Question

Discuss how the current economic restrictions caused by COVID-19 affect Australian reporting entities in applying AASB 136 Impairment of Assets.

Need two examples to relate to the essay topic of discussion as stated above.

Thank you.

Answer 1

Answer :

AASB 136 Impairment of Assets requires an entity to assess other finite non-financial assets for impairment when impairment indicators exists, while goodwill, indefinite-lived intangible assets and intangible assets not yet ready for use are required to be tested for impairment at least every year. Detailed examples of indicators of impairment are included in AASB 136.12.

The most relevant indicators are included below - note that this list is not exhaustive.

Given the prevalence of certain of these indicators, we encourage management to undertake impairment testing as appropriate. External indicators • Observable indicators of decrease in value; • Significant changes with an adverse effect on the entity have taken place during the period in the economic environment in which the entity operates or in the market to which an asset is dedicated; • The carrying amount of the net assets of the entity is more than its market capitalisation.

Internal indicators • Assets becoming idle; • Evidence that economic performance is worse than expected; • Plans to dispose of an asset; • Plans to restructure. Due to the temporary interruption of operations and potential ongoing uncertainty, an immediate decline in demand and reduction of profitability can be expected. These declines must be included as key assumptions in ViU forecasts with clear, reasonable, and auditable assumptions included in the model. It is not reasonable, in the current environment, for most entities to forecast growth from the comparative period. It is also likely, given the recent volatility of capital markets, that: • Beta for the entity may increase (as a result of increased risk related to forecasts given increased uncertainty);and • The indicated cost of equity may increase; resulting in increases in the weighted average cost of capital and decreases in the net present value of future cash flows. Impairment is thus likely to be expected in many instances. Where impairment results upon the application of the ViU model, the Fair Value less Costs of Disposal model must be considered.

Reference should be made to closed and completed transactions, while minimising reliance upon fire sales of assets or asset groups that may have occurred. In the current environment, it may be difficult to determine a current fair value in the absence of arms-length transactions between willing parties. As a reminder, the entities using a single predicted outcome approach should make adjustments to incorporate the risk associated with COVID-19. The associated risks could be either reflected in the cash flows or the discount rate while ensuring the long-term growth assumptions are appropriate. No matter which approach is used (multiple probable outcome or single predicted outcome), management must ensure the outcome reflects the expected present value of future cash flows.

Impairment of long-lived assets Individual long-lived assets should be assessed for impairment where indicators of impairment are identified. For certain assets, this may be best achieved by reference to the Cash Generating Unit that the asset operates within. For others, particularly where an observable Fair Value less Costs of Disposal exists, it may be appropriate to test for impairment at the asset level, notwithstanding a lack of independent cash inflows being able to be generated by the asset (AASB 136.22). Classes of long-lived assets likely to be impacted include: • Right-of-use lease assets; • Property, plant and equipment; • Intangible assets.

Other assets potentially subject to impairment Entities may have assets that are subject to impairment testing that do not qualify as long-lived assets and are not financial assets. These assets should be assessed for impairment, particularly where these amounts reflect historic transactions with third parties where the creditworthiness of these third parties is now called into question. Examples include: Security deposits held by third parties What is the creditworthiness of the counterparty - is the deposit recoverable? Prepayments Does the counterparty retain its ability to provide the prepaid services? E.g. prepaid software maintenance.