Standards on Compliance and Reporting Costs †MyAssignmenthelp.com

Question: Discuss about the Standards on Compliance and Reporting Costs. Answer: Introduction: In the AASB 136 in Para 9 it states, that an entity is required to assess the indications related to impairment of assets. The assessment is conducted by the entity at the end of each accounting period (Oulasvirta 2014, pp.272-285). If the indication of the impairment of assets exists then the entity is required to calculate the recoverable amount of the assets. The definition of impairment is provided in the Para 6 of the AASB 136. The assets that have carrying amount less than the market value in that case the assets is impaired and the impairment loss is recorded in the income statement. The Para 12 -14 of the AASB 136 provides indication related to the impairment of assets. There are certain situations that are described under the mentioned Para in which the assets impairment can be regarded as necessary (Du et al. 2017, pp.557-605). The indication that the impairment of assets exists are provided in the two major headings of information: Internal and External; External Sources of Information includes the following: The external source of information that indicates the existence of impairment of assets are given below: There has been a decline in the market value of the assets due to normal usage and the passage of time; There is sudden change in the market, technological, economic or legal environment that has adversely affected the assets of the entity. There has been increase in the return on investment and the market rate of interest that have resulted in decline in the recoverable value of the assets. The carrying amount of the asset is lower than the market capitalisation of net assets. Internal Sources of Information includes the following: It is evident that there is damage or obsolesce of assets; The manner of using assets have changed significantly; The AASB 136 states that an assets is impaired if the carrying value of the assets is less than the recoverable amount of the assets. The recent developments in the external environment of Myer business indicate that there is an evidence of impairment of assets. The company has changed its strategy to take on the online business of Amazon (Christensen et al. 2016, pp.397-435). In the altered strategy, the company has developed new store format and made changes in the outlet. The company has made announcement related to closure of store, new stores are terminated and the space is optimised. The above discussion states that this are the evidence of impairment of assets. Processes for determining asset impairments The amortisation is not applicable to goodwill and intangible assets that do not have definite useful life. In this case, the assets are tested annually to determine the impairment of assets. The company conducts impairment testing of noncurrent assets when there is an indication that the amount recoverable from the assets is lower than the carrying value of the assets (Wang 2014, pp.955-992). The loss of impairment should be recognised and in order to do that the assets should be grouped together. In case of Myer, the goodwill that are arising on the acquisition of the business cannot be identified with the separate cash generating units. Therefore, in this case goodwill is allocated to the entire business. There are no definite life periods for the brand name of the company and is currently is valued $402.8 million as on 2015 (Anon 2017). The intangible assets that have indefinite life is required to be tested for impairment on annual basis. The company has adopted the process of discounted cash flow model in order to determine the recoverable amount of assets. In this model, the projected cash flow of the five year is used to ascertain the recoverable amount (Albu et al. 2014, pp.489-510). The company by using the terminal growth rate extrapolate the cash flow that is beyond the five-year period. There are certain assumptions that are made in calculating the projected cash flow: The gross profit margin of the company is 39.5%; The pre-tax discount rate is taken as 14.4%; The terminal growth rate is taken as 2.5%; ; The same procedure and assumptions are used to calculate the carrying value of the stores. In addition to this, the company also makes assessment whether there is any indication that the financial assets of the company are impaired. If there is a prolonged decline in the value of equity below the cost then an impairment loss in the value of equity share is recognised. Therefore, the procedure that have been followed by the Myers for determining the impairment of assets have been discussed. Information needed to determine asset impairments The method that have been applied for determining the impairment amount ascertains the information need and the details that are required. The Para 30 of the AASB 136 provides that for value in use of the assets the information is required to determine the liquidity condition of the assets (Christensen et al. 2015, pp.397-435). In determining the amount of impairment, the estimated cash flow is required to be calculated. The flowing informations are required to determine the impairment of assets: The economic information is necessary to make the assumption; In order to justify the period of budget the information is required to be obtained; In order to determine the average growth rate of the company the information should be obtained; In order to determine the growth rate of the industry the information is required to be obtained; The information pertaining to the market in which the business operates should be obtained. Flexibility management has in the determination of asset impairments The flexibility in the management refers to the ability of the manager to use judgment in making estimations. The Para 24 of the AASB 136 provides the manner in which the management measures the amount that is recoverable from the intangible assets is an example of flexibility that is used by the management. The Para 30 of the AASB 136 provides that in calculating the value in use the management is required to calculate the future cash flow (Miller and Power 2013, pp.557-605). In calculating the future cash flow, the management has enough flexibility to make appropriate assumptions. The estimated future cash flow is required to be calculated based on the management best assessment of the economic condition that is expected in the future period. Therefore, it can be seen that the management has sufficient flexibility in determining the impairment of assets. Referencing Albu, C.N., Albu, N. and Alexander, D., 2014. When global accounting standards meet the local contextInsights from an emerging economy.Critical Perspectives on Accounting,25(6), pp.489-510. Anon, (2017). [online] Available at: https://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2016.pdf [Accessed 25 Aug. 2017]. Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?.European Accounting Review,24(1), pp.31-61. Christensen, H.B., Nikolaev, V.V. and WITTENBERG?MOERMAN, R.E.G.I.N.A., 2016. Accounting information in financial contracting: The incomplete contract theory perspective.Journal of accounting research,54(2), pp.397-435. Du, K., Givoly, D. and Alhusaini, B., 2017. The Impact of the Codification of Accounting Standards on Compliance and Reporting Costs, and its Usefulness for Empirical Research. Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting accounting research and organization theory.Academy of Management Annals,7(1), pp.557-605. Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public Sector Accounting Standards of the IFAC. A critical case study.Critical Perspectives on Accounting,25(3), pp.272-285. Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer.Journal of Accounting Research,52(4), pp.955-992.