Impairment testing process of Computershare Limited

The annual report of Computershare Limited for the financial year of 2017 has been chosen for the purpose of this report.   The assets that have been tested for impairment are the intangible assets of the firm namely goodwill and mortgage servicing rights and trade receivables (Kabir and Rahman 2016).

The firm had conducted the impairment testing by grouping the assets at the lowest levels. These are the assets that result in largely independent cash inflows or are the cash generating units of the firm. The cash generating units or the groups of cash generating units are the financial components to which the allocation of goodwill is done. It has been further mentioned in the annual report of the company that with the expansion of business by the group, the reporting structures may change which may lead to the re-examination of the cash generating units and the allocation of goodwill to these cash generating units. When the testing is done the carrying amount for each of the groups of cash generating units is compared with the recoverable amounts. This recoverable amount has been further calculated on the basis of value-in-use calculation for each of the CGU groups to which the goodwill has been allocated. The computation of the value-in-use is executed by a discounted cash flow method on the basis of five years of cash flow forecasts added with the terminal value (Li and Sloan, 2017).

The firm has recorded expenditure or impairment charge during the period, which amounts to $11,315 million. This had occurred due to the fact  that the previous implementation of UK Tax Free childcare scheme reduced the earnings of the voucher services by Computershare Limited as a result of which $11.3 million had been booked against goodwill (Filip, Jeanjean and Paugam 2015).

The key assumptions that had been made by the firm in conducting the impairment testing are as follows:

• The five-year post tax cash flow forecasts have been developed on the basis of budgets that essentially cover a period of one year along with the subsequent periods that are based upon the expectation of the Group in regards to growth excluding the future acquisitions, improvement or restructuring of business. The different earning growth rates that are applied in the period of five years are Asia 3.9% (2016: 3.8%), Australia and New Zealand 3.0% (2016: 3.0%), Canada 2.0% (2016: 2.5%), Continental Europe 1.7% (2016: 1.8%), UCIA 3.0% (2016: 3.0%) and the United States 3.0% (2016: 3.0%).
• The value-in-use calculations have been computed for each CGU by applying the post-tax rates of discount for the purpose of discounting the future attributable post-tax cash flows.

The subjectivity that is involved in the impairment testing process is that the firm has undertaken a huge number of assumptions in testing the impairment of the assets. It has been further mentioned in the annual report of the company that as the impairment testing is based on certain assumptions and judgments, the Group has considered sensitivity of the impairment test results to the particular changes in key assumptions (Bepari and Mollik, 2015).

The fact that has been found to be interesting about the impairment testing is that the firm has adopted a new impairment model as mentioned in the annual report of the company. The new impairment model is required to recognize the provisions of the impairment that is based on the estimated credit losses as has been mentioned under AASB 139. The estimated losses related to credit are generally determined by the evaluation of the range of the possible outcomes that has been considered by taking into account, the time value of money, past events, current conditions and the estimations in regards to the economic conditions in the future. The impairment loss or gain in regards to the mortgage servicing rights has not been disclosed in the annual report of the company. However, the mortgage servicing rights has been included in the list of the intangible assets that have been impaired. Another interesting factor in regards to the impairment testing of the company is that the company has recognized the gain of $0.4 million from impaired trade receivables  and the amount has been included in the direct services expense and technology costs in the comprehensive income statements(Bepari and Mollik, 2015).

Key estimates and assumptions used in impairment testing

The new insight that has been gained about how companies conduct impairment testing is that the effective adherence to the AASB 139 results in the proper ascertainment of the fact whether companies should recognize an impairment as a loss or gain. It has also been learnt that the process of impairing an asset is carried out on an ongoing basis. It has been further stated in the annual report of the company that the impairment is recognized as a profit or loss only when objective evidence is available in regards to the fact that the company is not able to collect the due amounts in accordance to the terms of the trade. In spite of the execution of the impairment of the intangible assets, it has been mentioned in the financial report of the company that the property, plant and equipment have been stated at historical costs, which has been reduced, by the amount of depreciation and depreciation. Thus, the impairment of the intangible and fixed assets are deduced to be different (Rennekamp, Rupar and Seybert 2014).

The fair value measurement for a particular asset or liability refers to the consideration of the particular features or characteristics of the asset or liability that has to be revalued. This is essentially executed when the market participants take into account the characteristics of an asset or liability when the pricing of the asset or the liability has to be computed on the date of measurement. Moreover, the crucial characteristics of the assets that are considered are as follows:

• The condition or the position of the asset
• Any kind of restrictions, if applicable on the utilization or the sale of the asset

The technique that has been adopted by Computershare Limited in regards to the fair value measurement process has been successful, as the firm has gained a significant amount in terms of the impairment of the accounts receivables (Rennekamp, Rupar and Seybert 2014).

The chairperson of the IASB believes that the former accounting standard for the leases did not reflect economic reality. This can be explained with the help of an example. The former accounting standard in respect to the treatment of leases includes the revenue based contingent rentals at the time of measurement of the lease liability, which will evidently lead to the situation when the costs will not match with the income. Moreover, as mentioned in the case study, the adoption of the old accounting standards in regards to the leases facilitated the companies categorize 85 percent of the leases as operating leases and cannot be recorded on the balance sheet of the company. However, it should be noted here that in spite of the fact that the  operating leases are not included in the balance sheet of the company, the liabilities of the firm will increase which will eventually lead to their bankruptcy. Furthermore, the firms for covering up their liabilities often utilize this facility thus, restricting the reflection of the economic reality (Öztürk and Serçemeli 2016).

Fair value measurement process of Computershare Limited

Under the former accounting standard, the lease liabilities of the reporting entities that had been computed off the balance sheet were 66 times greater than the debt reported on their balance sheet. This had been the situation because according to the old leasing accounting standards, the lessees could recognize the leases off the balance sheet. This facilitated the preparation of the balance sheet in such a way that the financial statement reflected a healthy position of the firm by maintaining an optimum balance between the acquired assets and the liabilities. However, the real situation has not been such. Under the new accounting standards in regards to the leases, that is IFRS 16, all the leases will have to be included  in the balance sheet which will reveal the  actual debt position of the firm (Joubert, Garvie and Parle 2017).

The chairperson of the IASB has argued that the former accounting standard for leases facilitates the absence of a level playing field between some airlines company. This statement is correct in regards to the former accounting standard. The former accounting standard facilitates the off balance sheet computation of the operating leases. Thus, in such a situation the airline company that has been leasing most of the aircraft fleet may cover up the incurred liabilities by categorizing the financial proceedings in regards to leasing under the head of operating leases. The fact that the operating leases can be treated off the table will help this particular airline company to maintain a balance sheet that reflects an optimum amount of liability. However, in case of the airlines company that has been mostly purchasing the aircraft fleet will mandatorily have to show such purchases in the balance sheet of the company. This will evidently affect the balance sheet of the company as the liability position will increase. Thus, complying to the former accounting standard will limit the ability of the users of financial statements to distinguish between the liability position of the companies belonging to the similar industry dealing in operating leases (Edeigba and Amenkhienan 2017).

The chairperson of the IASB had stated that the new accounting standards for leases will not be popular with everyone. For understanding this statement , the impact that the new leasing standard will have needs to be understood in a proper way. The new standard will affect all the significant ratios of a particular firm. These ratios include all the essential ratios that reflect the financial performance of the firm like gearing, current ratio, asset turnover, interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows.  The new leasing standard will result in the growth of the balance sheets and the gearing ratios but the capital ratios will decrease. It must be understood that the new leasing standards will result in the firms including the operating lease in the balance sheet of the company. This means that the liability position of the company will increase thus, affecting its image in respect to the shareholders or the investors of the company. The firms with whom the leasing standard will not be popular are the real estate companies, equipment manufacturing companies, trains, aircrafts and the shipping companies. The asset turnover ratio of the affected companies will also decrease as because the leased assets will increase the entity’s reported asset base with no change in sales. Therefore, this evidently supports the statement, that the new accounting leases will not be popular with everyone (You 2017).

The possible reasons as to why the chairpersons of the IASB would comment that the new visibility of all the leases will lead to better informed investment decisions by the investors and to more balanced lease versus buy decisions by the management are as follows:

• Compensation for the missing information that most of the investors utilize for making the potential investment decisions
• The effective application of the 2019 leasing standards will result in the better representation of the financial statements of the company which will effectively result in the investors getting a true and fair view of the liquidity and the financial condition of the company. This will aid the investors in taking the crucial financial decisions in regards to the particular investment venture in the companies undertaking operating leases (Sari, Altintas, and Ta? 2016).

References

Bepari, M.K. and Mollik, A.T., 2015. Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing. Journal of Applied Accounting Research, 16(2), pp.196-220.

Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate Transparency and Accountability: Evidence from New Zealand. Australasian Accounting, Business and Finance Journal, 11(3), pp.3-19.

Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill impairment losses: Evidence and effect on future performance. Journal of Business Finance & Accounting, 42(3-4), pp.515-554.

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.

Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting & Economics, 12(3), pp.290-308.

Li, K.K. and Sloan, R.G., 2017. Has goodwill accounting gone bad?. Review of Accounting Studies, 22(2), pp.964-1003.

Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard” IFRS 16 Leases” on Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in Turkey. Business and Economics Research Journal, 7(4), p.143.

Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment. The Accounting Review, 90(2), pp.739-759.

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.

You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline Companies (Doctoral dissertation, Auckland University of Technology).