FINANCIAL the new visibility with regard to all





Name: Muhammad Zahid

STUDENT ID:  Kem3067


Table of Contents
Assessment task Part A: 3
(i)          Assets tested for impairment 3
(ii)        Method
of conducting impairment test: 4
(iii)       Impairment
expenditures. 5
(iv)       Assumptions
and estimates used by the company for conducting impairment test 6
(v)        Subjectivity
involved in the process of impairment testing. 7
(vi)       Interesting,
surprising, difficult or confusing part to understand impairment testing. 8
(vii)      New
insights regarding conducting the impairment 8
(viii)         Fair
value measurement 8
Assessment task Part B: 9
(i)          Reason why the former accounting standards does not reflect the economic
reality. 9
(ii)        Reasons
why under the previous accounting standards the lease liabilities of the
reporting entities in the balance sheet were 66 times more than the reported
debts under the balance sheet 9
(iii)       Reasons
why the Chairperson of IASB is in the view that under the previous accounting
standard no level playing field was there among some airline entities. 10
(iv)       Reasons
why the Chairperson is in the view that the new standard will not be popular
with everyone  11
(v)        Possibilities
that the new visibility with regard to all the leases will result into better
informed decision for investment 11
References: 13



Assessment task Part A:

The focus of the report is to lay
emphasis on the impairment elements and its assumption that is applied by Codan
Limited to prepare its annual report, financial statements and conducting
impairment tests on the company’s assets. The given report also focuses on the
methods or procedures related to impairment testing practiced by the
organization. Furthermore, the subjectivity aligned with procedures for
conducting the test is elaborated. Codan Limited is a leading supplier and
manufacturer of communication, mining technology and metal detection. It is
headquartered in South Australia with high revenue of $132.3 million (
2018). The annual report of Codan Ltd. has been included for the year
ended 2016. The company uses technology to overcome communications, security,
productivity and safety problems existing all around the globe. In the current
scenario, the products are sold in over 150 nations and approx 85% of revenue
is generated from export.

Impairment of asset is generally
the existing assets of the organization having a lower market value than the
carrying value of the specified asset (Amiraslani, Iatridis
and Pope 2013). Tangible fixed assets of the company like property,
plant and equipment is more likely to get impaired. Whereas, the intangible
assets of the company includes goodwill and accounts receivable. In the
company’s income statement, loss is recorded subsequent to adjusting the carrying
value for impaired asset. After following the procedure for writing off
impairment, the company assets will display a reduced carrying cost.  The value of the assets get reduced due to
the adjustments made in the assets and will be further recognized as loss.

Assets tested for impairment

As per the financial or annual
report of Codan Ltd. for the year ended 30th June 2016, following
assets for impairment were tested by the company are as

The intangible assets and goodwill
of the company are not amortized, as they are generally tested for impairment
frequently, more than once in a year or annually. If there is any change
occurred in an event or particular circumstances, it indicates that the asset
impairment is required (Andrews 2012). This is
further recorded in the financial statement at cost lower by accumulated losses
due to impairment. Codan Ltd. other assets that includes equipment,
inventories, property and plants are further tested for asset impairment, when
it shows an indication about the assets carrying amount, which may be

Method of conducting impairment test:

When there is an indication that
the carrying amount of assets could not be recovered then the assets are tested
for impairment except the goodwill and intangible assets. however, goodwill and
intangible assets  of the company that
are unamortized previously can be annually tested for impairment or can be
tested for more than once in a year. This could be resulted due to an event or
circumstance indicates so (Jennings and Marques 2013).
For impairment assessment, the specified set of assets is combined together at
its reduced levels that can be identified easily as cash inflow separately.
They are further independent of cash inflows from group of assets or other
assets that are considered to be as cash generating units. Furthermore, the
non-financial assets excluding goodwill that are responsible for impairment are
analyzed (Filip, Jeanjean and Paugam 2015). As there are
possibilities for reversal at each reporting date of impairment in the

Impairment expenditures

Codan Ltd. recorded impairment
expenditure for the year ended 30th June 2016 as follow:

assets- during the specified period, the given company Codan Ltd. has
recorded a total impairment on building, which amounted to $ 1,379. The impairment
amount on Minetec equipment, property and plant includes $524 for the year

Intangible assets: the impairment amount for the inventory
and intellectual property are $1,287 and $592 respectively

 Assumptions and estimates used by the company for
conducting impairment test

Codan ltd. has made several
estimates and assumptions as the company is highly concerned about its future.
The accounting estimates outcome should be equal to the organization related
actual outcomes.  Certain mistakes and
estimates include considerable risks and could further lead adjustment of
materials to the specified assets. The particular asset of the company carrying
the value to the next financial year should further be disclosed and discussed
at the end of accounts with the help of notes (Rennekamp,
Rupar and Seybert 2014). The  judgments
are  made according to the accounting
required. As the business market of Codan ltd. goes through negative or adverse
condition and there is continuous downturn in the market. In order to ascertain
the recoverable amount for the company’s tangible  and other intangible assets, cash generating
units was conducted. Cash generating units (CGU) recoverable amount is computed
according to the calculation of value-in-use. Moreover, this calculation
utilizes the projection of cash flows that are based on the financial forecast,
which is generally prepared by the management of the company since last 5
years. Impairment is generally measured by the difference between present value
and carrying amount at estimated future cash flows (Cotter 2014).
This has been discounted at a previous rate of interest. For assessing the
value-in-use, following assumptions are used:

Discounts rates

Sales margin

Growth rates using the extrapolate cash flows
beyond forecast period.

 Subjectivity involved in the process of
impairment testing

According to the accounting
regulations IAS 36 upon Impairment of assets, it is usually perceived to be
included in IFRS standards and demands subjective interpretation. It could
further be adaptable as per the managerial requirements. The impairment of
assets further  does not limit creative
accounting (Ramanna and Watts, 2012). From the annual report of
Codan ltd, it can easily be reflected that huge amount of subjectivity
involvement is present in the given statement. While the organization carrying
out the impairment test procedures had opportunity for exploiting its
discretion and carrying out the impairment test for goodwill opportunistically.
This could further be proved from the fact that allocation of goodwill to the
cash generating units. Computation of amount that is recoverable with no
possibility of active prices due to the given goodwill, which is a subject of
discretion (Bertomeu and Cheynel 2015).

 Interesting, surprising, difficult or
confusing part to understand impairment testing

From the analysis of the above
assessment that was undertaken, it can be ascertained that the most confusing
or difficult part related to the impairment testing is the indication of
impairment. The indication mostly depends on the internal and external signal
for the impairment of assets. The frequency related to conducting the impairment
test for goodwill and intangible assets mostly depends on the discretion of
management (Bertomeu and Cheynel 2015). Furthermore, there are
chances that the management will practice the impairment test opportunistically
when there is any value downturn.

 New insights
regarding conducting the impairment

Impairment loss within the
management is usually the difference in value between assets carrying amount
and recoverable amount for the particular asset.  The recoverable amount of the asset that is
higher among the fair value and value-in –use is further decreased by the deposal
cost (Costantini and Zanin 2015). The fair value in the
organization is determined only through the value of assets or sales agreement
present in the active market, where trade of assets is taken place. Moreover,
the determination of fair value is made through availability of adequate
information that reveals the true or exact amount at which the business can
sell its asset (Bepari, Rahman and Mollik 2014).
According to IAS 36, the value in use of the business is the present value
related to future cash flows, which is expected to be gained from the assets or
cash generating units.

 Fair value measurement

According to the IFRS 13 
standards, fair value is ascertained or determines d through the

Sales agreement

The value of asset in present active market in
which it is traded.

The availability of true and fair information
that reveals the amount in which the company’s assets can be sold.

Assessment task Part B:

 Reason why the
former accounting standards does not reflect the economic reality

In 1 out of 3 companies using IFRS
or US GAAP are generally affected by the various changes in accounting
techniques. According to the current status, organizations under IFRS or US
GAAP  have leased assets and commitments
that amount to more than 3.3 trillion ( 2018).
Majority amount that is 85% are generally not reported in the company’s financial
statement or balance sheet as they are regarded as operating leases. The investors
usually include all the estimates, which are inconsistent, incomparable and
inaccurate computation for compensating this. Therefore, the statement is
provided that the former accounting standards fail to reflect the true
economics reality.

 Reasons why under
the previous accounting standards the lease liabilities of the reporting
entities in the balance sheet were 66 times more than the reported debts under
the balance sheet 

According to the earlier accounting
standards, majority of the organizations reported 85% of its league identified
the true and fair amount related to operating lease and moreover, did not
presented it within their balance sheet. The operating leases of the company
although were not recorded within the company’s balance sheet but actually
created real liabilities. Henceforth, during the time of financial crisis, major
companies get bankrupt as they are unable to adjust to the latest economic
reality as fast as possible (Fitó, Moya and Orgaz 2013).
Furthermore, the companies  had adequate
amount of commitment related to the long-term operating leases whereas, the
company balance sheet were identified as quiet lean. Therefore, the reporting
entities lease liabilities within the balance sheet proved to be 66 times more
than compared to the debts under balance sheet.

Reasons why the Chairperson of IASB is in the
view that under the previous accounting standard no level playing field was
there among some airline entities


The former techniques of accounting
for lease resulted into absence or lack of compatibility. Airlines industry
generally accounts almost all of their organizational leases as operating
leases. The company also does not record this operating lease under their
financial statements and balance sheets. Henceforth, an airline firm, which
leases mostly all of its aircraft fleets is known to be very dissimilar from its
competitors that purchase all of its overall fleet (Lee and Hooy
2012). Although in reality, in both the airline companies the financial obligations
are almost very similar. Hence, there are no or negligible level playing field
present among these airline industry. After the new standard introduction in
the companies all the existing leases would be accounted as assets . Moreover
the lessees will be regarded as liability. Henceforth, it is expected that the
problems would be resolved.

Reasons why the Chairperson is in the view that
the new standard will not be popular with everyone

The recent changes made in the
standard will is not possible to be popular with all the companies but is
expected to have a long lasting impact in majority of the listed company.  The main reason regarding this are that the
changes made are always controversial in nature (Banker, Basu
and Byzalov 2016). This can further leads to warning effects related to
adverse or negative economic circumstances and fair costs associated due to the
system changes. Moreover, the organization should readily accept the required
changes in the balance sheet as well as the income statement because of the
changes made in new standards. Furthermore, the changes made in the
organization may have huge commercial impacts. For example, various banking covenants
and contractual arrangements tied with the company’s financial statements
should be needed to get revised before implementation of the new changed
standards. This also includes debt to equity ratio and profit targets required
for arranging employees bonus payments (Gordon and Hsu 2017).
Hence, the overall department within the business has to clearly understand the
consequences or impact of changes. This includes the departments such as human
resource, treasury, IT, finance, investor relation and asset procurement
department. All these above mentioned valid reason would further lead to new
accounting standard unpopularity.

Possibilities that the new visibility with
regard to all the leases will result into better informed decision for

According to the former accounting
standard, majority of the company used to treat its operating leases as off
balance sheet element . The investors or financial statement user does not have
complete picture of the business financial position (Nawaiseh, 2016).
Hence, it was impossible to compare the organization that leases assets with
the one that buy assets. The advanced update of IFRS 16 would outweigh the cost
and provide better decisions.



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Andrews, R., 2012. Fair
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