ACCG224 - Application of Professional Judgment on Impairment Report

This report examines the critical role of professional judgment in financial accounting and reporting, specifically in the context of impairment testing. It uses the annual report of Asaleo Care Limited, an ASX-listed company, as a case study to illustrate the application of professional judgment in various areas, including the determination of discount rates, the assessment of future cash flows, and the evaluation of Cash Generating Unit (CGU) performance. The report explores how accountants utilize professional judgment to make informed decisions in accordance with accounting pronouncements and guidelines, ensuring the preparation of financial statements that provide a true and fair view of a company's financial position. The conceptual framework and AASB 136 are discussed to highlight the importance of consistent interpretation across accounting procedures. The report also addresses the impact of impairment write-downs on assets, the importance of professional judgment when accounting for intangible assets and inventories, and the implications of non-compliance with professional judgment requirements. The report concludes by emphasizing the importance of professional judgment in financial reporting for stakeholders and shareholders.

FINANCIAL ACCOUNTING AND REPORTING
Application of Professional Judgment
On
Impairment Testing

REPORT ASALEO CARE 1
Executive Summary
The following work highlights the significance of the exercise of the professional judgements
in the preparation and presentation of the financial statements for the use of the shareholders
and stakeholders. While, the professional judgements are exercised in the varied areas of the
accounting, the area impairment of assets is highlighted in the work.
The annual report of the ASX listed company Asaleo Care Limited serves as an aid for the
evaluation of the application of professional judgements. Some key areas identified are the
measure of discount rate, future cash flows, expects performance of CGU and others.

REPORT ASALEO CARE 2
Introduction
The preparation of the financial reports is done by the corporations with
the aid of the accounting pronouncements and guidelines. These
guidelines not only aid the stakeholders of the company to gain insight of
the business of company, but also makes the comparison and evaluation
of the financial performance over the years in a systematic manner
(Garrett, Hoitash and Prawitt, 2014). Additionally, financial statements aid
in decisions making for various stakeholder groups in respect of the
performance of corporation. One of the significant elements of the
preparation and presentation of the financial statements is the exercise of
the professional judgement by the accountants.
The reports is aimed at studying the accounting process, relevancy of the
professional judgements with respect to the impairment of the assets in
respect of the ASX listed company Asaleo Care. The report has the
objective of evaluation whether the relevant approaches have been
followed by the entity and the role of the same in provision of information
to the shareholders and other stakeholders of the corporation.
Conceptual Framework and the Role of professional judgements
In order to ensure the uniformity in interpretation across numerous
accounting procedures, the International Accounting Standards Board
(IASB) developed a set of accounting fundamentals and objectives that
are collectively known as the accounting conceptual framework. The ACF
helps the accountants so that they may prepare the report, which can be
understood worldwide. In other words, conceptual frameworks are rules
and principles that should be considered by accountants while dealing
with an issue (Accountingtools.com, 2018). Professional judgment is one
of the aspects in this area, which provides a conceptual framework for the
accountants. Before discussing the importance of professional judgment,
the first meaning of the same is required to understand.

REPORT ASALEO CARE 3
In order to explain professional judgment, this is to state that professional
judgment is the application of required skills gained by training and
experience to the practice. Further, this is highly significant when it comes
to choose one option out of many alternatives. It means professional
judgment helps accountants to take a financial reporting decision, which
is logical, objective and unbiased (Dlbconsulting.com, 2015). Further, in
order to demonstrate the role and significance of professional judgment,
this is to state that before of this principle, one may prepare the financial
statements that reflect the true and fair economic situation of company
(IVAN, 2016).
There are many implications of the failure to comply with professional
judgment requirement. It affects users of accounting information in a
different manner. First, it is required to understand that if professional
judgment would be missing then financial statements will not be able to
provide a true financial condition of the company. Firstly it will affect the
decision of the shareholders and their investment decisions will be
motivated from a false situation. Secondly, debtors of the company will be
affected as they will not be able to know the solvency position of the
company and can give loan more than the repayment ability of the entity
which will further create an issue for them.
Conceptual framework and Impairment Write Downs
The conceptual framework refers to a systematic framework provides the
relevant guidelines to every organisation to prepare the reliable and
relevant financial statements to aid the users of the financial statements
gain knowledge of business functions of the corporation In respect of
Asaleo care, it has been assessed that the annual report of entity has
been prepared as per the conceptual framework guidelines. The AASB 136
on the Impairment of Assets serves as the guide for the organisations regarding the
identification of asset to be impaired, the measurement of the recoverable amount,
additionally, the recognition and measurement of the Impairment Loss, significance of the

REPORT ASALEO CARE 4
cash generating units and the goodwill, Impairment Loss for a Cash-generating Unit, reversal
of an Impairment Loss, and other incidental aspects.
One of the aspects of the annual report is the impairment write-down(s)
made by the company, which are explained and elaborated as follows. As
per the latest annual report of the entity, there is a decrease in the
Property, plant and equipment because of the impairment of Personal Care New Zealand and
the Tissue Australia, together with the impairment in the Intangible assets as well, also due to
the impairment of brands for Tissue Australia, goodwill and brand of the Personal Care New
Zealand (Asaleo Care, 2019a). The total impairment losses amounted to $ 27.302 million for
the year ended on 31st December 2018. The following picture (Picture 1) is descriptive of the
impairment losses in respect of the property, plant and equipment of the entity. Thus, the net
amount of assets are shown after writing down the impairment losses, as follows.

REPORT ASALEO CARE 5
The picture 2 highlights the CGU Level summary of the impairment charge of the entity.
Role of professional judgements in the impairment write-down of the
assets
The following segment is descriptive of the professional judgements as applied in varied
areas for the impairment write-down of the assets. For instance the professional judgements
are used in the valuation of the recoverable value of an intangible asset. Further, the
judgement has a key role to play in the case of the assessment that an asset possesses an
indefinite life. Further, such an assessment of the assets is done at each reporting date. The
role of professional is evident in the provision for impairment of inventories. Here
professional judgement aids in the establishment of the provisions for slow-moving
inventories and the obsolete category of inventories, taking into account the discontinued
lines, the ageing of inventories, the amount of the forecasted sales and the history of the sell
through. Further, the entity reviews the various non-financial assets other than the goodwill
that is faced with impairment in the light of the professional judgements for the possible
reversal of the impairment at the end of each reporting period. The management has
calculated the discount rate as based on the weighted average cost of capital. The discount
rate as computed and estimated accounts for the Group accounts to a pre-tax rate of 11–
11.6%, using the professional judgements (Asaleo Care, 2019b, p. 88). Further, the exercise
of the professional judgements is also evident in the cash flow projections for each CGU.
These have been determines based on prospects of upcoming performance, which is a
subjective matter. In addition, there are key assumptions in the cash flows in relation to the
sales, volume growth and costs of goods sold. The professional judgements of the
expectations of market demand and operational performance of the entity as a whole, form
the base for the said assumptions.
Thus, it can be stated that there is a reasonable application of the professional judgements.
Conclusion
As per the discussions conducted in the previous parts, it can be stated that preparation and
presentation of the financial statements require compliance with guidelines of conceptual
framework, application of statutes and regulations and the exercise of professional
judgements by the management and the accountants of the entity. The report highlighted the
role of the professional judgements in the impairment accounting for the assets. The case

REPORT ASALEO CARE 6
study of the company Asaleo Care was taken to highlight the various aspects of the
impairment accounting and the key areas have been described where the professional
judgement is exercised.

REPORT ASALEO CARE 7
References
Asaleo Care. (2019a). Annual Report 2018 [online] Available from:
https://fy2018.asaleocare.com/ [Accessed on: 28/04/2019].
Accountingtools.com. (2018) Conceptual framework.
https://www.accountingtools.com/articles/2017/5/5/conceptual-framework
Dlbconsulting.com. (2015) Why Is Professional Judgment Important In Accounting?
https://www.dlbconsulting.com/why-is-professional-judgment-important-in-accounting/
IVAN, I. (2016). The importance of professional judgement applied in the context of the
International Financial Reporting Standards. Audit Financiar, 14(142), p.1127.