University Assignment: Impairment Testing of JB Hi-Fi Limited

This report provides an in-depth analysis of the application of professional judgment in impairment testing, focusing on the case of JB Hi-Fi Limited. It begins with an overview of the importance of professional judgment in accounting, including its role in ensuring the quality of financial information and ethical practices. The report then examines the impaired assets of JB Hi-Fi, the estimations used for impairment write-downs, and the relevant disclosures in the 2018 annual report. It assesses the suitability of the professional judgments made by the organization, considering aspects like cash flow assumptions and compliance with ASIC regulations. The analysis concludes by evaluating the alignment of these judgments with the objectives of general purpose financial reporting, highlighting areas where improvements could be made to enhance the quality and transparency of financial reporting. The report emphasizes the critical role of professional judgment in financial reporting and offers recommendations for better adherence to accounting standards and regulations.

Running head: APPLICATION OF PROFESSIONAL JUDGEMENT ON IMPAIRMENT
TESTING
Application of Professional Judgment on Impairment Testing
Name of the Student:
Name of the University:
Author’s Note:
Course ID:
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APPLICATION OF PROFESSIONAL JUDGEMENT ON IMPAIRMENT TESTING
Executive Summary:
The initial section of the report has emphasised on the value of professional judgement in the
accounting profession. The second part analyses the impairment testing of JB Hi-Fi Limited
based on its disclosures made in the 2018 annual report. The next section has laid stress on
the suitability of the used professional judgements of the organisation. Finally, the report has
shed light on investigating whether the applied professional judgements of the organisation
are in line with the objectives of general purpose financial reporting.
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APPLICATION OF PROFESSIONAL JUDGEMENT ON IMPAIRMENT TESTING
Table of Contents
Introduction:...............................................................................................................................3
Requirement a:...........................................................................................................................3
Role played by professional judgement in accounting:.........................................................3
Two implications on the accounting information users in case of inappropriate professional
judgement:..............................................................................................................................3
Requirement b:...........................................................................................................................4
Impaired assets of JB Hi-Fi Limited:.....................................................................................4
Estimations needed for writing impairment:..........................................................................4
Amount of write-down of impairment:..................................................................................4
Relevant disclosures in the latest financial report with respect to impairment testing:.........5
Requirement c:...........................................................................................................................5
Requirement d:...........................................................................................................................6
Conclusion and recommendation:..............................................................................................6
References:.................................................................................................................................8
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Introduction:
The financial reports provide useful information to the users regarding the financial
health of a particular organisation in order to assist them in making investment decisions
(Rennekamp, Rupar and Seybert 2014). The higher-level management of the organisation
uses a number of accounting models, projections and professional judgement before the
financial reports are presented to the users. The current report is focused on evaluating the
various aspects related to impairment testing of JB Hi-Fi Limited, which is the biggest home
entertainment retailer in Australia (Jbhifi.com.au 2019).
Requirement a:
Role played by professional judgement in accounting:
Professional judgement includes accounting expertise and knowledge as two
significant elements and they have immense value in the accounting field as well. The
accurate application of accounting expertise and knowledge coupled with practical training
assists in ascertaining the quality of reported financial information (Banker, Basu and
Byzalov 2016). Therefore, professional judgement plays a pivotal role in undertaking
accurate decisions. One of the significant concerns confronting the accounting profession in
the current era is ethics, since the professional does not have the same credibility owing to
various accounting scandals that have taken place globally in the past. With the help of sound
professional judgement, ethics could be maintained within the profession necessary to ensure
professional success. Thus, the role of professional judgement is crucial in terms of
disclosure of quality financial information to the financial statement users (Carvalho,
Rodrigues and Ferreira 2016).
Two implications on the accounting information users in case of inappropriate
professional judgement:
When professional judgement is not appropriate, there are two possible implications
on the users of accounting information, which are discussed as follows:
 Firstly, it is not possible to gain an understanding of the actual financial health of an
organisation due to lack of relevant or proper professional judgement. In this manner,
the financial statement users would be misguided regarding the financial standing of
the organisation in its operating markets (Coste, Tudor and Pali-Pista 2014).
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 Secondly, due to the use of inappropriate professional judgement resulting in
inaccurate financial information, it is likely that the users would undertake wrong
investment decisions that would minimise their overall return on investment (Paugam
and Ramond 2015).
Requirement b:
Impaired assets of JB Hi-Fi Limited:
From the annual report of JB Hi-Fi Limited in 2018, it has been identified that the
assets impaired include leasehold improvements, intangible assets having indefinite economic
lives and plant and equipment. Impairment has been recorded by the organisation for its plant
and equipment in 2018; however, there has been no impairment recognition for intangible
assets (Member.afraccess.com 2019).
Estimations needed for writing impairment:
Based on the latest annual report of JB Hi-Fi Limited, it is necessary to use a number
of significant estimations for impairment write-downs. These estimations include cost of
conducting business, growth in revenue, gross margin and discount rate. These estimations
are generally made from previous experience along with projected financial and operating
performance of the organisation for each cash-generating unit (CGU) (André, Dionysiou and
Tsalavoutas 2018). The discount rate is obtained from cost of capital, after which adjustment
is made for different risk profiles (Member.afraccess.com 2019).
Amount of write-down of impairment:
The below-stated table reveals the write-down of impairment for different assets of JB
Hi-Fi Limited:
From the above table, it could be witnessed that JB Hi-Fi has impaired its plant and
equipment by $0.7 million in 2018 compared to $1.1 million in 2017. Even though goodwill
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has been impaired by $14.7 million in 2017, there has been no impairment of the same in
2018.
Relevant disclosures in the latest financial report with respect to impairment testing:
The organisation conducts impairment test of its leasehold improvements and plant
and equipment, if it finds the carrying values of these assets to be irrecoverable owing to
alterations in circumstances and events, in accordance with AASB (IAS) 36 (Komissarov,
Kastantin and Rick 2014).
In terms of goodwill impairment, JB Hi-Fi assigns goodwill to each CGU or group of
CGUs, since they are expected to fetch benefits arising out of the benefits of business
combination. In order to ascertain the recoverable amount of a CGU, value-in-use is
generally used and JB Hi-Fi is not an exemption (Darrough, Guler and Wang 2014). Finally,
the organisation assigns brand names and goodwill to the group of CGUs so that impairment
testing could be conducted effectively.
Requirement c:
Based on the ASIC media release, different matters are involved with cash flow
assumptions and these assumptions mainly comprise of funding cost, previous cash flows and
market and economic conditions (Asic.gov.au 2019). Long-term growth rate of 2.5% is used
by JB Hi-Fi so that cash flows could be extrapolated beyond budget. However, this
assumption generally does not include funding cost and previous cash flows (Linnenluecke et
al. 2015). Hence, JB Hi-Fi needs to incorporate all aspects in order to undertake its cash flow
assumptions.
Moreover, according to ASIC, discounted cash flows need not be used for
ascertaining fair value minus disposal cost due to the lack of reliability on assumptions and
forecasts (Detzen, Wersborg and Zülch 2015). In case of JB Hi-Fi, it has used discount rate of
10% denoting the presence of reliable assumptions and forecasts.
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The organisations are obliged by ASIC of not using increasing cash flows after five
years without taking into account the offsetting effect on discount rate (Kabir and Rahman
2016). Due to this, JB H-Fi has used extrapolation method in order to take into account the
impact of cash flows above five years. Moreover, ASIC restricts the organisations in
identifying CGUs at excessively high levels, in which cash flows of an individual asset are
dependent (Sinclair and Keller 2014). By taking into consideration this aspect, JB Hi-Fi has
grouped its CGUs at lower level where there are distinct identifiable and considerably
independent cash flows.
Corporate assets and costs are required to be allocated to the CGUs suitably, in which
reasonableness regarding allocation could be identified (Chen, Krishnan and Sami 2014).
However, these judgements and estimations are found to be missing in the financial reports of
JB Hi-Fi and hence, it is advised to take into account these aspects. Finally, according to
ASIC, organisations are required using fair value effectively in order to conduct exploration
testing. No such disclosure could be found from the latest annual report of JB Hi-Fi, which it
has to consider for enhancing the quality of financial reporting.
Requirement d:
In accordance with general purpose financial reporting (GPFR), organisations have
the obligation to report about their financial position in the market (Su and Wells 2015). The
second objective needs the organisations to reveal their financial performance and the final
objective is to provide cash flow information to the users for decision-making. In addition,
the financial reports presented have to be relevant and represented faithfully. JB Hi-Fi has
applied necessary professional judgements in relation to impairment that carry relevance to
the users. However, it has failed to include certain aspects discussed in the earlier sections in
its financial reports that lack professional judgement and faithful representation (Yallwe and
Buscemi 2014). Therefore, it could be stated that the applied professional judgement are not
aligned completely to the GPFR objectives.
Conclusion and recommendation:
From the above analysis, it is apparent that the role of professional judgement is
crucial, as it possesses the ability of affecting the financial information quality and decision-
making process of the users. The analysis clearly reveals the fact that JB Hi-Fi has reported
the required information of asset impairment in its latest annual report and majority of them
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adhere to the prevailing standards. However, the organisation has to take into account the
ASIC regulations for enhanced impairment testing and reporting of assets.
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References:
André, P., Dionysiou, D. and Tsalavoutas, I., 2018. Mandated disclosures under IAS 36
Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on analysts’
forecasts. Applied Economics, 50(7), pp.707-725.
Asic.gov.au., 2019. 18-159MR Major changes affecting reported net assets and profit, and
other focuses for 30 June 2018 reporting | ASIC - Australian Securities and Investments
Commission. [online] Available at: https://asic.gov.au/about-asic/news-centre/find-a-media-
release/2018-releases/18-159mr-major-changes-affecting-reported-net-assets-and-profit-and-
other-focuses-for-30-june-2018-reporting [Accessed 28 Apr. 2019].
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.
Carvalho, C., Rodrigues, A.M. and Ferreira, C., 2016. The recognition of goodwill and other
intangible assets in business combinations–The Portuguese case. Australian Accounting
Review, 26(1), pp.4-20.
Chen, L.H., Krishnan, J. and Sami, H., 2014. Goodwill impairment charges and analyst
forecast properties. Accounting Horizons, 29(1), pp.141-169.
Coste, A.I., Tudor, A.T. and Pali-Pista, S.F., 2014. Compliance of Non-current Assets with
IFRS Requirements Concerning the Information Disclosure–Case Study. Procedia
Economics and Finance, 15, pp.1391-1395.
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.
Detzen, D., Wersborg, T.S.G. and Zülch, H., 2015. Bleak weather for sun-shine AG: A case
study of impairment of assets. Issues in Accounting Education, 30(2), pp.18-39.
Jbhifi.com.au., 2019. JB Hi-Fi | JB Hi-Fi - Australia's Largest Home Entertainment Retailer.
[online] Available at: https://www.jbhifi.com.au/ [Accessed 28 Apr. 2019].
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Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion
under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting &
Economics, 12(3), pp.290-308.
Komissarov, S., Kastantin, J.T. and Rick, K., 2014. Impairment of Long-Lived Assets: A
Comparison under the ASC and IFRS. The CPA Journal, 84(5), p.28.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Member.afraccess.com., 2019. [online] Available at: http://member.afraccess.com/media?
id=CMN://3A498121&filename=20180813/JBH_02008547.pdf [Accessed 28 Apr. 2019].
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.
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset
impairment reversibility and cognitive dissonance on future investment. The Accounting
Review, 90(2), pp.739-759.
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.
Su, W.H. and Wells, P., 2015. The association of identifiable intangible assets acquired and
recognised in business acquisitions with postacquisition firm performance. Accounting &
Finance, 55(4), pp.1171-1199.
Yallwe, A.H. and Buscemi, A., 2014. An era of intangible assets. Journal of Applied Finance
and Banking, 4(5), p.17.
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