Part A

All amounts are in USD million.

Answer to I: 

Property, plant and equipment of Amcor Limited:

Building (2.5% to 7.00% Depreciation) 3.6

Plant and equipment (4% to 33% Depreciation) 21.9 also a reversal of impairment loss of 0.1 was accounted for in the year 2016.

In 2015:

Building (2.5% to 7.00% Depreciation) 1.0

Plant and equipment (4% to 33% Depreciation) 16.8 also a reversal of impairment loss of 0.1 was accounted for in the year 2016.

Intangible assets of Amcor Limited: 2016

Assets	Goodwill	Customer relationship	Computer Software	Product development	Other
Amortization period	NA	10 to 20 years	3 to 10 years	Less than 10 years	Less than 10 years
Impairment loss			2.5

Intangible assets of Amcor Limited: 2015

Assets	Goodwill	Customer relationship	Computer Software	Product development	Other
Amortization period	NA	10 to 20 years	3 to 10 years	Less than 10 years	Less than 10 years
Impairment loss			0.20

Thus, the firm has tested all the above assets for impairment (Nastase et. al. 2016).

Answer to II: 

In order to conduct the impairment testing on the non-current and intangible assets of the company, the management has followed the guidelines of relevant accounting standards issued by the Australian Accounting Standards Board, i.e. AASB 136. In this regard it is important to note that AASB 136 has been modelled on the International Accounting Standard (IAS 36) on impairment of assets. Thus, the company has followed the international accounting standards as well as the AASB 136 to test the assets of the company for impairment.

For the financial year ending on June 30, 2016 the company recognized USD 25.5m as impairment loss in the income statement of the company compare to USD 17.8m in the preceding previous year ending on June 30, 2015 (Popovi? et. al. 2017).

In order to test impairment of assets the company conducted specific testing on items of property, plant and equipment. The specific items of property, plant and equipment that were identified as surplus to the current requirements have been impaired to such extent.

The company conducts impairment testing by finding out the recoverable amount of each individual asset and in case that is not possible it finds out the recoverable amount of the Cash Generating Unit (CGU) to which the asset belongs. CGUs refers to the lowest level at which an asset is groped and it is capable of generating separately identifiable cash flows. The recoverable amount is arrived at by deducting cost of disposals and value in use from higher of fair value of the asset or CGU. The value in use is calculated on the basis of discounted cash flows arising from the asset.   

Answer to III: 

Amcor Limited has recorded USD 25.5m as impairment expenditures in the financial year ending on June 30, 2016. The impairment expenditures has been included in general and administration expenses of the company.

Part B

Compare to the financial year ending on June 30, 2015, i.e. the previous financial year, the impairment expenditures of 2016 has been increased by USD 7.7m. In 2015, the company recognized impairment loss of USD 17.8m in the books of accounts against the specific items of property, plant and equipment and intangible assets (Deegan 2013).

Answer to IV: 

The company has used the following estimates and assumptions to conduct impact testing:

Estimates:

In case of Goodwill the company has estimated the amount of goodwill of the company as on the end of the financial year, i.e. on 30^th June, 2016 on the basis of best available information about the goodwill of the company’s products, offering and services. This amount if has been estimated at lower than the amount at which it is being shown in the financial statements of the company then impairment has been recognized to the extent of such exceeded amount at which the goodwill has been shown in the financial statements of the company.

The intangible assets can be segregated in different categories and accordingly, the useful life of these assets can be determined with relative certainty by using the process of estimation.      

In case of specific items of property, plant and equipment the useful life of these assets have been estimated differently (Florou et. al. 2017).

Assumption:

1. The Goodwill of the company is perpetual and does not have any particular useful period.
2. The specific items of property, plant and equipment all will add value to the company till their useful life and there is no risk of technology overlapping and the assets becoming completely irrelevant.

• Intangible assets have different useful lives and the assets will provide financial benefits to the company in the future throughout the useful lives of these assets.

Answer V: 

Yes, the impairment testing process of the company involved subjectivity. The company has mainly used impairment testing on property, plant, equipment and intangible assets. Thus, the company has pre-decided that the impairment testing shall only be conducted on specific items of property, plant and equipment in addition to the intangible assets.

The outcome of impairment testing has obviously been influenced due to the above subjectivity involved in the process of impairment testing of the company. As a result of the above subjectivity on the following non-current assets have undergone the impairment testing:

1. Specific items of property, plant and equipment of the company.
2. Intangible assets of the company (Picker al. 2016).      

Answer VI: 

From the assessment of the annual report of the company a clear picture on the impairment testing of the company has been found. On the basis of that let us dissect the different elements of the impairment testing process of the company in the following broader headings: 

Interesting:

The company has not shown the impairment expenditures separately in the income statement of the company. Rather the company has decided to include the amount of impairment loss within general and administration expenses of the company.

Confusing:

Despite substantial amount of impairment loss, both in the previous year ending on June 30, 2015. In the current year ending on June 30, 2016 the company’s decision to include the impairment loss of USD 17.8m and USD 25.5m in the general and administration expenses of the company is certainly confusing from the point of view of the users of the financial statements (Hoyle et al. 2015).

Surprising:

The fact that the company used impairment testing only on specific items of property, plant, equipment and intangible assets of the company is certainly surprising as the company has left other non-current assets apart from the above beyond the realms of impairment testing (Altamuro et. al. 2014).  

Difficult:

The inclusion of impairment loss to the tune of USD 25.5m in 2016 within general and administration expenses of the company will certainly affect the ability of the users of the financial statements to analyse the financial performance and financial position of the company without getting into the depth of financial reporting (Beatty and Liao 2014). Thus, the reason for inclusion of the impairment loss within general and administration expenses is certainly difficult to understand. 

Answer VII: 

Well, the companies in Australia, apart from using the Australian Accounting Standards also uses the International Accounting Standards to ensure that the relevant guidelines of financial reporting process is followed. In order to test impairment the company has assessed the surplus of current requirement of its non-current assets.

Answer VIII: 

AASB 13 deals with fair value measurement. Fair value measurement is the technique used to assess the amount that would be realised from the sale of an asset. AASB 13 has prescribed the procedures to be followed to ascertain the amount that would be realized from the sale of an asset. In case of liability the fair value measurement technique includes the procedure to be used to determine the amount to be paid to transfer a liability (Kim and Schmidgall 2017). On the basis of the fair value measurement the assets and liabilities of a company is measured in terms of their amount to be received and amount to be paid respectively.

The address of the Chairperson of International Accounting Standards Board was about explaining the benefits of proposed new accounting standard to deal with accounting procedures to record lease transaction. Taking into consideration the address of the Chairperson of IASB and the accounting standard 16, Leases, let us provide the answers to the different queries of this part.   

Answer i

The reason that Chairperson of IASB beliefs that the former accounting standard on leases was not capable of reflecting the true economic reality of an organization are mainly the following:

The former accounting standard does not require operating leases to be shown in the Balance sheet. The former accounting standard makes a clear distinction between financial lease and operating lease. Not only the standard makes a characteristic differentiation between operating and financial lease but the accounting standard also provides different accounting treatments to record the financial and operating lease transaction (Robson et al. 2017). In case of financial lease, the lessee is required to show an appropriate liability and asset in respect of the leased assets in the Balance sheet. Thus, the accounting procedure to record the financial situation certainly reflects the actual reality of the financial transaction in the books of accounts of the lessee. However, the former accounting standard does not require a lessee to show any liability or asset in the Balance sheet of the lessee in respect of the asset taken on operating lease. Thus, even if a valuable asset is used in the business operations of the lessee on operating lease the balance sheet of the lessee will not show such asset and resultant lease liability. Thus, the economic reality of the business of the lessee will not be properly reflected using the guidelines provided in the former standard to record leases (Wong and Joshi 2015).

Answer ii

As already mentioned, that the former accounting standard recommended different procedures, accounting treatments to record financial leases, and operating leases. Whereas the lessee required to record financial lease in the Balance sheet, there was no similar requirement for operating lease. Thus, operating lease remained an off balance sheet item under the former accounting standard on leases. Thus, the entities despite using number of assets on operating lease were not required to show these in the balance sheet (Bushman 2014). As a result of off balance sheet items entities which were using huge number of assets on operating leases which were nothing but debt, the actual amount of debt and the asset were not shown in the Balance sheet of the company. Thus, under the former accounting standard, the reporting entities were not showing any operating leased assets and resultant obligation in the Balance sheets. Hence, in some cases, especially entities in Airline Industry, the reporting enterprises has as much 66 times more off balance sheet liabilities due to the extent of use of operating lease to finance the business of these entities (Meyer and Meyer 2014). Hence, for reporting entities who have used operating leases to substantial extent the former accounting standard on leases was not capable to bring out the economic reality of such transactions through Balance sheets as the operating leases are treated as off balance sheet items in the former accounting standard. Considering the Airline Companies have used operating leases to finance most of its equipment and plant requirements it was only obvious that such entities had 66 times more debt in off balance sheet items that debt recognized in the Balance sheets (Andradeet. et. al. 2014).   

Answer iii

Not all Airline companies operate with similar strategy thus, whereas few capitally intensive companies opt to buy aircrafts and other equipment to operate there are other companies who have taken these aircrafts and equipment on operating leases. Thus, in case of the capitally intensive companies which have directly financed their acquisitions by using debt funds will record necessary debt liability in respect of the assets acquired by the companies (Nigrini 2016). However, in case of the companies who have opt to take the aircrafts and equipment on operating lease, all these assets have become off balance sheet items along with no reflection of huge obligation for the operating leases. Thus, the economic reality of the two companies despite being similar will not be reflected accordingly in the financial statements of these entities. Thus, there is definitely no level playing field as far as the financial statements are concerned (Martin and Roychowdhury 2015). Thus, the financial statements of the reporting entities, i.e. both for the entities who have acquired the assets and for the entities who have taken these assets on operating leases, will not reflect the economic reality of these entities properly. Hence, the Chairperson of the IASB have commented that the former accounting standards does not provide a level playing field to the Airline companies due to non-recognition of operating leases as a balance sheet item (Cosci et. al. 2015).

Answer iv

The new accounting standard has made it compulsory that each and every organization will have to record the leases in its Balance sheet by recording lease assets and subsequent liabilities. Thus, even if the operating leases are used by companies to finance the equipment, property and plant the lessee will have to recognize the operating leases in the Balance sheet to reflect the actual economic reality of the lessee in the Balance sheet of the lessee. Thus, whereas the earlier practice under former accounting standard was to recognize lease liabilities and resultant assets only if the lease is in the nature of financial lease the proposed accounting standard has made it compulsory for the lessee to recognize assets and liabilities in leases of all kind including operating leases. As a result of recognition of assets and liabilities even for operating leases the company which earlier was allowed not to show the debt for operating leases in the Balance sheet will require to recognize respective lease asset and resultant liabilities for the debt under operating lease. As a result of recognition of liabilities as debt under operating leases the actual liability position of the reporting entities will be reflected in the balance sheet of these entities (Glover 2014). The disclosure of operating liability in the balance sheet of a reporting entity will obviously help the users of the financial statements to correctly analyse the debt and resultant liability position of an organization better. The stakeholders will be able to assess the economic reality of the entities with appraisal of the financial statements. Thus, the economic reality of an entity will be better reflected by using the new accounting standards and the users of the financial statements will be in better position to reflect the true and correct financial position of the reporting entities. Thus, though the new accounting standard on leases, i.e. IAS 16, will reflect the economic reality of an organization but at the same time it will not be popular for those entities who have huge amount of operating leases as the financial potion of these entities will be actually reflect the financial position of these entities via their balance sheet which will obviously be much different from earlier (Fitó et. al. 2013).

The reasons for the unpopularity could be summarized as following:      

1. Huge increase in debt of the reporting entities who have substantial amount of operating leases.
2. The financial position will reflect the actual economic reality of a business organization which in all probability will be much worse than that reflected following the guidelines of the former accountings standard.

• Deteriorated solvency and bankruptcy position will be reflected in the financial statements of the reporting entities.

Answer v

The investors as a result of the new accounting standard on leases would get financial statements of reporting entities that will reflect the actual economic reality of the reporting entities in their financial statements. Earlier the operating leases were off balance sheet items under the former accounting standard as a result of which the economic reality of the reporting entities were not properly reflected in the balance sheets of these entities however, with the introduction of new accounting standard which has made it mandatory for the reporting entities to recognize liability in respect of operating leases too will help to reflect the economic reality of these entities in their financial statements. This will ensure that all leases will be visible in the books of accounts of the reporting entities including the balance sheet of the reporting entities. The investors, one of the users of the financial statements, would be able to properly assess the financial performance and financial position of a reporting entity as the new accounting standard will ensure that all types of leases will be visible in the financial statements of the reporting entity. Thus, the investor would be in a better position as a result of the introduction of the new standard to assess the financial position and performance of an entity compare to earlier with the use of former accounting standard. Proper assessment of the financial position of an entity will help the investor to take better decision affecting their interests in the reporting entities using the new accounting standard to record the leases (Vernimmen et. al. 2014).

The management will also be in a far better position to assess the pros and cons of different decision. Since all leases will be visible in the balance sheet with the introduction of the new accounting standard, the management will be in a better position to assess the actual financial impact of the decision to lease an asset versus the decision to buy an asset. 

References: 

Altamuro, J., Johnston, R., Pandit, S.S. and Zhang, H.H., 2014. Operating leases and credit assessments. Contemporary Accounting Research, 31(2), pp.551-580.

Andrade, S.C., Henry, E. and Nanda, D., 2014. The impact of operating leases and purchase obligations on credit market prices.

Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383.

Bushman, R.M., 2014. Thoughts on financial accounting and the banking industry. Journal of Accounting and Economics, 58(2), pp.384-395.

Cosci, S., Guida, R. and Meliciani, V., 2015. Leasing decisions and credit constraints: Empirical analysis on a sample of Italian firms. European Financial Management, 21(2), pp.377-398.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista Española de Financiación y Contabilidad, 42(159), pp.341-369.

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.

Glover, J., 2014. Have Academic Accountants and Financial Accounting Standard Setters Traded Places?. Accounting, Economics and Law Account. Econ. Law, 4(1), pp.17-26.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Kim, M. and Schmidgall, R.S., 2017. Key managerial and financial accounting skills for private club managers: Comparison to lodging managers. International Journal of Hospitality & Tourism Administration, pp.1-21.

Martin, X. and Roychowdhury, S., 2015. Do financial market developments influence accounting practices? Credit default swaps and borrowers? reporting conservatism. Journal of Accounting and Economics, 59(1), pp.80-104.

Meyer, M.J. and Meyer, T.S., 2014. Accounting case search: A web-based search tool for finding published accounting cases. Journal of Accounting Education, 32(4), pp.16-23.

Nastase, G., Calin, A.M. and Margina, O., 2016. INTERNATIONAL ACCOUNTING STANDARD NO. 16 TANGIBLE ASSETS AND ITS PRACTICAL IMPLEMENTATION. Calitatea, 17(S1), p.285.

Nigrini, M.J., 2016. The implications of the similarity between fraud numbers and the numbers in financial accounting textbooks and test banks. Journal of Forensic Accounting Research, 1(1), pp.A1-A26.

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.

Popovi?, S., Novakovi?, S., ?uranovi?, D., Miji?, R., Grublješi?, Ž., Ani?i?, J. and Majstorovi?, A., 2017. Application of international accounting standard-16 in a public company with predominantly agricultural activities. Economic Research-Ekonomska Istraživanja, 30(1), pp.1850-1864.

Robson, K., Young, J. and Power, M., 2017. Themed Section on Financial Accounting as Social and Organizational Practice: Exploring the work of financial reporting. Accounting, Organizations and Society, 56, pp.35-37.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.