Impairment Of Assets And Lease Accounting Standards In Credit Corp Group Limited’s Annual Report
Impairment testing procedures for Credit Corp Group Limited
Credit Corp group has conducted impairment testing annually for goodwill and other intangible assets. Recognition of provision of impairment is done as indicated by objective evidence that impairment of trade receivables are done. Goodwill is tested for the impairment as indicated by change in circumstances or events. Recognition of trade receivables are done at fair value by deducting any amount of impairment loss attributable to that particular asset. Moreover, impairment recognition is done as indicated by objective evidences of conducting impairment of assets (Creditcorp.com.au 2017). In the current financial year, organization has tested goodwill and other intangible assets for the purpose of impairment.
Allocation of goodwill is done to the municipal collections operating unit of the group for the purpose of impairment testing. The lowest level with the group is represented by operating unit at which the monitoring of goodwill is done for the purpose of internal management. Assessment of impairment is done by group at least on annual basis. Recognition of impairment loss is done when the carrying value of assets is more than their recoverable amount. Assets recoverable amount is highest of the value in use or fair value minus cost to sell (Creditcorp.com.au 2017).
Credit Corp Group limited has not recorded any impairment expenses for the financial year 2017 and 2016 respectively. The reason for organization not recording any impairment expenses is that in the current financial year, there was no impairment of any relevant assets and liabilities (Creditcorp.com.au 2017). However, only the impairment provision was made in financial year 2017 in relation to the trade receivables.
When assessing the impairment of liabilities and assets, Credit Corp Group limited is required to determine the carrying value of liabilities and assets. In determining the carrying value, management of the group is required to make estimates and assumptions as they are not readily available for other apparent sources. Estimation and assumptions are based on relevant factors and historical experience. A reasonable expectation of future events is assumed for determining estimated figures that are based on economic data and current trend both within the group and that are obtained externally. Underlying assumptions and estimates are reviewed on an ongoing basis (Creditcorp.com.au 2017).
Analysis of annual report of Credit Corp Group limited depicts that it has not adopted or adhered to accounting standard AASB 136. As per the standard, an organization can incorporate substantial amount of subjectivity in their procedure of impairment testing and enabling managers to act opportunistically (Maynard 2017). It provides management with opportunities to act at their discretion when testing assets for impairment. However, involvement of subjectivity in the methodology will not provide users with appropriate input concerning impairment. Evaluation of annual report of company concerning impairment testing depicts that management might have incorporated some degree of subjectivity in their process of impairment testing.
Objective evidence for recognizing impairment
After the evaluation of analysis of annual report of Credit Corp Group limited, it has been ascertained that users of financial statement will not be able to gather much information regarding impairment of assets. It was quite surprising to find that there was not detailed presentation and disclosure of the assets that are impaired. Moreover, there was provision of only impairment of trade receivables and no provisions made for any other assets.
Evaluation of annual report of Credit Corp Group limited provides user with the illustration that there were no different impairment testing procedures compared to other companies. There were no new insights that are gained by users of the financial statements as the information’s presented on impairment was limited. Moreover, notes to financial statement do not make any disclosures about the impairment testing in detail and most of the information’s are pertaining to impairment provision of trade receivables. Information has been presented in the movement of impairment provision that depicts net changes in the impairment. Disclosures regarding impairment of plant, equipment and property are related to total impairment losses that are accumulated. All the estimates and assumptions regarding the impairment testing have not elaborated and explained to provide user with clear insights (Creditcorp.com.au 2017). Users of the financial statement of this particular organization will not be able to gain detailed insight into the facts and figures of the impairment as it do not discloses much accurate and proper information.
Measurement of revenue is done at fair value along with cash and cash equivalents that are subject to fair value risks. Customer value receivables, purchase debt ledgers, share based payments, customer loan receivables, non derivative financial liabilities, all the non-monetary items are intangible assets are measured at fair value. Fair value of financial liabilities and assets that are recognized at fair value are subjected to currency exchange rate risks. It has been ascertained that consolidated financial statements have not been prepared at fair value except for employee remuneration costs that are determined at fair value in the form of equity settled transactions at the date of making grant. Determination of such fair value is done by using appropriate valuation model. Financial assets such as trade and other receivables are recognized at fair value in the initial stage. Intangible assets are measured at the excess of cost of acquisition over the net identifiable assets fair value (Creditcorp.com.au 2017).
The former lease accounting standard makes it mandatory to classify the lease as either operating lease or finance leases. Operating lease under IAS 17 is not required to disclose on the statement of financial position rather they are treated as expenses and are mentioned in the notes to financial statement. This enabled companies to keep their balance sheets at low level and thereby distorting gearing and other key financial ratios and consequently transactions are not represented faithfully. In actual terms, the lease commitments were considerably higher and that was known to outsiders and users of financial statements as the liabilities were hidden. Significance of missing information on the balance sheets varied by region, industry and between companies (Lin and Graham 2017). It made it difficult for investors to make a comparison between companies as true financial position was not reflected. From the source of secondary research, it has been ascertained that IASB has estimated that out of $3.3 million worth of lease all over the world, only 25% is presented on the balance sheets (Mayo 2017). Therefore, users and investors were not provided with economic reality.
Fair value measurement for trade receivables
One of the criticisms that are associated with IAS 17 is the off balance sheet financing as the operating lease are presented off balance sheets and it was viewed as arguably most attractive advantage of operating lease. Companies acquiring assets with debt financing leads to present it on the balance sheets and the acquisition of assets via leasing does not obligate company to present it as liability under former standard. However, they are treated as expenses and the rental payment should be paid in future. Organizations classifying lease as operating lease takes advantage in terms of depicting their overall liabilities lower than they actually have. This system of off balance sheets liabilities does not only inflate their corporate earnings but also misrepresent financial position. In order to maintain their debt covenants, companies are able to satisfy their ratios and thereby reducing the covenants influence (Hussan and Sulaiman 2016). This is so because companies in actual are not keeping their debt low rather they are misrepresenting the overall debt they are carrying. This elaboration depicts the reason why the debt presented on balance sheet is 66 times lower that off balance sheets.
Industries that use heavy equipments make use of operating leases mostly and airline industry is the perfect example. The funding structure of airline companies differ considerably from some carriers that finances aircraft through longer term lease and short-term lease and other carriers purchasing the aircraft fleets. For investors, financial position of such companies might appear different from those other companies in same industry. However, in reality, financial position of such companies might be same. It can be explained with the help of an instance, Emirates airlines leases most of its aircraft fleets unlike its competitors such as German airline Lufthansa that purchases most of its fleet. However, this difference in structure of funding might make investors to seek difference between their financial positions but in reality their financial position might be similar. The existing lease standard helps companies in masking their liabilities as they had tied up in their renting as against financing lease (Henderson et al. 2015). Therefore, under the former lease standard, there were no level playing fields between airline companies.
New lease standard IFRS 16 has the likelihood of impacting as many organizations as possible mainly capital intensive industry such as shipping industry. This particular standard is criticized for many reasons that are associated with change in accounting treatment and administrative system. Some of the key financial ratios are likely to be adversely impacted; however, it is believed by many companies that their financial position will not be less attractive. It is perceived that the obligation of new standard to disclose operating lease on the balance sheet will increase their balance sheets and overall structure of debts. Increased focus on operating lease capitalization is not embraced by all organization as it would make their financial reporting more complex (James 2016). Bank credits are associated with debt covenants that are related to key financial ratios and the existing covenants seeks renegotiation under the new lease standard (Weygandt et al. 2016). Organizations consider change in financial ratios to be of highly important and it is suggested by findings that operating profits under new standard will be worsen. Moreover, since all lease standard end up on balance sheet, it is expected that administrative burden of companies will increase. Reporting entities will be keen to rely on short-term lease with the implementation of this standard as it is perceived that such lease will not have considerable impact on the balance sheet. Furthermore, increased cost and complexities of reporting followed by increased administrative burden is responsible for making IFRS 16 unpopular. Companies will be required to update their IT system, invest in educational efforts and accounting system updating.
Substantial subjectivity in impairment testing procedures
The possibility of company to classify lease as operating leased and financing lease is removed under the new lease standard IFRS 16. All the leases in future will be classified as financing lease by companies that have the implication of recognizing them as liabilities and assets on balance sheets. This will help in reducing the abuse of accounting rules and helps in increasing comparability between companies. Purchasing of assets will become more common with the implementation of new standard by companies. The biggest change will be the transparent and enhanced visibility of actual amount of liabilities and assets on balance sheets and investors and analysts will not be required to make any guesswork and make rough calculations for comparing the companies and determining their actual financial position (Warren 2016). Presentation of all the liabilities and assets in faithful form will facilitate better and informed decision among investors (Lubbe et al. 2014). Management of organization will be facing issues relating to administrative burden in the initial stage, however, with the time, IFRS 16 implementation will lead to allocation of capital in a better way and formation of leasing strategies that will lead to a more balanced lease versus buy decisions.
References list:
Cheng, J., 2015. Small and Medium Sized Entities Management’s Perspective on Principles-Based Accounting Standards on Lease Accounting. Technology and Investment, 6(01), p.71.
Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I. and Castoldi, S., 2015. Advanced Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA spa.
Creditcorp.com.au. (2018). CreditCorp – How we work with you. [online] Available at: https://www.creditcorp.com.au/customers/ [Accessed 26 Jan. 2018].
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hussan, S.M. and Sulaiman, M., 2016. BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS) AND FINANCIAL ACCOUNTING STANDARDS (FASS): THE DEBATE CONTINUES. International Journal of Economics, Management and Accounting, 24(1), p.107
James, M.L., 2016. Accounting for Leases: A Case Exploring the Effect of the New Lease Accounting Standard on the Financial Statements. Journal of the International Academy for Case Studies, 22(3), p.152.
Lin, K.C. and Graham, R.C., 2017. How Will the New Lease Accounting Standard Affect the Relevance of Lease Asset Accounting?.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP Catalogue.
May, R.A., 2017. An Investigation of Financial Accounting Statements and Reporting Techniques (Doctoral dissertation, University of Mississippi).
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Mayo, W., 2017. GAAP: An Analytical Study of Financial Accounting Standards (Doctoral dissertation, University of Mississippi).
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2016. Applying international financial reporting standards. John Wiley & Sons.
Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.