Disclosure Of Goodwill Impairment Testing -Myassignmenthelp.Com

Question: Discuss About The Disclosure Of Goodwill Impairment Testing? Answer Introducation The main objective of this study is to make analysis and evaluation of various aspects of impairment testing for Forge Group Limited. It needs to be mentioned that the testing of impairment takes place when the marketing value of an assets shows less than the reported value in the financial statements (Ramanna and Watts 2012). From the analysis of the annual report of the company, it can be observed that the company has used goodwill for the purpose of impairment testing. The analysis of the annual report also shows that the company has their business goodwill in each of the groups cash generating units that is expected to be beneficial for the company. Forge Group Limited does the testing of the cash generating units of goodwill on an annual basis or more frequently when the company gets the indication that the particular asset may be impaired. In case there is any loss of impairment in goodwill, the company uses to recognize it in the profit of loss in the comprehensive income stat ement (Ji 2013). The analysis of the annual report of Forge Group Limited shows that the company uses a specific technique for impairment testing. In Forge Group Limited, goodwill originated from the business combination is considered as intangible assets. There is not any provision for amortizing the goodwill but to test them when there is any indication of impairment (Aschfal, Evertz and Oliver 2013). As a part of this testing, the allocation of goodwill is done among the companys cash generating units. With the help of goodwill testing, the company use to determine the recoverable amount of each cash generating units and it is done with the help of value-in-use calculation. The value-in-use calculation is done based on the present value of the cash flow projections over a period of three years. The discount of the cash flows is done with the use of a post-tax nominal discount rate that is based on the companys weighted average cost of capital after the adjustments of risks and cash generating unit s. At the time of carrying on the impairment testing, business organizations incur certain amount of expenses that is considered as impairment expenditures. There is not any exception of this fact in case of Forge Group Limited (Khairi, Laili and Tran 2012). From the analysis of the annual report of Forge Group Limited, it can be observed that the company has not incurred any expenditure related to the testing of impairment in the year 2013. However, it can be seen that the company recorded $224,000 as impairment loss in the year 2012. The analysis of the annual report of Forge Group Limited also shows that the company has recorded $582,000 and $267,000 as provision for impairment of trade receivables in the year 2013 and 2012 respectively. These are the expenditures related with impairment testing in Forge Group Limited. It is required for the business organizations to make certain important assumptions at the time of conducting the impairment testing. In case of the impairment testing of Forge Group Limited, the presence of certain assumptions can be seen. These key assumptions are discussed below: For the projection of cash flows, the company uses to factor long-term sustainable growth rates into the valuation models based on the comparability to the market and industry average. The basis of modeling is average post-tax discount rate specific to the cash generating units (Olante 2013). From the used discount rates, the estimation of the management related with the time value of money can be done along with the risk associated with each of the cash generating units. The use of the weighted average cost of capital is used for the determination of the discount rates for each cash generating units. Forge Group Limited has made the assumption of the required growth rate and discount rate for the testing of goodwill. For Forge Group Construction, the assumed growth rate and discount rate is 5.0% and 15% respectively. On the other hand, for Forge Group Power, the assumed growth rate and discount rate is 5.0% and 15% respectively. As per the assumptions made by the management of Forge Group Limited, the calculation for value-in-use is based on the approved budget for each cash generating units. In these budgets, the use of weighted average growth rate can be seen for the projection of revenue. The calculation of cost is done by considering the historical gross margins along with the estimated weighted average rate of inflation over the periods. The assumptions related with the discount rates are done based on the nominal post-tax rate after adjusting them with the risk associated with the cash generating units (Amiraslani, Iatridis and Pope 2013). From the above analysis, it can be seen that Forge Group Limited has done their impairment testing as per the required accounting regulations. From the analysis of the annual report of Forge Group Limited, it can be observed that there is not any subjective discretion in the process of allocation and impairment testing of goodwill and it implies that the company has not carried out the impairment testing in any opportunistic manner. The impairment testing of the goodwill in Forge Group Limited has been done in the presence of appropriate discount rate along with future amount of cash flows. Thus, it can be said that that is not any subjectivity that can influence the impairment testing outcome (Darrough, Guler and Wang 2014). The most interesting aspect in the goodwill impairment testing of Forge Group Limited is the making of right set of assumptions along with the allocation of goodwill in the cash generating units. It can be observed that the company has provided all the justifications along with the clarifications regarding goodwill impairment testing in the notes of financial statements. The surprising aspect of the impairment testing is the review of assets on an annual basis in order to check the presence of impairment (Bepari, Rahman and Mollik 2014). After the assessment of the impairment testing of Forge Group Limited, it can be observed that the company follows the standards of AASB 9 for the impairment testing and the allocation of the impaired assets in the cash generating units. In addition, from this analysis, one can get effective insight about the process of impairment testing carried out by the large business organizations. Apart from this, proper insight can be obtained about the matter that the companies have started to use the new accounting model for impairment testing that is based on the anticipated credit losses instead of incurring the credit losses (Hamberg and Beisland 2014). Fair value refers to a basis for the valuation of the assets and liabilities of the companies. More specifically, fair value measurement is considered as a standard as the price that would be received from the sale of any assets or the price that needs to be paid for the transfer of a liability will be based on the date of measurement. It implies that the business organizations are required to consider the market value of the assets and liabilities at the time of doing transactions related with the selling or buying (Glaum et al. 2013). As per the current accounting standard, it is the obligation to the lessees and lesser to make the necessary classification related with the operating lease and capital lease of their businesses. The current accounting standard provides the companies with the choice of disclosing the information related to lease under the liability and asset section for a brief period of time. There is not any obligation for the operating lease as well as the capital lease to disclose them in the company balance sheet. For this reason, companies get the option to present the lease information in the balance sheet (Collins, Pasewark and Riley 2012). Companies state the information related with the total amount of liabilities in their balance sheet; but the understatement can be seen in case of lease as it is not mandatory for the companies to disclose the lease information. It can be happened that the companies have huge amount of lease liabilities that are more than the total liability of them and still, it cannot be observed from the balance sheet. For this reason, the investors will not be able to access sufficient amount of information about the assets and liabilities of the companies from the balance sheet that will make the investors depictive about the financial position of the companies (Jackling, Howieson and Natoli 2012). The earlier standard of lease made it obligatory for the companies to only record the information about capital lease in the company balance sheet. For this reason, there was lack of disclosure for the users of financial information and investors in gaining better understanding regarding the uncertainty about the origination of cash flow from lease activities. Thus, in the previous lease standards, there was lack of qualitative as well as quantitative aspects in gaining required information about leases in the financial statements of the companies. Due to this, the firms used to fail in attaining the desired financial results. More importantly, the lack of information leads to less realistic presentation of liabilities and assets related with lease (Weil, Schipper and Francis 2013). Under the current accounting standard, there is not any obligation on the companies in recording the lease information in the balance sheet; but it is the obligation on the companies to make the timely payment of these leases. It implies that the business organizations are underestimating the liabilities of their business by not including the leas liabilities in the balance sheet. In addition, it needs to be mentioned that there are number of lease liabilities that are responsible for creating major difference between the recorded amount of total liabilities in the balance sheet and the liabilities existed in off-balance sheet record. For this p particular reason, the total amount of debt in the balance sheet stands 66 times lower than the liabilities recorded as per off-balance sheet (Street 2012). It can be seen that the airline companies have made lease of huge amount of planes and there is not any obligation on them to record these leases in the company balance sheet as per the previous lease standard. As per the earlier lease standard, companies have made the classification of leases based on historical cost and have recorded them based on off-balance sheet system (Huerta, Petrides and Braun 2013). For this reason, huge difference can be seen in the liability position of the airlines companies that are making the lease of large amount of planes and the companies that are purchasing the planes. Due to this, he difference can be seen in the financial position of the companies on off-balance sheet basis. For this reason, the investors face great difficulties in determining the actual financial position of the airline companies. In addition, there were contrasting results due to the presence of financial leverage and operational activities. The presence of numerous number of criticism can be seen in the new introduced standard of lease accounting and for this reason, there will not be many popularity of this new lease accenting standard. Under this standard, there will be considerable change in leases in the balance sheet that would create impact on the leverage situation and thus, there will be increase in the cost of the company. It needs to be mentioned that this new lease standard has brought complexities in the process of lease accounting and cost reporting. For this reason, it is the obligation on the companies to update their financial system in order to improve the process of lease disclosure. For this reason, companies will be required to incur more amounts of costs that will lead to the unpopularity of this lease standard (Gordon et al. 2013). The companies will be able to present the financial information in a better manner in the presence of new leasing standard. Thus, there will be both qualitative as well as quantitative information about lease in the balance sheet of the companies. Moreover, investors will be able to gain better understanding about the financial position of the companies. The reflection of enough information about assets and credits risks will be there in the financial statements. 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