Financial Accounting Report on Impairment Testing and Leases

This report provides an in-depth analysis of financial accounting principles, specifically focusing on impairment testing and lease accounting. The report examines the application of impairment testing by Service Stream Limited, including goodwill, inventories, and financial assets, and assesses the company's assumptions related to discount rates and growth. It explores the impact of impairment losses on financial statements and discusses the subjectivity inherent in impairment treatment. Furthermore, the report delves into the complexities of fair value measurement and the implications of the new accounting standards for leases, as per IFRS 16, highlighting the shift from operating to finance leases and their impact on balance sheets and stakeholder decisions. The analysis covers the chairman of the International Accounting Standards Board's perspective on lease accounting and its influence on various industries, especially airlines and retail. The report also discusses the advantages of IFRS 16, such as better investment decisions, and the enhanced allocation of capital and financial resources.

Advance financial accounting

TABLE OF CONTENTS
PART A...........................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................3
Question 3....................................................................................................................................3
Question 4....................................................................................................................................4
Question 5....................................................................................................................................4
Question 6....................................................................................................................................4
Question 7....................................................................................................................................5
Question 8....................................................................................................................................5
PART B...........................................................................................................................................5
Question 1....................................................................................................................................5
Question 2....................................................................................................................................6
Question 3....................................................................................................................................6
Question 4....................................................................................................................................6
Question 5....................................................................................................................................6
Reference.........................................................................................................................................7

PART A
Question 1
Impairment takes place when the business ensures that the assets are carrying not more than the
recoverable price (Huikku, Mouritsen and Silvola, 2017). In Service Stream Limited, the
company applies impairment testing on various assets. These include goodwill which is a
significant asset for any company, inventories which are termed as the lowest of all the cost and
net realizable value and financial assets which include financial liabilities and instrument of
equity (Annual report of Service Stream Limited. 2017)
Question 2
For the objective of impairment testing the goodwill of the company is allocated to each of the
units or groups which generate cash. All these units and groups which generate cash are then
tested annually for the impairment. Further, if the recoverable sum of such units is less than the
carrying sum the loss of impairment is allocated, then it is mandatory to decrease the carrying
sum followed by a pro rata in the units (Kabir and Rahman, 2016). Further for the impairment of
the intangible excluding goodwill and tangible assets, the company reviews the total carrying
assets to identify any indication which states the impairment loss.
Question 3
By the annual report of the company; impairment losses are recorded in the section of "total
operating expenses" present in an income statement thereby net income of organisation is
decreasing (Wen and Moehrle, 2015). It is also known as an impairment charge. However, it
takes place when a corporate writes-off goods or assets that it assess as damaged, unworthy, or
unusable. Despite a P&L statement, an impairment loss impacts other financial information
abstracts; it is another name given by accountants to the financial report (Sandell and et al.,
2017). Asset’s value impairment generates a fall in the statement of shareholder’s equity change,
as high expenses and reduced income impacts the retained earnings account is an item of equity
statement. Moreover, Low value of asset produces a numerical dent in the balance sheet of
corporate, particularly in the section of total resources.

Question 4
In the current study, the company has made assumptions while using the impairment testing
which was related to discount rates and growth. The company has evaluated the effect of the
company’s organizational structure on the units generating cash and also assessed the enclosure
of obtaining the tech safe area in the water and energy forecast of the cash flows (Annual report
of Service Stream Limited, 2017). The company also evaluates the correctness of the rates of
discounts adopted by the PwC experts of valuations. They have estimated the underlying flow of
cash by assuming that the level of a model of the single client along concerning the current
year’s outcomes and future projects stayed in the pipelines. It also considers the industry data
and market information externally. The company also checks the calculations of the model in
mathematical technique (Annual report of Service Stream Limited, 2017). The calculation
sensitivity reflects that the key assumptions made by the company in the structure are related to
the application of applies other values in a possible and reasonable range for water and energy
business.
Question 5
Most of the features of impairment are extremely doubtful and subjective and often turn into an
illusory. When the subjectivity is given, the treatment of impairment is considered weak in the
manipulation of the P&L and balance sheet (Gronachan and Lemberger, 2016). In general
situations, the company would expect a few portion of the impairment to be written off slowly,
and as the estimated synergies for which the impairment was paid are being used. While in
practice the company hesitant to use impairment as it will provide wrong decision for the
investments.
Question 6
The present study is about the impairment testing of the assets of Service Strea . The interesting
thing about this testing is that if this is done correctly and effectively it will offer the
stakeholders with essential and valuable data and information. In impairment testing the most
confusing point is the company uses it on their own presumptions and calculations supporting the
testing of the assets is bit complex (Sinclair and Keller, 2017). The surprising aspects associated
with the present study were the company is using different process of impairment testing for
goodwill and other process of testing for the tangible assets. The most difficult thing about this

testing was that it is easy to understand, but while implementing it, the company face issues as
each asset has a different testing process.
Question 7
From this study, I have learned about the impairment testing is that the calculations of the cash
flows in these are reasonable and supportable for the company so that they get the best
estimation of the conditions of the economy. Another thing about this testing was that while
calculating the value in use for the future flow of cash it estimates the assets in the current
condition (Kolačević and Hreljac, 2014). It will help the company to know about the cost of
future expenses so that they can intent to enhance or improve the business from the forecast of
cash flows.
Question 8
Based on the present study, it can be stated that the fair value measurement is needed to
calculate the price on which a transaction for selling an asset or transferring the liabilities takes
place among the participants and the markets at the date of measurement under the prevailing
conditions of the market (Cannon and Bedard, 2016). The fair value measurement entails the
company to determine the specific asset and liability which is subject of the calculation, the
market principle of the asset and liability, the technique of valuation and the assumptions made
by the participants and the market. The study also tells about the guidance of the fair value which
includes a company which takes into accounts the features of the assets and the liability.
PART B
Question 1
The chairman of the International Accounting Standards Board believes that the prior accounting
structure for lease did not replicate the reality of the economy. As per the previous model of
accounting for lease, it was essential to have both the lessors and the lessees so that they can
classify the lease differently, as either operating lease or finance lease (Hussey, 2017), whereas
in today’s accounting representation the operating lease is not being recorded in the balance
sheet, and in no doubt they make the real liabilities (Griffith et al., 2015). At the time of financial
crises, some of the major retail companies went insolvent as they were not able to get adjusted to
the sudden change in the new economy.

Question 2
The main reason behind the rise in the lease debt as compared to any other debt was their long-
term commitments on operating lease prevailing in the stores. Additionally, the balance sheet
was showing the misleading information. So the current debt consists of lease obligation which
leads to deficient of comparability (Beckman, 2016). Hence, the prior accounting model reports
that the off-balance sheet liabilities of the lease were 66 times more than the actual debt
calculated on the balance sheet.
Question 3
The chairman of the IASB argued that the previous accounting model of lease was of no status of
playing on the fields for some of the airline's businesses (Vernimmen et al., 2014). This was
because the standards were not appropriate as per the level of comparability, on the other side,
most of the airline companies put a maximum of aircraft on a lease, which is not similar with the
number of competitors, but in reality, the financial obligations can be same (You, 2017). Another
reason can be that, all the companies had different types of standards of bookkeeping, and
because of this differences between the lease structure of the businesses occur.
Question 4
The new accounting standards for lease will affect half of the companies and will not be readily
accepted by everyone because, it will impact their business process, controls and systems. The
new system will require more critical data for applying lease as compared to an earlier model
(Warren, 2016). The companies will not only have to do accounting but will also have to take a
cross-functional approach to implement the process of leasing further.
Question 5
The current visibility of lease will now lead to better investment decisions made by the
stakeholders and will also balance the lease buying decisions by the management. This will be
useful for almost all the companies who are using leasing such as sectors like airlines, shipping
and retailing (Edeigba and Amenkhienan, 2017). The lease is a significant form of the finance
for most of the businesses and listed companies internationally. The chairman expects the
advantages of IFRS 16 to prevail over the costs highly. This will also lead to enhancement in the
allocation of the capital and financial resources which will prove to be beneficial for the growth
and development of the economy of Australia.

REFERENCE
Annual report of Service Stream Limited, 2017. Retrieved on 24th January 2018, from
<https://www.servicestream.com.au/investors/asx-announcements>
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from the field. The Accounting Review, 92(4), pp.81-114.
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Transparency and Accountability: Evidence from New Zealand. Australasian Accounting,
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under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting &
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Kolačević, S. and Hreljac, B., 2014. Fair Value Measurement. Računovodstvo i porezi u praksi,
(3), pp.44-49.

Sandell, N., Sandell, N., Svensson, P. and Svensson, P., 2017. Writing write-downs: The rhetoric
of goodwill impairment. Qualitative Research in Accounting & Management, 14(1), pp.81-102.
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