Auditing is challenging in value measurement - MyAssignmenthelp.com

Question: Discuss about the Auditing is challenging in value measurement. Answer: Task 1 Impairment assets associated with commonwealth bank are goodwill, joint ventures and plant and equipment. The goodwill arising from the combinations of business which include intangible assets on balance sheet is impaired. If any indication occurs that the investment is being impaired, then the whole carrying cost of the investment in the joint venture is tested for impairment. In plant and equipment, the company calculates it on fair value based on market valuation independently (Annual report of Commonwealth Bank 2018). For the purpose of impairment testing of plant and equipment the companys revaluations adjustments are shown in the reserves of asset revaluation in the income statement. The realized amount of the reserves of asset revaluation are then transferred to the retained profit account. Other properties remain at a cost which includes direct increasing of the cost of acquisition by subtracting accumulated depreciation and heading towards impairment testing (Lind and Arvidsson, 2014).The goodwill of the company is impaired annually by locating the units from where the cash is being generated. It is done by comparing the recoverable sum from the carrying amount of the goodwill. If the carrying sum is more than impairment testing is conducted by the company. The loss held from the impairment testing of the assets of the company is further recorded in the income statement under the section of total operating expenses. The loss occurred by impairment testing is a reason for the reduction in the net income of the firm (Paugam and Ramond, 2015). This is included in testing for the recoverability by calculating the future undiscounted flow of cash for the assets and then comparing the value with the carrying cost of assets. The applicability of Groups impairment testing needed the relevant use of judgements, assumptions and estimated which are based on past experience and factors that are assessed to be viable and are considered on a continual basis. The provisions are formed on the basis of fair value estimated and are considered as the variation between carrying the value of assets and the future cash flow value reduced at the effective interest rate of the financial assets (Huikku, Mouritsen and Silvola, 2017). The nature of key estimates and assumptions are considered as uncertain as provisions vary. The Group assess that provisions are applied adequately and state the best estimate of expected future costs. The impairment requirement can result in prescriptive as well as subjective to for making considerable judgements. The group must make sure that all requirements are applied in an appropriate manner (Carlin and Finch, 2011). The impairment testing process applicable under the AASB particularly AASB 136 of impairment assets is complex yet prescriptive. Although, there is more subjectivity engaged in the application of these requirements and can create significant impacts due to lack of specific guidance. For example; If or if not impairment in the cash-generating unit is applicable to goodwill or financial asset then it will be based on the goodwill allocation over the cash-generating units of Group (Wen, and Moehrle, 2015). In a situation where goodwill has not been allocated to the unit for the required impairment then it will be subjected to impairment. Thus, the actual outcomes might vary from subjectivity and can impact the net assets and profit of the Group. By considering the present study, I found that this topic is interesting yet complex due to the diversity of applicable provisions. The most interesting aspect of this study was a requirement of impairment testing by considering the viability of information for users. However, the confusing aspect of this study was variation in applicability of provisions of impairment in different situations. The most surprising thing about this study is that the company can use different methods of impairment testing for different types of assets. In accordance with the conducted study, I have gained new insights regarding the conduct of impairment testing done by companies to consider if or if not the goodwill or other assets with their useful lives are impaired. Subsequently, the cash-generating units carrying amounts are evaluated with their recoverable amount (Mazzi, Liberatore and Tsalavoutas, 2016). Further the recoverable amount is identified at their fair value less costing, by applying earnings multiples to the Banking and Wealth Management of Group. Fair value refers to the amount that will be gained to sell an asset or paying for liability transferring on an orderly basis with market applicants on a measurement date (Carlin, Finch and Laili, 2009). Further, the fair value measurement is stated under standards which requires measurement done on fair basis or disclosures about the same. The specified standards are applicable in terms of an exit price with using a fair value hierarchy' and lead to a market-based notion rather than an entity-specified one (Sellhorn and Stier, 2017). The Groups anticipated fair value and fair value hierarchy for the Commonwealth Banks financial aspects were not measured on the basis of fair value as on 30 June 2017. This shows consideration that small-scale firm which is subjected to low scrutiny by management and investors. Along with this, it is noticed that the performance of firm measures as revenue and expected cash flow are low to small firms. However, the medium values of the same for larger firms represent that they are also suffering from poor performance. The fair value must be indicating price estimated at which financial instruments can be sold or transferred by a transaction among market participants. Task 2 In the given study; the head of the IASB has a perception that in past accounting model which was used to record lease transactions were not capable of imitating the exact economic condition of the company. In accordance with the accounting model for lease earlier the company can easily separate the type of lease and was being recorded on the balance sheet. The recent lease accounting does not need operating lease to be recorded in the firms balance sheet and hence the result of this that it do not represent the assets, liabilities and the financial statements of the firm correctly (Haywood, 2018). The rise in the debt for lease in the companies took place because of the misleading information recorded on the balance sheet. The issue is related to the operating lease as in the core content of the current accounting model; it is stated that there are two type of lease financial and operating lease (IFRS, 2018). The financial lease is identified when asset and liabilities are recorded on balance sheet. But the operating lease is identified as the expense of the company and is not recorded on the balance sheet. The companies face problems as writing off the operating lease as it will show less of profitability and liability than it should be. As a consequence, the entity overlooks this unrecorded lease and hence it will result in an lease debt 66 times more than the actual debt. The argument given by the president of the board for most of the aviation industries was that; they would not be able to cope up with the new regulations of the accounting model for lease. The reason behind his argument was that the effects would be on the financial performance of the airline industry. Further; there will be only a little impact on the lessors but their accounting treatment will remain same. The only problem which will arise is the change in the dynamics of the market and also a change in the demand for borrowed aircraft (You, 2017). The coming up of new IFRS standards will have a great impact on the aviation companies which use IFRS as a framework for financial reporting (Lexology, 2018). The companies from now onwards will be needed to identify all type of lease on balance sheet and will also record new assets and liabilities. According to the Chairman of the board, the introduction of new IFRS 16 will affect many companies as it comes up with a single model of accounting which will abolish the differences among the operating and financial lease. The new model will also be applicable to the previous leases, and now all leases will be recorded on the balance sheet of the entity. In the model, the lease will be defined as an identified asset and will have right to control the contract (Carlin and Finch, 2010). The rent expenses will be substitute by the depreciation and cost of interest and entities will need to identify the liability of lease for the present worth of future payments of the lease. The biggest benefits of IFRS16 in lease accounting model is that it will now implement both the lease financial as well as an operating lease on the balance sheet. It will also have an effect on the entitys interest cover; asset turns over, net income, operating profit and cash flows. The company will also experience great impact on the decision-making process, forecasting, and financial reporting. References Annual report of Commonwealth Bank. (2018). (pdf). Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf [Accessed 25 Jan. 2018]. Bean, A. and Irvine, H., (2015). erivatives disclosure in corporate annual reports: bank analysts' perceptions of usefulness.Accounting and Business Research,45(5), pp.602-619. Cannon, N.H. and Bedard, J.C., (2016).Auditing is challenging fair value measurements: Evidence from the field.The Accounting Review,92(4), pp.81-114. Carlin, T.M. and Finch, N. (2010), Resisting compliance with IFRS goodwill accounting and reporting disclosures evidence from Australia, Journal of Accounting Organizational Change, Vol. 6 No. 2, pp. 260-280. Carlin, T.M. and Finch, N. (2011), Goodwill impairment testing under IFRS: a false impossible shore?, Pacific Accounting Review, Vol. 23 No. 3, pp. 368-392. Carlin, T.M., Finch, N. and Laili, N.H. (2009), Goodwill accounting in Malaysia and the transition to IFRS a compliance assessment of large first year adopters, Journal of Financial Reporting Accounting, Vol. 7 No. 1, pp. 75-104. Haywood, A. (2018).Why Is Global Lease Accounting About to Change?IFRS 16 and FASB ASC 842: Leases. [Online].Available at: https://blog.innervision.co.uk/blog/why-is-global-lease-accounting-about-to-change-ifrs16-and-fasb-asu-842-leases [Accessed 25 Jan. 2018]. Huikku, J., Mouritsen, J. and Silvola, H., (2017). Relative reliability and the recognisable firm: Calculating goodwill impairment value.Accounting, Organizations and Society,56, pp.68-83. Ifrs.org. (2018).IFRS. [Online] Available at: https://www.ifrs.org/news-and-events/2016/03/hans-hoogervorst-article-shining-the-light-on-leases/ [Accessed 25 Jan. 2018]. Kemppainen, S.P., (2015). Goodwill Impairment Testing in Accordance.Accounting Review,27(4), pp.283-310. Lexology.com. (2018).How will the Aviation Industry be affected by IFRS 16? | Lexology. [Online] Available at: https://www.lexology.com/library/detail.aspx?g=22680ff3-ec0f-4557-85d5-520404dd4489 [Accessed 25 Jan. 2018]. Lind, E. and Arvidsson, M., (2014). Indicators of goodwill impairments: Pre-and post-acquisition indicators ability to predict future impairments. Mazzi, F., Liberatore, G. and Tsalavoutas, I., (2016). Insights on CFOs perceptions about impairment testing under IAS 36.Accounting in Europe,13(3), pp.353-379. Paugam, L. and Ramond, O., (2015).Effect of Impairment?Testing Disclosures on the Cost of Equity Capital.Journal of Business Finance Accounting,42(5-6), pp.583-618. Sellhorn, T. and Stier, C., (2017). Fair Value Measurement for Long-Lived Operating Assets: Research Evidence. Wen, H.J. and Moehrle, S.R., (2015). Accounting for goodwill: A literature review and analysis. You, J., (2017).The Impact of IFRS 16 Lease on Financial Statement of Airline Companies(Doctoral dissertation, Auckland University of Technology).