Case Study
ACCG 224
Jiao Yang
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Table of Content Executive Summary…………………………………………1 Introduction………………………………………………….1 Intangible Assets…………………………………………….2 Impairment Testing…………………………………………3 Disclosures Concerning Impairment Testing……………...6 Conclusion…………………………………………………...6 Reference List………………………………………………..8
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Executive Summary
According to the announcement of Australian Securities and Investment Commission (ASIC), it will review some of important information about Coca Cola Amatil Ltd. 2010 Annual Financial Report, one of the most important review points is about asset impairment. The report is based on AASB 136 so that the relevant information of company’s financial report could match the requirements of ASIC and accounting standards. The goal of the investigation is to provide board of director information of listed issues:
1, Relevant accounting information and rules about CCA 2010 Annual Financial Report;
2, how the company provides the accounting information and relevant rules; 3 find out if there are conflicts between the annual report of CCA and the requirement of ASIC
After the investigation, I will make recommendations to the company to overcome conflicts and pass the review.
Introduction
The purpose of this report is to make sure we provide following information: 1. Write-downs of indefinite life intangible assets
2. Impairment testing, including the identification of cash generating units, the
allocation of goodwill to cash generating units and the use of unrealistic
assumptions to calculate recoverable amounts
3. Disclosures concerning impairment testing, including key assumptions, goodwill
allocated to each cash generating units, and sensitivity analysis for changes in key
assumptions.
We need to guarantee to satisfy the requirements of ACIS’s revision, it is necessary to
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avoid the damage of company’s reputation. It is also essential to make information about the company relevant and reliable; it is easier for the both shareholders and stakeholders to make economic decisions.
For the purpose, the first section of the report is going to describe the related information that released by the Australia Accounting Standard Board. And then, we will check if the information of the annual financial report is consistent with the demands of ASIC. Finally, we will try to make the potential problems right.
Intangible Assets
According to the prescription of AASB 136 Para.1, An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered
through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognize an impairment loss, at meanwhile,
the impairment loss should be recorded as expense (AASB 136 Para.59). Besides, AASB 136 Para.6 indicates that recoverable amount should be chosen the higher amount either fair value less cost to sell or value in use.
Furthermore, about indefinite life intangible assets and goodwill, no matter if there is a sign that its recoverable amount will be less than its carrying amount, the corporation should have impairment test about those assets. And the recoverable amount of indefinite life intangible assets and goodwill is going to be formally estimated. (AASB 136 Para.8)
In other words, after annually impairment test about indefinite life intangible assets and goodwill, if the carrying amount exceeds than recoverable amount, we should write down the beyond part and recorded as impairment loss.
After reviewing the 2010 annual report, the practice we use about indefinite life intangible assets and goodwill is strictly obey the requirements of AASB. According
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to the 2010 annual financial report, the company determines whether the indefinite life intangible assets and goodwill are impaired at each balance and will recognize the exceeded part between carrying amount and recoverable amount as impairment loss. When this kind of information reflects on the income statement, it will be recognized as expense. The Group will have a formal estimation of recoverable amount at each balance date.
Basically, the method we use in the annual report follows the accounting standards. However, after the investigation, the company has failed to write down goodwill since 2008. According to the accounting standards of AASB136, goodwill from the merger should go through impairment test every year and write down related impairment loss. Although, the Group could explain they predict the recoverable amount of goodwill is higher than its carrying amount, then in this situation there is no impairment loss to write down. But, other intangible assets after company combination, such as brand name and customer list, are recognized as impairment loss for two years. The amount of those intangible assets is related to goodwill one way or other. Hence, it is not reasonable that two of intangible assets have devalued, while the third one still remains the value for over two years.
The company should reconsider the practice of goodwill and re-estimate the recoverable amount in order to record related impairment loss.
Impairment Testing
Identification of cash generating units: According to AASB 136 Para.66, if there is
any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the
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cash-generating unit to which the asset belongs (the asset’s cash-generating unit). A
cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. (AASB 136 Para.6)
Allocation of goodwill to cash generating units: For the purpose of impairment
testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash-generating units, or groups of cash
generating units, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall:
(a) Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes;
(b) Not be larger than an operating segment as defined by paragraph 5 of AASB 8 Operating Segments before aggregation.
The use of unrealistic assumptions to calculate recoverable amounts: According
to the standards, the recoverable amount of an asset or a cash generating unit is the higher of its fair value less costs to sell and its value in use. And the calculation of value in use is consisted of four parts. In AASB 136 Para.31, it indicates two steps of calculation for recoverable amount, first is to estimate the entity’s future cashflow;
second is to redeem the future cashflow to current value under a certain discount rate.
According to the 2010 annual financial report, the corporation divides cash generating unit into four parts, Australia beverage, New Zealand and Fiji, Indonesia & PNG, food and service business. These four parts are divided by the different location and varieties of revenue. Within the four parts, the cashflows are independent from each other which corresponded with the requirements of AASB.
After reviewing Note 1 from the annual financial report, goodwill allocation fully obeys the requirement of AASB.
1. The key assumptions that the entity considered to estimate future cashflow
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includes EBIT margins, Volumes, and Pricing which all of them belong to cash
inflow, while capital expenditure belongs to cash outflow. It is also what AASB
requires. And in order to fit AASB 136 Para.50, there are no income tax receipts
or payments. However, the company uses after-tax-rate as discount rate rather
than the before-tax rate. When the entity estimates future cash flows of Brand
Name, it also uses after-tax rate.
2. Impairment loss should be deducted directly from cash generating units. 3. When the company estimates IBA cash inflow, the group uses three-year financial
budget and prediction as reference.
There is a gap between the practice the company uses and the requirement of AASB. According to AASB 136 Appendix A20, discount rate should be before-tax rate. If the entity uses post-tax discount rate, then the relevant basis should be changed. What is more, the impairment loss should be deducted from goodwill, but the company did not write down any goodwill carrying amount that allocated to cash generating units. It is against the accounting standards. At last, the period of predicting company’s
future cashflow should be 5 years. When the company made the prediction of EBIT margins and Volumes, it only considers three-year financial prediction. The period is too short to provide the most reliable forecast.
The recommendations that I would make are:
1. Change post-tax rate to before-tax rate for discount rate and re-forecast future
cashflow.
2. Deducted the impairment loss from goodwill’s carrying amount.
3. Extend the period to 5 years to make reasonable prediction.
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Disclosures Concerning Impairment Testing
According to AASB 136, at the end of financial report, the company should disclosure the relevant information of impairment loss, the information of how the company recognizes cash generating unit, the assets that affected by impairment loss, assumptions used to determine recoverable amount and the carrying amount of goodwill allocated to the units.
After reviewing the annual report, the company discloses most information that required by AASB. However, the company did not fit to AASB 136 Para.130, the information and recognition of cash generating units.
The company should add relevant information of cash generating units to the financial report.
Conclusion
After investigation based on the requirements of AASB 136, following issues are found out:
1. Goodwill has not been written down for two years.
2. When the company predicts future cashflow, it uses after-tax tax 3. The company failed to deduct impairment loss from the carrying amount of
goodwill.
4. The company uses a short time period to predict future cashflow. 5. The relevant information of cash generating units is not disclosure. The related recommendations to above problems has been made during the report, I hope the company would consider those advises. The purpose of the report is to make sure the company could fix the problems as soon as possible in order to reflect the
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true information of impairment within the group.
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Reference List
Impairment of Assets, Australian Accounting Standard Board 136
2010 Annual Financial Report of Coca Cola Amatil Ltd
ndPicker, Impairment of Assets, Australian Accounting Standards, 2 Edition