is
used for the calculations of the recoverable amount depends on a variety of estimates and
assumptions out of which if any goes wrong the whole impact will come to the value of the
assets on which the impairment process is being conducted.
Insights on Impairment
Downer EDI’s Impairment test shows that the company uses value in use method for calculation
of the recoverable amount. The impairment testing process divides the Cash generating units into
six groups on which the impairment test is being conducted by the company. the company
assumes various areas such as budgeted cash flows and EBITDA and long term growth rate as
well (Mazzi, Liberatore and Tsalavoutas 2016).
Fair value Measurement
As per IAS 36, impairment of assets is done on the basis of carrying amount and recoverable
amount. Fair value measurement states the measure of the market or intrinsic value of the aassets
Part B
Question 1
As per the chairperson of IASB, Hans Hoogervorst a new standard is required for
accounting for leases which can ensure full disclosures of all kind of leases in the annual reports.
The chairperson considers that the former lease standard did not reveal economic reality is

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because most of the companies showed they had more operational leases which had no
treatments in the financial statements as per the former standard. As per the chairperson currently
listed companies around the world has around 3 trillion euros worth leases in most of the sectors,
especially airline sector, retail and shipping. Most of theses companies as per accounting
treatment of former standard show 85% of such leases as operating risks and not recorded in the
financial statements. However such operating risks are capable of creating real liabilities for the
company.
Question 2
As per the Chairperson of IASB, under the former lease standard the operating leases was
not stated in the balance sheet. This fact was used by most of the companies and they recorded
85% of the leases as operating lease which was not recorded in the balance sheet. As the
companies considered leases to be operating in nature. The debt which was shown in the balance
sheet was less than such off balance sheet leases which were 66% greater as compared to debts
shown in the balance sheet.
Question 3
As per the chairperson, an airline which has obtained most of its aircrafts with the use of
leases can make the balance sheet look more decent. However in the case of firms which
purchases the air fleet has to bear the costs of such air fleets which requires a considerable
amount of finances which will definitely be affecting the company’s revenue for that year. The
company which is leashing air fleets does not faces the above problem. Therefore the
chairperson comments that the airline company which leases its air fleet will be on a different
ground as compared to the airline company which purchases its air fleets.

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Question 4
The chairperson is of the opinion that the basic problems which were present in the
previous lease standard will be taken care of in the current lease standard. In the former lease
standard which is going to be replaced the lease were recognized only of financial nature and
operating risks were not shown in the balance sheet. The new standards will be tackling the
problems which were present in the old standard. The new standard will be recognizing all the
assets and liabilities concerning leases. The accounting process will be better in reflecting the
economic consideration which a lease may have on the overall business and thus ensure that the
decision making process of the management considers the lease of the company. The books of
accounts is also going to reflect the effect of lease in the balance sheet. The new changes will not
be welcomed by many companies accounting changes are always controversial in nature.
However the chairperson has provided the assurance that IASB has looked after all the possible
risk which may arise due the introduction of the new standards on lease. Another reason for the
unpopularity of new standard on leasing as per the opinion of the chair[person might be the
increased level of costs which will arise and which the company has to bear.
Question 5
With the introduction of the new standard on leasing the accountability of the balance
sheet will increase and the stakeholders will be provided with clear information on lease
agreements of the business. The new agreement will not shorten the advantages of a lease
agreement but ensure that proper records of the same is maintained in the books of accounts. As
per the chairperson with the introduction of the new standard the cosmetic affect which the
company adds to the balance sheet is reduced showing a clear analysis of the same. The new
lease agreement will be increasing the costs of the company. However it is the expectation of the

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IASB that the benefits associated with the introduction of the new standard can outweigh the
costs factor associated with the standard. The shareholders will get the clear information on the
leases and the short term and long term impacts of such leases and then they will be able to take
decisions accordingly. In case of the management of the business, they will also be benefiting
from the new standard as this will increase the costs of the leases and so the management can
effectively measure the costs of the business while taking the lease and also the benefits which
arise from taking such a lease. The company can also compare these costs and benefits and
decisions can be taken accordingly.

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Reference
Capalbo, F., 2013. Impairment of Assets.
Devalle, A. and Rizzato, F., 2012. The quality of mandatory disclosure: the impairment of
goodwill. An empirical analysis of European listed companies. Procedia Economics and
Finance, 2, pp.101-108.
Downer Corporate Site. (2018). Downer Group. [online] Available at:
https://www.downergroup.com [Accessed 24 Jan. 2018].
Khokan Bepari, M., F. Rahman, S. and Taher Mollik, A., 2014. Firms' compliance with the
disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial
crisis and other firm characteristics. Journal of Accounting & Organizational Change, 10(1),
pp.116-149.
Kuzmina, I. and Kozlovska, I., 2012. ACCOUNTING MEASUREMENT OF LONG-LIVED
ASSETS: A CASE OF IMPAIRMENT PRACTICE. Journal of Business Management, (5).
Mazzi, F., Liberatore, G. and Tsalavoutas, I., 2016. Insights on CFOs’ perceptions about
impairment testing under IAS 36. Accounting in Europe, 13(3), pp.353-379.
Paugam, L. and Ramond, O., 2015. Effect of Impairment‐Testing Disclosures on the Cost of
Equity Capital. Journal of Business Finance & Accounting, 42(5-6), pp.583-618.
Shiramizu, B., Ananworanich, J., Chalermchai, T., Siangphoe, U., Troelstrup, D., Shikuma, C.,
De Grutolla, V., Sithinamsuwan, P., Praihirunkit, P., Rattanamanee, S. and Valcour, V., 2012.
Failure to clear intra-monocyte HIV infection linked to persistent neuropsychological testing

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impairment after first-line combined antiretroviral therapy. Journal of neurovirology, 18(1),
pp.69-73.