The Quality of Financial Information in the Annual Report Sample

Question: Analyzed Whether the Disclosures Made are as per the Specific Provisions of AASS. Answer: Introduction Assets are the main part for effective and efficient functioning of an organization and while preparing the financial statements for the year end the amount is written off from the value of an asset as depreciation which is the amount incurred on account of loss of tear and wears, change in technology, etc. Another amount which has been written off from the value of an asset is Impairment. The main aim of this report is to assess the quality of financial information in the annual report. The emphasis has been laid on the Impairment of an Asset. In the first, the requirements of disclosure have been mentioned as per Australian Accounting Standard Board (AASB) 136. Then the disclosure made by the company is discussed and analyzed whether the disclosures made are as per the specific provisions of AASB 136. Thereafter, the difficulties faced in checking whether the assets has been actually impaired or not has been discussed. Then the list of issues have been mentioned which will be consi dered or taken into account by the directors of the company while making the calculations for the impairment of the assets. At the last the study has been closed with proper and adequate conclusion. The report has divided into several parts so as to give the understanding of the concept of Impairment to the readers. Disclsoure Requirements as per AASB 136 Australian Accounting Standards Board 136 provides the guidelines on the topic Impairment of an asset. Following are the relevant disclosures that every company to which this standard shall apply shall comply for each class of asset: The amount of the impairment made for the particular asset shall be charged to the Profit and Loss Account for the relevant period and the statement of comprehensive Income in which the impairment losses are included. The reversal amount of impairment made for the particular asset shall be recognized in the Profit and Loss Account for the relevant period and the statement of comprehensive Income in which the those impairment losses are reversed. In case of revalued assets, the amount pertaining to the impairment losses are recognized the statement of other comprehensive income for the relevant period. In case of revalued assets, the amount pertaining to the reversal of impairment losses are recognized in the statement of other comprehensive income for the relevant period (AASB,2010). The aforesaid requirements are disclosed in the schedule pertaining to the Reconciliation of Carrying Amount for each class of assets where the opening balance and closing balance at the year end is also mentioned. In addition to the above disclosure, following disclosures are further required: Where an entity reports the reportable segment that too in accordance with AASB 8, then its mandatory to disclose by recognizing the amount of impairment loss and reversals thereof in the subsequent period in the Statement of Profit and Loss Account and the statement of comprehensive income for the year end. In case of an individual asset, goodwill or cash generating unit, the entity shall disclose the following: The situations which has happened during the year and has made it important to recognize the impairment loss and reversal thereof if any The amount pertaining to impairment and reversal. In case of an individual asset, its nature and the reportable segment if any. In case of Cash Generating Unit, its description and the amount of impairment and reversal recognized by the segment which is reportable as per the AASB 8. The recoverable amount of any asset is either Fair Value less costs to sale or Value in use. If it is fair value then how it has been arrived and if it is value in use then which discount rate has been used to calculate the flows. In this way, the disclosures are required. Annual Report Complanace with Requirements For facilitating the study further, the company Woolworths Limited has been chosen. The analysis of whether the annual report complies with the disclosure requirements as per the AASB 136 is given below (Woolworths, 2015): As per Note 12 Property Plant and Equipment and Note 13 Intangible Assets of the Annual Report of the Company, the carrying amounts of these assets are arrived after deduction depreciation and the impairment loss. As per Note 12 of the Annual report, it is mentioned as how to calculate the recoverable amount and states that the impairment loss is recognized as and when carrying amount of any assets is increase by its recoverable amount. The statement has been written that the Property Plant and Equipment are checked at each reporting date for impairment and Intangibles are reviewed at least for annual. The procedure of calculating the Recoverable amount has been detailed and stated that the recoverable amount is the higher of Value in use or Fair value less costs to sell. The assumptions regarding the calculation of Value in use and Fair Value has been mentioned and states that for Value in Use the effective discount rate of 13% may be taken as based on the past year records. The reconciliation of the carrying amount at the beginning of the year and year end has been disclosed. It has been disclosed that the no reversals of impairment losses have been made during the year. The impairment loss has been charged to Profit and Loss Account and Statement of Other Comprehensive Income. The company has made separate disclosure for impairment loss on reportable segment Home Improvement and has disclosed that the change in assumptions adopted for calculation will not change the impairment loss amount by so many amounts which can create material effect in the financial statement. In this way, the annual report contains all the matters that is required to be disclosed as per AASB 136. Issues in Impairment Testing One of the major issues that have been confronted by almost all the companies is that till which level the testing for impairment shall be done. This is a very debatable question in this field but it is done as per the past requirements. It depends on the nature and details of the asset and how the allocation is being made for each cash generating units. Second major issue that has been encountered is the difference between the Value in Use and the Fair value. Fair value is the price of an asset which can be easily fetched from the market or the amount investor is ready to pay for the same whereas Value in use is the amount of cash discounted as per the given rate. Third major issue is the usage of discounted rate which is required to calculate the Value in Use. Discount rate shall be as per the relevant rate in the market and shall not be decided in isolation. Without having the correct discount rate, the amount of cash flows will be highly variable and which in turn will not provide the best results. Fourth is that the grouping of assets shall include some types of working capital or short term or current asset (Dolson, 2005). Fifth is that the test for impairment shall be done on regular and periodical basis. The model selected for impairment shall be one which can be easily adapted to the changeable external environment and which can be applied for years to come to an individual or the class of an asset (Chow and Marchev,2010). Last is that the discount rate after tax shall be used while calculating the Value in Use otherwise the 30% pertaining to tax shall be wrongly added to the value of cash flows generating from the various cash generating units. While Calculating Imairment Four major issues which shall be considered while calculating the Impairment: Adoption of Correct Discount Rate First of all the company shall take into account that discount rate which exhibits that the formulae of calculating rate gets itself arranged at the time of any change in the external environment. Also the rate so calculated shall be post tax otherwise the cash flows will higher by the tax amount. Determining the Proper Cash Generating Units The Company shall define the correct cash generating units and that too with proper allocation. Wrong allocation will lead to wrong estimation of the impairment loss. Level of testing the Impairment The impairment shall be checked to that level after which the testing will not serve any purpose. The test for impairment shall be done each year and it should be tested at the low level of the management. It is because the lower level will not in any manner will be the higher of operating segments. Thus, the level shall be as per the needs. Calculation of Value in Use and Fair Value less Cost of Sales It is advised as per AASB 136 that the Fair value less Cost of sales shall be calculated using discounting cash flow technique otherwise it will not be comparable with the Value in Use and thus will always provides wrong results for impairment. Thus, these four shall be considered while performing the calculations. Conclusion Assets play very important role for every organization in order to have future benefits. Along with the maintaining of an asset, the documents of company including the Annual report which contains the financial report of the company. Depreciation and Impairment are the two distinct and different terms which depletes the value of an asset and in the case of latter there can be the place of reversal. In the paper the impairment of assets has been detailed. It has been described by throwing light on the AASB 136 and AASB 8. The description has started from the disclosure requirements as envisaged by the AASB 136 till the issues that will be considered by the top management to review the impairment testing and calculations. Thus, in the way to conclude the study is extensive and the impairment of assets have significant place in the annual report. References Australian Govt, (2010), Impairment of Assets available at https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf accessed on 15/04/2017. Chow E and Marchev M, (2014), Impairment Issues to watch available at https://www.pwc.com.au/assurance/ifrs/assets/ifrsinbrief-se-15may13.pdf accessed on 16/04/2017 Dolson M, (2015), A Look at Current Financial Measures available at https://www.pwc.com/hu/hu/services/assets/ifrs_kiadvanyok/in_depth/testing_for_impairment_in_the_upstream_industries.pdf accessed on 15/04/2017. . Woolworths Official Website, (2015) available at https://www.woolworths.com.au/ accessed on 16/04/.2017.