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
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?
