HA 3011 Advanced Financial Accounting

A 3011 Advanced Financial Accounting

Assessment item 2 — Assignment

Due date: 11.00pm Friday Week 10

Weighting: 20%

Assessment Task Part A (10 Marks)

In the excel file “Find Your Company” you will find the listed company you have been given

for this course. This file will be made available on Friday of Week 4. Complete this assignment

for the company you have been given. Please be careful to use the listed company you have

been given. Your assignment will not be marked if you use a different company to the one you

have been given; and you will be asked to resubmit your assignment using the right company.

Go to the website of your company, by clicking on the URL next to your company in the list

of companies in the file “Your Company”. Then go to the Investor Relations section of the

website. This section may be called, “Investors”, “Shareholder Information” or similar name.

In this section, go to your firm’s annual reports and save to your computer your firm’s latest

annual report. For example, these may be dated 30 June 2015 or 31 March 2016. Do not use

your firm’s interim financial statements or their concise financial statements. You are need to

do the following tasks:

Please read the relevant footnotes of your firm’s financial statements carefully and include

information from these footnotes in your answer.

Within your firm’s latest annual report

(i) From your firm’s annual report find out the asset/s that your firm has tested for impairment.

(ii) How did your firm conduct the impairment testing?

(iii)Has your firm recorded any impairment expenditures during the period?

(iv) Identify the key estimates and assumptions used by your firm in conducting the impairment testing.

(v) Do you find any sort of subjectivity involved in the impairment testing process? How can this subjectivity influence the outcome of the impairment testing?

(vi) What do you find interesting, confusing, surprising or difficult to understand about the impairment testing?

(vii) What new insights, if any, have you gained about how companies conduct impairment testing?

(viii) Based on your assignment, comment on the “fair value measurement”.

For your understanding of the impairment testing process, you may download and read the

following articles using ProQuest:

1. Md Khokan Bepari, Sheikh F. Rahman, Abu Taher Mollik, (2014) “Firms’

compliance with the disclosure requirements of IFRS for goodwill impairment

testing: Effect of the global financial crisis and other firm characteristics”, Journal

http:/ganizational Change, Vol. 10 Issue: 1, pp.116-

149, https://doi.org/10.1108/JAOC-02-2011-0008

2. Carlin, T.M. and Finch, N. (2010), “Resisting compliance with IFRS goodwill accounting and reporting disclosures evidence from Australia”, Journal of Accounting

& Organizational Change, Vol. 6 No. 2, pp. 260-280. [Google Scholar] [Link]

[Infotrieve]

3. Carlin, T.M. and Finch, N. (2011), “Goodwill impairment testing under IFRS: a false impossible shore?”, Pacific Accounting Review, Vol. 23 No. 3, pp. 368-392. [Google

Scholar] [Link] [Infotrieve]

4. Carlin, T.M., Finch, N. and Laili, N.H. (2009), “Goodwill accounting in Malaysia and the transition to IFRS – a compliance assessment of large first year adopters”, Journal

of Financial Reporting & Accounting, Vol. 7 No. 1, pp. 75-104. [Google Scholar]

[Link] [Infotrieve]

Assessment Task Part B (10 Marks)

In an address entitled ‘introductory comment to the European parliament’ (made in Brussels,

Belgium) on 11 January 2016, the Chairperson of the IASB, Hans Hoogervorst, made the

following comments in relation to the new accounting for leases (as reported 11 January 2016

on the IASB website at www.ifrs.org):

I would like to make some comments about our upcoming Leases Standard, which we will

publish the day after tomorrow. Currently, listed companies around the world have around 3

trillion euros’ worth of leases, especially in sectors such as the airline industry, retail and

shipping. Under current accounting requirements, over 85 per cent of these leases are labelled

as operating leases and are not recorded on the balance sheet. Clearly, the accounting today

does not reflect economic reality. Despite operating leases being off balance sheet, there can

be no doubt that they create real liabilities. During the financial crisis, some major retail chains

went bankrupt because they were unable to adjust quickly to the new economic reality. They

had significant long-term operating lease commitments on their stores, and yet had deceptively

lean balance sheets. In fact, their off balance sheet lease liabilities were up to 66 times greater

than the debt reported on their balance sheet. Moreover, the current accounting for leases leads

to a lack of comparability. An airline that leases most of its aircraft fleet looks very different

from its competitor that bought most of its fleet, even when in reality their financing obligations

may be very similar. There is no level playing field between these companies. These problems

will be resolved in the upcoming Leases Standard. All leases will be recognised as assets and

liabilities by lessees. The accounting will better reflect the underlying economics. This change

is expected to affect roughly half of all listed companies and will not be popular with everyone.

Accounting changes are often controversial and can be met with warnings of adverse economic

effects and costs of system changes. The IASB has looked at all these possible risks very

carefully and we will publish a detailed effect analysis on the Standard. Our conclusion is that

the risks and costs of the new Leases Standard are manageable. First of all, IFRS 16 will not

put the leasing industry out of business. Leases will remain attractive as a flexible source of

finance. It will remain appealing to companies to lease assets so that they do not bear the risks

of owning them. While the cosmetic accounting benefits of leasing will disappear, the real

business benefits of leasing will not change as a result of the new Standard. We do not deny

there will be costs involved in updating systems to implement the new Leases Standard, but

we have done our best to keep these costs to a minimum. For example, we are not requiring

companies to recognise assets and liabilities for short term and small ticket leases. This should

be especially beneficial for smaller companies. In sum, we expect the benefits of the new

Leases Standard to greatly outweigh its costs. The new visibility of all leases will lead to better

informed investment decisions by investors, and to more balanced lease-versus-buy decisions

by management. IFRS 16 will lead to improved capital allocation, which should be beneficial

for economic growth.

Requirements

(i) Explain why the chairperson of the IASB believes that the former accounting standard for

leases did ‘not reflect economic reality’?

(ii)Explain the reason why, under the former accounting standard, reporting entities’ ‘off

balance sheet lease liabilities were up to 66 times greater than the debt reported on their

balance sheet’.

(iii) Why does the Chairperson of the IASB argue that under the former accounting standard

for leases there was ‘no level playing field’ between some airlines companies?

(iv) Why do you think the Chairperson of the IASB said that the new accounting standard for

leases ‘will not be popular with everyone’? What would cause this unpopularity?

(v) What are some of the possible reasons why the chairperson of the IASB would say “the

new visibility of all leases will lead to better informed investment decisions by investors, and

to more balanced lease versus buy decisions by management?