How Does the FASB Make Decisions? A Descriptive Study of Agenda-Setting and the Role of Individual Board Members.

By considering the annual report of Hills industry limited, the impairment assets are inventory, assets transferred, intangible assets, goodwill, plant, property, equipment and other receivables (Annual report of Hills Limited, 2017). The further statement shows that goodwill and accounts receivables were impaired in 2016, but the same transaction is not noticed in 2017, as it is already on its fair value as per applicable accounting provisions.

The annual report shows that the net loss of the year ended is inclusive of a total expenditure of $4.395 million regarding inventory’s impairment (including purchased stick on agreeing on a distribution contract with Tyco during Feb 2015 of amount of $3.461 million and other departure brands with an amount of $0.934 million) (Annual report of Hills Limited, 2017). Moreover, unrealised losses are eradicated unless and until the transaction offers proof of assets transfer impairment. Impairment of intangible assets, receivables and goodwill is stated as non-IFRS measures which are not subjected to review of the audit.

For the impairment of assets; the residual values of assets and their useful life are audited and altered if suitable, at the end of every accounting period. The carrying amount of assets is written down instantly to its recoverable amount, in case the carrying amount is more than its predicted recoverable amount. Profits and losses on disposable are identified by making comparisons of proceeds with the asset’s carrying amount (Huikku, Mouritsen and Silvola, 2017). These are inclusive of gains or losses. While revaluing assets are sold, it is the policy of Group to do transferring of amounts comprise in reserves in context with those assets to the proceeds reserve.

In terms of goodwill; the value of an asset held on the purchase of subsidiaries is inclusive of intangible assets is considered. Goodwill is not considered as amortised. However, it is tested for impairment on an annual basis or more often when changes in situations show that may be impaired. Further, it is carried at less cost accumulated impairment losses, Profits and losses on enterprise disposal contain the goodwill’s carrying in relation with the enterprise being sold (Chen, Shroff and Zhang, 2014). 

Customer relationship, patents, trademarks and brand create a limited useful life and are carried at the cost-less impairment losses. Further; Trade receivable are realized formerly at their fair value and consequently are evaluated at amortised costs by make use of less provision and interest method for impairment (Li, 2015).

Fair value measurement capabilities, disclosure, and the perceived reliability of fair value estimates:

It can affect the accounting procedures of Group for its financial assets and liabilities, with a rise in the impairment provision versus trade receivables estimated as per the AASB 9.

For recording impairment expenses company applies following provision; in a situation where recoverable amount of asset is less from the carrying amount of asset, then the carrying amount is discounted to the amount of recovery of the asset and the discounted amount (impairment loss) is considered as an expense (Annual report of Hills Limited, 2017). In case the carrying amount of asset is revalued then the treatment of impairment loss is done as a revaluation reduction by applying the relevant accounting standards. Ultimately, the overdue amounts are realized in P&L as the sold goods costs in case of stocks, depreciation and impairment in a situation of plant and equipment.

Key assumptions by company:

• If a trade receivable wherein an impairment allowance has realised is considered as uncollectible at a later time and is written-off in opposition to the allowance account.
• Goodwill is allocated to the units of cash generation with the intention of impairment testing (Annual report of Hills Limited, 2017).
• Depended on the reduced part default rates, it is believed by the Group that no allowance of impairment is essential in terms of trade receivables.
• The company is not providing preference to early adoption of provisions of AASB 9.

Impairment testing is generally based on the estimation of asset’s values by reducing estimated future cash flows by making use of appropriate rates of discounting (Mazzi, Liberatore and Tsalavoutas, 2016). Given the subjectivity of aspects of impairment estimations, calculations and disclosures regarding uncertainties and assumptions are significant for the users of financial reporting.

Based on this study, I had found that understanding meaning of impairment is easy, but its application is highly complex due to changing provision of accounting standards. For me, the most surprising aspect regarding this study was that corporate entities are required to update the value of assets on the basis of fair value measurement concept. This enhances the authenticity of provided financial information by company (Kabir and Rahman, 2016). Although, this standard provides prospects of manipulating financial data and comparison of financial figures in terms of impairment is highly confusing.

With this study, I have learned that impairment testing tends to ensure that assets of a company are not carried at greater than their recoverable amount that is, the higher of fair value minus expense related to disposal of asset and value in use. The exemption of goodwill and some intangible assist by which a yearly impairment testing is needed, companies are needed to conduct impairment testing when there is a proof of assets impairment (Kabir, Rahman and Su, 2017). Further the testing might be conducted specifically for the units of cash-generating wherein an asset does not create cash inflows which are highly not based on those from other assets.  

Fair value measurement is applicable to IFRS which needs or allows the same or disclosures and offers a particular IFRS structure of evaluating the fair value and needs disclosures regarding fair value measurements (McDonough and Shakespeare, 2015). The standards state fair value in the context of an exit price concept while making use of a ‘fair value hierarchy’ thereby resulting in a market-based instead of an entity-specific notion.

Accounting conservatism and the cost of capital

The chairperson of the IASB believes that the former accounting standard for leases did ‘not reflect economic reality because listed companies throughout the world have the leases of approx 3 trillion Euros, particularly in the sectors like airline, retail and shipping sectors. According to the accounting requirements, above 85% of such leases are listed as operating leases. Further, these leases are not recorded on the balance sheet. Indeed, it can be said that the accounting does not reflect the reality of economy (Ghafoor and Khan, 2017). Apart from the operating leases which are not recorded on the balance sheet, by considering this aspect it can be said that these leases can create real liabilities. In the financial crises, few retail chains got bankrupted as they were not able to amend according to today’s economic reality.

In accordance with the analysis conducted by IASB, in the situation of some retailers, the total value of these off-balance sheet debts was up to 66 times more than the value stated under balance sheet (Weidner, 2016). The reason behind this is they were having considerable long-period commitments of these debts in their stores but had misleading inclining balance sheets. They did not state the accurate picture of their balance sheet which resulted in insufficient comparability. Their significant debt liabilities were consisted of lease obligations due to which they had 66 times over value.

Current standards are not suitable for these sectors, as the operating leases are similar to each other although having the same background leases results in complexity to compare. Further, the new IFRS 16 being effective by 2019 will have corresponding provisions which are applicable to all industries (McCall, 2017). This will address such issues; it will lead to considerable changes in balance sheets of companies. All the operating leases will be realized as assets and liabilities thereby reflecting the core economics.

The new standard is likely to impact approximately half of the total listed companies. The specified change will not become popular with each and every company, the reason behind this unpopularity is; IFRS will not eliminate leasing industries from business, and the leases will appeal to best the best financial source (O’Regan, 2015). The IASB consider that it is not likely that the increased leased obligation visibility will have an effect in context with borrowings and debts. costs will be engaged in the new system to adopt IFRS 16, and the benefits of the same will highly compensate the losses.

The new IFRS 16 standards will result in the improved allocation of capital which will be highly beneficial for the growth and development of the economy. The new standards need lessees to realize all assets within the balance sheet which will further state the right to implement an asset for a specific time period and the related liabilities meant for payments (Jiang, Wang and Wangerin, 2017). By considering the same, the new visibility of every lease will result in better investment decisions made by investors and more overweighed leases against buying decisions made by management.

References

Annual report of Hills Limited. 2017. Available through <https://corporate.hills.com.au/getattachment/b94ab85c-0d18-4b19-9352-2fc0f436c007/HIL-Annual-Report-to-Shareholders-FY2017>. [Accessed on 24^th January 2017].

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Chen, W., Shroff, P.K. and Zhang, I., 2014. Fair Value Accounting: Consequences of Booking Market-driven Goodwill Impairment.

Ghafoor, Z. and Khan, M.A., 2017. ISSUES IN FINANCIAL REPORTING. Corporate Social Irresponsibility: Individual Behaviors and Organizational Practices, p.241.

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.

Jiang, J.X., Wang, I. and Wangerin, D., 2017. How Does the FASB Make Decisions? A Descriptive Study of Agenda-Setting and the Role of Individual Board Members.

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.

Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.

Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), pp.555-582.

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.

McCall, N.C., 2017. Financial Reporting: An Analysis of Accounting Methods and Principles (Doctoral dissertation, The University of Mississippi).

McDonough, R.P. and Shakespeare, C.M., 2015. Fair value measurement capabilities, disclosure, and the perceived reliability of fair value estimates: A discussion of Bhat and Ryan (2015). Accounting, Organizations and Society, 46, pp.96-99.

O’Regan, P., 2015. Financial Information Analysis: The Role of Accounting Information in Modern Society. Routledge.

Weidner, D.J., 2016. New FASB Rules on Accounting for Leases: A Sarbanes-Oxley Promise Delivered.