Implementation Process After Initial IFRS -Myassignmenthelp.Com

Question: Discuss About The Implementation Process After Initial IFRS? Answer: Introducation Goodwill of Brickwork limited is tested on annual basis for the impairment purpose along with other intangible assets. Brickwork limited has conducted impairment testing of its plant, equipment and property and the total amount corresponding to this impairment stood at $ 30 million before taxation. It has been ascertained from the analysis of annual report of company that noncurrent assets have also been tested for impairment in year 2016 and the total amount of impairment is recorded at $ 3046 and $ 62185 in year 2016 and 2017 respectively. Impairment of tangibles and goodwill was done in year 2016 of amount $ 47258. Plant, equipment and property impairment in year 2016 and 2017 stood at $ 3046 million and $ 14927 respectively (brickworks.com.au 2017). The procedure of impairment incorporates assessment of carrying value of assets in the event of indication whether impairment is required. Assets carrying mount is written down to recoverable amount if the estimated recoverable amount is less than carrying amount. For conducting impairment, group performs the allocation of goodwill to the cash-generating unit, the assessment of recoverable amount is done for impairment determination, and to which the goodwill is relating. The assessments of impairment in reference to brand name with indefinite useful lives have been allocated to CGU of Australian bricks (brickworks.com.au 2017). Brickwork limited has not recorded any impairment expense in relation to land and building in financial year 2017 and the total amount of impairment expenses for financial year 2016 and 2017 stood at $ 14927 and 3046 respectively. Impairment expense attributable to plant and equipment for both the financial year stood at $ 3046 million and 13610 million. Impairment expenses for land and building in year 2016 stood at $ 1317 million. No impairment expense has been recorded in relation to intangible assets (brickworks.com.au 2017). For the assessment of non-financial assets carrying amount for determining impairment, management of Brickwork limited is required to make considerable judgments and estimates. Carrying amount of each CGU is supported by valuations that are based on assumptions that are forward looking and they are uncertain by their very nature. All such CGU incorporates intangible assets, goodwill and property, equipment and plant. Estimation of discount rates and future cash flow forms is done by nature and basis of some key assumptions. Value in use formed the basis of recoverable amount of CGU and the computation of value in use involves projection of cash flows, movement of working capital and financial projections. Computation of costs is done by estimating inflation rates and by considering gross historical margin. Valuation of cash flow involves assumption of long-term growth rates (brickworks.com.au 2017). Appropriate discount rate is calculated by using an independent external adviser IAS 36 provides the involvement of substantial subjectivity in the impairment testing procedure for goodwill (Lin and Graham 2017). If an organization practices higher degree of subjectivity in the process of impairment testing, then a scope allows manager to act opportunistically when they tests goodwill for the impairment purpose. Moreover, if the management of organization involves subjectivity in the methodology of impairment testing, then it make somewhat difficult for the users to obtain informations that are appropriate and accurate. Presence of subjectivity makes the measurement of recoverable amount of assets highly sensitive to some unverifiable assumptions. After the evaluation of annual report of Brickwork limited, it has been depicted that there is no involvement of subjectivity in the valuation of impairment and in the methodology of conducting impairment (brickworks.com.au 2017). Management of the group is not acting opportunistically in determining impairment assessme nt. The impairment testing methodology of Brickwork limited has been found to be surprising as there were separate and proper discussion of the impairment testing. Arrangement of the impairment procedures is done in a segregated way so that users of financial statement can derive appropriate information that helps them in identifying whether the recoverable and carrying amount of assets are done by maintaining accuracy. Assessment of impairment relating to goodwill, other intangible assets and assets such as plant, equipment and property is done in separate section that outlines the detailed discussion of their recognition and measurement. Amount of impairment is calculated by group as difference between carrying amount and recoverable amount of the joint ventures and its associates (brickworks.com.au 2017). While assessing the impairment testing process of Brickwork limited, some interesting and new insights have been gained by users of financial statement. Annual report depicts that there has been segregated disclosure of all the components of impairment and this comprise of formation of all key estimates and assumptions and determination of recoverable amount. Recognition and measurement of all the impairments of all assets that is intangible assets, goodwill and property, plant and equipment are done separately so that users do not get confused (brickworks.com.au 2017). Furthermore, there was separate recognition of impairment losses relating to all such assets. In nutshell, it can be said that users of financial stamen of company will be able to gain detailed and proper information about impairment testing method that will assist them in understanding the position of reporting entity in better way. Measurement of investment property and derivative financial instruments are done using fair value. Organization does the grouping of assets and liabilities into level 1 to level 3 if they are measured at fair value if they are measured on degree of observation of fair value. Level 1 fair value are those that are derived from quoted price for identical liabilities and assets. Level 2 fair value measurement are those that derive value from inputs other than quoted price and level 3 are those whose values are derived from valuation techniques (brickworks.com.au 2017). Identification of all liabilities and assets at fair value is depicted in the notes to financial statements and are categorized into the provided levels. Some of the elements of several financial statements that are recorded at fair value involve borrowing, derivatives, foreign currency, government grants and properties. Cost of assets that are acquired is measured at fair value and such costs are directly attributable to business combination (brickworks.com.au 2017). The reason why the former accounting standard for lease does not reflect true economic reality is its underlying principle that does the classification of leases into operating lease and financing lease. Treating leas as operating lease by reporting entity make them disclose it as an expense in the footnotes and treating operating lease as liabilities and assets in the balance sheet. Comparison of operating lease can be done to regular rental agreement and comparing finance lease as debt financed purchase. The criteria for lease recognition under the existing lease standard are ambiguous and there is a possibility of exploitation if organization intends to achieve specific classification (Joubert et al. 2017). Organization might dupe investors my making them appear financial stronger than they actually are by classifying lease contracts as operating lease. It would enable them to obtain assets while maintaining same level of debt. Therefore, the value of debt disclosed on balance she ets might be less than liabilities off balance sheets. Hence, in this regard, it can be said that former lease accounting standard do not reflect true economic reality to users. The former accounting standard does not mandate the disclosure of operating lease in the balance sheet of reporting entity. Due to this principle of the former standard, organization is able to obtain additional assets by classifying lease contracts as operating lease and there will not be any impact on debt structures. It would depict that while organization has more debt in reality but the absence of their disclosure would make it appear to be less leveraged that they actually are. Furthermore, the existing lease standard does not come with control-based approach and are not inclined toward focusing on risks and reward of ownership of lease contracts. Therefore, the true-leased assets and liabilities are not truly reflected in the balance sheets. Consequently, actual leased assets and liabilities might be considerably more than what is disclosed in the balance sheets (Lim et al. 2016). This explains why the off balance sheets liabilities were 66 times more than debt that the balanc e sheets of entity reports. Under the lease standard IAS 17, airline companies keep the liabilities and assets concerning fleet of vehicles and airplanes off balance sheets. Airline Company such As Emirates leases most of their aircraft fleets as compared to its competitor such as German airline Lufthansa that buys most of its fleets might look different in terms of their financial obligations (Morales and Zamora 2017). However, in reality, their financial obligations are similar and there do not exist much difference. The off balance sheet treatment of leases has the possibility of significantly influencing analysts and investors (Irvine 2016). It has also been ascertained from some sources of secondary research that leases most of its aircraft fleets have lower financial leverage and lower assets base compared to companies that leases few aircrafts. However, the scenario is different and the absence of information of lease would make it difficult for investors to make a comparison between such airline compani es. This explains why there were no level playing fields between airline companies under existing lease standard. Several criticisms that are associated with the new lease accounting standard are the reason for becoming unpopular. Balance sheets and debt structure of companies will increase as the focus of new standard is on operating lease capitalization. There exists possibility of violation of debt covenants due to hundred percent increases in balance sheets. Other criticism is in relation to short-term lease that new standard will replace the existing bright line between finance and operating leases (DiSalvio and Dorata 2014). This is so because companies for taking advantage of short-term lease would start shortening terms of lease and this corresponds to operating lease. It has been found that with the effectiveness of new standard, it will be difficult for companies to receive financing from banks, as there will be lower return on capital, lower asset turnover ratios and debt to equity ratios. Furthermore, unpopularity of new lease standard is also associated with considerable increase in administrative burden. Some of the common examples relating to this involve implementation of new IT system, changes in process and control system along with updating of the accounting system and increases expenditure in relation to consultation fees. Management is required to make investment in large amount of new IT systems and increased reporting time and complexities of management (Choubey 2016). It is so because organization under new standard that is IFRS 16 will be required to make more detailed estimates regarding the right to use assets and lease liabilities compared to IAS 17. ccounting standard IFRS 16 will eliminate all the subjective elements and lessees are required to depict most of lease on their balance sheets as liabilities and assets. There is the likelihood that some of the performance metrics such as cash from operations, earnings before interest, tax and depreciation and all in sustaining costs. Users and investors will accurately identify distinction between operating lease and financing lease under new lease. Some of the benefits that will be derived by companies from the implementation of new leasing standard incorporate flexible funding structures, reduction in cash flow due to residual value investment, cost effective funding compared to traditional funding, avoidance of disposal and ownership (Cheng 2015). Investors will be able to make better-informed decisions as they will not be required to make any rough estimation and calculation for operating the lease commitments of organization on to balance sheets. Comparison between the organiza tions will be facilitated and there will be more transparency that will help investors in making desirable investment decisions. In the former standard, most of entities used to treat lease as operating lease so that their overall debt structure remains same and they do not appear to be more leveraged (Barone et al. 2014). However, obligation of entity to make disclosure of all their liabilities and assets will reflect their actual financial position and lease commitments. It would lead management to make a better and balanced lease versus buy decisions. References list: Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: a review of recent literature. Accounting in Europe, 11(1), pp.35-54. Biddle, G.C., Callahan, C.M., Hong, H.A. and Knowles, R.L., 2016. Do Adoptions of International Financial Reporting Standards Enhance Capital Investment Efficiency?. Brickworks.com.au. (2018). [online] Available at: https://www.brickworks.com.au/IRM/content/annualreport/2017/files/assets/common/downloads/Brickworks%20Limited%20Interactive%20Annual%20Report%202017.pdf [Accessed 24 Jan. 2018]. Cheng, J., 2015. Small and Medium Sized Entities Managements Perspective on Principles-Based Accounting Standards on Lease Accounting. Technology and Investment, 6(01), p.71. Choubey, S., 2016. IFRS 16 Leases. The MA Journal, 51(2), pp.91-94. Dinh, T., Fink, C., Schultze, W. and Schabert, B., 2016. Leasingbilanzierung nach IFRS 16. PIR-Praxis der internationalen Rechnungslegung, (9), pp.235-243 DiSalvio, J. and Dorata, N.T., 2014. Lease accounting change: it's not over yet. Review of Business, 35(1), p.16. Florou, A., Kosi, U. and Pope, P.F., 2017. Are international accounting standards more credit relevant than domestic standards?. Accounting and Business Research, 47(1), pp.1-29. Irvine, J., 2016. IFRS 16 will bring $2.8 trn on to companies balance sheets, Economia, 13 januari. Tillgnglig online: https://economia. icaew. com/news/january-2016/ifrs-16-will-bring-2trn-pounds-on-balance-sheet.[Hmtat 2016-02-04]. January, I., 2016. the IASB issued IFRS 16, Leases. The new standard brings most leases on-balance sheet for. Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. Journal of New Business Ideas and Trends, 15(2), pp.1-11. Lim, S.C., Mann, S.C. and Mihov, V.T., 2014. Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings. Lin, K.C. and Graham, R.C., 2017. How Will the New Lease Accounting Standard Affect the Relevance of Lease Asset Accounting?. Mhedhbi, K., Mhedhbi, K., Zeghal, D. and Zeghal, D., 2016. Adoption of international accounting standards and performance of emerging capital markets. Review of Accounting and Finance, 15(2), pp.252-272. Morales-Daz, J. and Zamora-Ramrez, C., 2017. Effects of IFRS 16 on Key Financial Ratios: A New Methological Approach. Osei, E., 2017. THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), AND THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) SINGS SIMILAR TUNE: COMPARING THE ACCOUNTING TREATMENT OF NEW IFRS 16 WITH THE IAS 17, AND THE NEW FASB MODEL ON LEASES. Journal of Theoretical Accounting Research, 13(1). 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. Plotnikov, V.S., Plotnikova, O.V. and Melnikov, V.I., 2017. O teoreticheskikh aspektakh Mezhdunarodnogo standarta MSFO (IFRS) 16 Arenda[On the theoretical aspects of the International Standard IFRS 16 Lease]. Mezhdunarodnyi bukhgalterskii uchetInternational accounting, (1), pp.2-15. Sari, E.S., Altintas, A.T. and Ta?, N., 2016. The Effect of the IFRS 16: Constructive Capitalization of Operating Leases in the Turkish Retailing Sector. Simola, K., 2014. Successful IFRS standard change implementation process after the initial IFRS implementation. Song, X., 2016. Changes in lease financing practice during lease accounting standard overhaul (2005-2014). American Journal of Finance and Accounting, 4(3-4), pp.309-326. Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).