Question

You are a recent accounting graduate and have been employed in the Financial Reporting Unit of Myer Holdings Ltd, an ASX listed firm. Preparations are underway for the completion of the general purpose financial report for the year ended 29 July 2018 and you have been asked by the Chief Financial Officer to identify any major accounting issues which will need to be considered. Your attention is drawn to a media release by ASIC on 31 May 2018 (ASIC Media Release 17‐162) and this identifies areas of concern where attention will be directed in the ASIC surveillance program. Not surprisingly given a recent academic paper1 ‘impairment of assets’ receives specific mention.

Required:

You are required to prepare a report for the CFO considering whether impairment of assets is an issue requiring address for the firm.

The report should, with reference to AASB 136:

a) With reference to Myer outline what evidence is there that impairment testing of assets is necessary;

b) With reference to Myer outline the processes required to be addressed in determining any asset impairments that might be necessary

c) With reference to Myer outline the information needed in determining asset impairments

d) Evaluate the flexibility management has available in the determination of asset impairments.

Answer 1

Introduction :

Myer Holdings Limited is a Merchant Store Company in Australia. it Operates approximately 60 retail stores located across Australia. Myer Limited Company Deals With a range of products including menswear, Children’s wear, electronics, cosmetics, and accessories among others.

Impairment of Assets occurs on Intangible assets which involve identifiable non-monetary assets that cannot be touched, physically measured or seen.

(a) Possible Of Evidence Of Assets Impairment:

1. Change in the entity's environment such as political, technological, economic, market, and legal involved with Myer Holding Limited needs to ascertain whether it affected the carrying amount of the organization’s assets.

2. Change in sale volume of the organization- There has been noticed a drastic reduction change in the sale volume as shown by the income statement of the year 2018 and that of 2017. This is an evidence of asset impairment such as Goodwill of the organization to the customers could have reduced leading to sale volume reduction.

3. The decline in the value of assets- The provision did on assets for the year financial year ended in July 2018 is more than normal wear and wear, and this could be attributed by asset impairment in Mayer Holdings Limited.

4. Carrying amount of asset in Myer's Holdings Limited is more than that of market value as illustrated in the financial statements and the notes of the financial statements. This is a proper indicator of the asset impairment of the company.

5. Production level in the company reduced since some of the assets has become obsolete. Thus need to test asset impairment in the entity as there is an indication of such cases.

(b) The Procedure Of Testing Asset Impairment :

AASB 136 accounting standards outline the procedures followed in assessing the organization’s asset impairment. This will ensure comprehensive testing and provision of information which is relevant and reliable. The following procedure should be followed

1. Selection of asset to be tested- Someone in charge with the fixed assets sorts the carrying amount of fixed assets by deducting the depreciation of assets provided in that year from the previous book value of the assets. He can use the Pareto principle of determining the depreciation rate, which is 20% for assets that firm 80% of the organization’s fixed assets.

2.Determination of the impairment Level- The discounted future expected Cash flows for each asset is determined, where the value is recorded in the fixed assets register adjusted to the given asset. A note is made in any case the carrying amount of an asset is more than the expected discounted cash flows of the asset. If such notice is done, the asset impairment is calculated by deducting the projected discounted cash flows of the asset from its carrying amount, and then the journal entry is created for the balance in the general ledger as adjusting entry.

3. Updating Accounting Records- The requested general entry is posted to the general ledger by the general ledger Accountant. The impairment is ensured that it is recorded to the fixed assets register for each indicated assets together with the reasons for assets impairment.

(c) Information Needed In Determining The Asset Impairment:

1. Cash Flows And Assumptions :

The cash flow information is needed in the calculation of assets impairment Myer Holdings limited as this will assist in the prediction of future cash flows of the organization. Discounted Cash flow is used for fewer disposal costs to determine the fair value of the asset.

2. The asset value- To determine the carrying amount of the asset as the records in the balance sheet

3. Income statement to evaluate the financial performance of the firm and check whether there is an increase or decrease in the sale volumes.

(d) The Flexibility The Management Has Available In Determining The Asset Impairment :

1. Each director has the duty of skill, competence, and diligence to understand the information contained in the financial report of the organization and ascertain whether the information contained reflect the true and fair view of financial affairs of the organization. Directors and financial reports(INFO 183). Thus the audit committee and the management should understand the need and adequacy of assets impairment and the adequacy of the related closure of such information. The management should have adequate skills in matters about assets impairment.

2. The management should have sufficient information about the asset impairment and can instruct both internal and external auditors and experts and to monitor them and review the performed work and report, "International Journal of Amortization versus Impairment of Goodwill and Accounting Quality".

3. Myer Holdings Limited is an established firm and has an appropriate review process including review of independent work, sufficient authority, experience, and expertise. This makes the flexibility of management in determining the asset impairment easy.

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