Impairment Write-Downs in Australian Companies: Wesfarmers Analysis

This report provides a comprehensive analysis of impairment write-downs for Wesfarmers Limited, a prominent Australian retailer. The report begins with an overview of impairment write-downs, detailing the specific assets tested, including property, plant, and equipment, trade receivables, goodwill, and other intangible assets. It then delves into the complexities and key issues in impairment accounting, focusing on cash-generating units, the differences between fair value and value-in-use, and the use of appropriate discount rates. The report subsequently assesses Wesfarmers' compliance with AASB 136 disclosure requirements, providing specific examples from the company's annual report. Finally, it evaluates the alignment of Wesfarmers' impairment accounting with the objectives of general-purpose financial reporting, highlighting areas of compliance and suggesting potential improvements. The report concludes by emphasizing the importance of accurate impairment calculations in portraying a company's true asset position and overall financial health, while also suggesting areas for future improvement in Wesfarmers' impairment testing practices.

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Executive Summary
This report aims on the analysis of the impairment write downs for the Australian companies and
Wesfarmers Limited is selected. The first party of the report shows all the details of impairment
write downs in the company. The second part of the report shows complexities and key
challenges in impairment accounting. The third part shows the compliance of Wesfarmers with
the standards of AASB 136 for impairment calculation. The last part of the report shows the
compliance of impairment accounting of Wesfarners with the objectives of general purpose
financial reporting. As per this report, three main areas where Wesfarmers face complexity are
Cash Generating Units and Segments, Difference between Fair Value and Value-in-use and Use
of Appropriate Discount Rate. It can also be observed that the company has done necessary
disclosures as per AASB 136 along with aligning with the objectives of general purpose financial
reporting

Table of Contents
Introduction......................................................................................................................................1
a. Details of Impairment Write Downs............................................................................................1
b. Complexities and Key Issues in Impairment...............................................................................2
c. AASB 136 Disclosure Requirements...........................................................................................3
d. Alignment with the Objectives of General Purpose Financial Reporting...................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................8

1ACCOUNTING STANDARDS AND PRACTICE
Introduction
In the recent business era, utmost importance is provided on the quality of financial
information provided by the business entities as this information provides great aid in the
decisions-making process (Kabir and Rahman 2016). This particular report aims on the analysis
of the impairment write downs for the Australian companies and Wesfarmers Limited is selected
as it is one of the leading retailers of Australia (wesfarmers.com.au 2018). The first part critically
identifies and analyzes the impairment write downs in Wesfarmers. The aim of the second part is
to highlight the complexities and issues in the impairment testing of Wesfarmers. The third and
fourth part of the report analyzes the compliance of Wesfarmers with disclosure requirement and
objectives of general purpose financial reporting.
a. Details of Impairment Write Downs
As per the 2017 Annual Report of Wesfarmers, property, plant and equipment, trade
receivables, freehold property, goodwill and other intangible assets along with non-financial
assets are tested for impairment. For property, plant and equipment, Wesfarmers test them at cost
value less depreciation and impairment (wesfarmers.com.au 2018). Impairment is recognized in
the income statement for trade receivable when the evidence is obtained that the company will
not be able to recover the debt. Goodwill is initially recognized at cost and after that, it is carried
out at cost less impairment losses. In case of other intangible assets, they are recognized at fair
value and after that, they are carried out at cost less impairment losses and amortization
(wesfarmers.com.au 2018).
It is required for the Australian organizations to review their assets in order to ensure that
whether there is any sign of impairment of the assets on not and Wesfarmers has also adopted the
same strategy. In Wesfarmers, the main reason behind the impairment testing of their assets is
the change in technology or liquidation plan of any business operation (wesfarmers.com.au
2018). Apart from this, another major reason in Wesfarmers for impairment testing is the
decrease in the usefulness of the assets and the value of estimated economic benefits associated
with these assets (wesfarmers.com.au 2018). The following table shows the value of asset
impairment in Wesfarmers for the year 2017 and 2016:

2ACCOUNTING STANDARDS AND PRACTICE
Particulars 2017 ($ m) 2016 ($m)
Impairment of plant, equipment and other assets 27 954
Impairment of Leasehold Property 22 10
Impairment of Goodwill - 1,208
b. Complexities and Key Issues in Impairment
Certain complexities and issues in impairment testing of Wesfarmersca can be seen in the
following aspects:
Cash Generating Units and Segments: The major question related to impairment is the level at
which impairment needs to be done. It depends on the asset test and other assets in order to
obtain cash flows. Assets like brand name, machine and building requires other assets in order to
support carrying value. Thus, there is a requirement of impairment test for these assets that can
result in independent cash flow from other businesses (Linnenluecke et al. 2015).
Difference between Fair Value and Value-in-use: The use of fair value shows that how much
an investor would incur for an assets where value-in-use shows the ability of asset to generate
cash flow (Zhuang 2016). This difference creates complexity in the process of impairment
testing. For example, fair value takes into account risks, costs and benefits for restricting or
improvement in assets. On the contrary, value-in-use leads to the compromise of their synergies
and economies of sales that is specific to the organization (Bond, Govendir and Wells 2016).
Use of Appropriate Discount Rate: For the determination of value-in-use related with
impairment testing, many organizations use Capital Asset Pricing Model (CAPM) and Weighted
Average Cost of Capital (WACC) for ascertaining the rate of discount. These methods are
validated in case there is not any variation between the related risk and cash garneting unit.
However, in actual, variation in discount rates can be seen for various cash generating units. The
main reasons of this are currency risk, country risk, product risk and the maturity of market
(Bond, Govendir and Wells 2016).

3ACCOUNTING STANDARDS AND PRACTICE
c. AASB 136 Disclosure Requirements
Paragraph 126 (a) of AASB 136 puts the obligation on the companies to realise loss of
impairment in the income statement (aasb.gov.au 2018). In case of Wesfarmers, the company has
provided the amount of impairment loss in the income statement that can be found in 2017
Annual Report, page no. 94.
(Source: wesfarmers.com.au 2018)
Paragraph 126 (b) of AASB 136 has made it mandatory for the disclosure of amount of
reversal realized in the income statement for the specific accounting year (aasb.gov.au 2018). For
the reversals of impairment, Wesfarmers ascertains whether there is any change in inherent
estimated used by the company for the determination of recoverable amounts of the assets from
the realization of last impairment. In Wesfarmers, there is any reversal of impairments loss for
the year 2017 and it can be found in 2017 Annual Report page no. 125.

4ACCOUNTING STANDARDS AND PRACTICE
(Source: wesfarmers.com.au 2018)
As per Paragraph 130 (g) of AASB 136, in case the recoverable value of any cash
generating unit is discovered in value-in-use, there is a need to use the discount rate in current
and past estimates related to value-in-use (aasb.gov.au 2018). For this purpose, Wesfarmers has
made some key assumptions for the determination of recoverable amounts from different cash
generating units and it can be observed in 2017 Annual Report, page no.126.
(Source: wesfarmers.com.au 2018)
Paragraph 80 of AASB 136 puts the obligation for the allocation of goodwill to a class of
cash generating units estimated for overall benefits (aasb.gov.au 2018). Wesfarmers has done the

5ACCOUNTING STANDARDS AND PRACTICE
allocation of goodwill to a group of cash generating units and it can be found in 2017 Annual
Report, page no. 111.
(Source: wesfarmers.com.au 2018)
Thus, based on the above discussion, it can be concluded that Wesfarmers has fully met the
disclosure requirement of impairment as per AASB 136.
d. Alignment with the Objectives of General Purpose Financial Reporting
Capital investors can become beneficial by obtaining information from general purpose
financial reporting. Paragraph 70 of the Conceptual Framework states that impairment loss
needs to be recognized in case of the non-recovery of carrying amount of an asset (aasb.gov.au
2018). Wesfarmers recognizes their impairment loss in case the asset carrying amount is more
than its recoverable amount and it can be found in 2017 Annual Report, page no, 105.
(Source: wesfarmers.com.au 2018)

6ACCOUNTING STANDARDS AND PRACTICE
As per Paragraph 130 of the Conceptual Framework, companies are required to estimate cash
flow from the organizational perspective rather than market perspective for the impairment of
assets under AASB 136 (aasb.gov.au 2018). Wesfarmers has not generated independent cash
flows and one cannot project value-in-use near to the fair value and it can be found in 2017
Annual Report, page no. 125.
(Source: wesfarmers.com.au 2018)
Thus, based on the above discussion, it can be concluded that the impairment related
disclosure of Wesfarmers fully align with the requirement of general purpose financial reporting.
However, the company is required to put emphasis on some of the major aspects to bring
improvement in impairment testing like emphasis on foreign currency cash flow, alignment of
impairment information with market data, consideration of market capitalization and the scrutiny
of discount rate.
Conclusion
From the above discussion, it can be seen that the correct calculation of imapitement
write-downs has major significant in the companies as it helps in depicting the correct asset
position of them. The above discussion shows that the major assets considered for impairment in
Wesfarmers are property, plant and equipment, trade receivables, freehold property, goodwill
and other intangible assets along with non-financial assets. In addition, from the above
discussion, it can be concluded that Wesfarmers has fully complied with all the impairment

7ACCOUNTING STANDARDS AND PRACTICE
related requirement of AASB 136. It also has fully aligned with the objectives of general purpose
financial reporting. All these facts imply that Wesfarmers has carried out impairment accounting
in the correct manner by complying with all the requirements and standards.

8ACCOUNTING STANDARDS AND PRACTICE
References
Aasb.gov.au. (2018). Conceptual Framework for Financial Reportin. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 28 Apr.
2018].
Aasb.gov.au. (2018). Impairment of Assets. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
[Accessed 28 Apr. 2018].
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by
Australian firms and whether this was impacted by AASB 136.
Group, D. (2018). Who we are . [online] Wesfarmers.com.au. Available at:
http://www.wesfarmers.com.au/who-we-are/who-we-are [Accessed 28 Apr. 2018].
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.
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.
Wesfarmers.com.au. (2018). Annual Report 2017. [online] Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed 28 Apr. 2018].
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and
whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.