Corporate Accounting In Pearson Education -Myassignmenthelp.Com

Question: Discuss About The Corporate Accounting In Pearson Education? Answer: Introduction The company we selected is Transpacific Industries Group Ltd its name changed to Cleanaway Waste management it is a recycling and waste management company providing services to industries operating in Australia. Transpacific came into existence in August 1987 and listed on Australian Securities Exchange in May 2005. Requirements We did analyse the firms annual report of 2016. The firm has applied impairment test on goodwill that is only asset where firm applied the impairment test is on the goodwill allocated to the Cash Generating Unit. The goodwill is allocated in staffing, maintenance and marine.The CGUs to which goodwill is allocated (Staffing, Maintenance and Marine) are tested for impairment annually or the test can be conducted more frequently if the changes or the events indicate that the goodwill is impaired. The impairment test is done by reviewing the carrying amounts of the assets and group of assets to decide as if there is any symptom that those assets have undergone any impairment loss. If there is any such sign then the firm will guess the recoverable amount of such asset to access the degree or amount of impairment loss (Dagwell, Wines Ambert, 2015). Yes, the firm has recorded an impartment expenditure of $ 102397000 during the period. The impairment comprises the use of estimates and judgements that are not restricted to timing of the impairment and quantity of impairment. Significant judgements are made by the management about the estimation of the impairment indicators, that can be expectations of growth, changes in the competitive position, increase in cost of capital and many other issues that may lead to impairment like business restructuring. In addition this the management is required to make substantial estimations regarding the future cash flows of the firm and about the calculation of fair values while measuring the recoverable amount of the assets or the group of assets. The conventions and estimations are made about the forecasted earnings before interest and tax and future cash flows, applicable discount rates, growth rates, residual value and useful life of the asset. The estimates, judgements and assumptions which are made by management for assessing the impairment are based on forecasted as well cu rrent market situations. Changes in operating and economic situations will impact these assumptions that would result in the recognition of changes in impairment in future periods. The Recoverable amount of (CGU) that is Cash Generating Unit is based on the value in use which is calculated by using the pre-tax cash flow projections which are based on the financial budget of 2017 approved by the directors of the firm, which is then extrapolated for four years at a growth rate of 2% (between 1.70% and 1.80%) and pre-tax discount rate used is 12.20%. The cash flow projections of this period are based on the gross margins which were expected to be same throughout this period. These are substantially consistent with the gross margins of 2016. The cash flows which are beyond that five year period are generalized using the growth rate of 2.50% per annum. This growth rate is not over the long term average growth rate used in the business markets of Australia. Based on the above assessment, the Directors concluded that the carrying amount of Goodwill and other intangibles will not go beyond its Recoverable amount (Annual Report, 2016). The company did the impairment test and identified the impairment loss. It was companies contention that if the recoverable amount of the cash generating unit is less than the carrying amount then the impairment loss will be first allocated to reduce the carrying amount of goodwill if any distributed to the CGU and then to the other assets of the CGU in proportionate amount. The impairment loss of goodwill is directly transferred to profit and loss account and is not to be reversed in the subsequent years (AASB 136, 2009). Fair Value measurement is all about the price to be received at the point of sale or to transfer the asset. Fair value is market based measurement and not to be called as an entity based measurement. The firm also did the fair value measurement following the criteria used in the market. The fair value is calculated using the cash forecast of 5 years. Referring to the case, the IASB chairman believes that previous lease accounting standard does not shows economic reality. Reasons being, under current accounting standard, more than 85% of leases are recognized as operating leases and are not reported on the balance sheet of the company. Though they are off balance sheet, they create real liabilities and it becomes difficult for the major sectors like retail industry to adjust with the new economic reality during financial crisis. The fact that companies are allowed to be discrete about their operating leases, leads to faulty representation of companys financial position and investors find it difficult to compare and contrast the economic condition of separate entities. Moreover, the information, investors and analysts receive from the balance sheet is not true and reliable for doing analysis. This is why the chairperson feels that former lease standard does not reflect economic reality. According to old standard, when a lease is recognized to be similar to a purchase of an asset, it is considered as financial lease and is reported in companys balance sheet. All the other remaining leases are considered to be operating lease and are not reported. These are called off balance sheet lease liabilities (Iasplus.com, 2017). Entities reporting under former lease accounting standard have their off balance sheet lease liabilities 66 times greater than reported debt. The reason for this much difference is reporting requirements of the standard. The companies are not required to record their operating leases leading to the flawed presentation of its financial condition. As they are not recorded, so the investors and other people are not aware about the same. They can trade these lease liabilities in any manner and as and when they required. Having off balance sheet leases, helps the company to keep their debt equity ratio low. In the case given, the chairperson argued that there is no level playing field between some airlines companies in respect to their reporting formats. Airline entities working under old lease standard will report their leases as required but the competitor company which bought their product make a different entry in its books of accounts. The airline company, which leases its fleet may recognize it as an operating lease and does not report about the same in its balance sheet. On the other side, the competitor company which purchases its fleet will recognize it as a finance lease because it is considered to be similar to the purchase of an underlying asset. This finance lease will be reported in the balance sheet of the competitor. The difference between such reporting formats and requirements makes it difficult to compare the financial statements of both the airline entities. This is why the chairperson said that, former lease standard does not provide a same level to compare between two companies (Deloitte UK. 2016). Introduction of new lease standard will mainly impact airline industry, retail and shipping sector. As the chairperson said, it will not be popular among everyone. The reason for this unpopularity may be the retaliation by the companies towards the new standard. IASB has established IFRS 16, a new lease standard which will replace IAS 17 and will be effective from 2019. Under this standard, the leasing requirements for the lessee will be changed as they have to record all the leases on the balance sheet and the classification as operating and finance will be eliminated (KPMG, 2016). Another reason is that the reporting of all leases will increase the assets and liabilities which results in changes in the key financial ratios. Companies debt equity ratio may increase because of this (Morales-Daz and Zamora-Ramrez, 2017). The IFRS 16 will bring certain changes in the lease accounting. By complying with this standard, companies will be able to reflect true and fair position of the finances in their financial statements. This will ultimately help the investors to take correct decision and accurately evaluate the financial performance of the companies. Comparability will become easier which results in better decisions regarding lease or buy. The new format will bring a single lessee accounting model which removes the classification of off balance sheet and on balance sheet lease liabilities. Reporting all the leases in the annual financial statements will provide analysts with the true and reliable figures. Moreover, IFRS 16 will results in better allocation of capital, which will be advantageous for economic growth (IFRS 16, 2016). References: AASB 136, 2009. Impairment of Assets, Accessed on 29-01-2018, from https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf. Annual Report, 2016. Transpacific Industries Group Ltd, Accessed on 29-01-2018, from https://programmed.com.au/media/65229/13-programmed-2016-annual-report.pdf. Dagwell, R., Wines, G. Ambert, C., 2015. Corporate Accounting in Australia, Pearson Higher education. IFRS 16, 2016.The Leases Standard is Changing, Pwc.com. Retrieved 29 January 2018, from https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf IFRS 16 Leases | Deloitte UK. 2016.Deloitte United Kingdom. Retrieved 29 January 2018, from https://www2.deloitte.com/uk/en/pages/audit/articles/ifrs-16-leases.html Iasplus.com. 2017.IAS 17 Leases. [Online] Available at: https://www.iasplus.com/en/standards/ias/ias17 [Accessed 29 Jan. 2018]. Morales-Daz, J. and Zamora-Ramrez, C., 2017. Effects of IFRS 16 on Key Financial Ratios: A New Methological Approach. KPMG. Retrieved 29 January 2018, from https://www.in.kpmg.com/ifrs/files/first-impressions-leases-IFRS16.pdf