Part A – Revaluations and impairment testing of non-current assets
Question 1
The proposed solution is fair value accounting for the valuation of fixed assets. The board of the company should adopt this proposal. It is because this revaluation method will be useful to improve the fairness of the company’s Statement of Financial Position in the current context.
This method is helpful to provide the accurate assets and liabilities valuation on an ongoing basis to users of the financial information of the firm (McDonough and Shakespeare, 2015).
It also enables the firm to increase or decrease the value of the asset and liability to reflect any change in the market price of the assets and liabilities. So, the key advantage of this revaluation method is the accurate valuation of assets that enhance the fairness of the financial position of the company.
On the other hand, this also provides the true income as it limits the ability of the firm to manipulate the reported net income as it is necessary for the firm to report any gains or losses from any price change in assets or liability in the period in which they occur (Henderson et al., 2015).
At the same time, it is based on the most agreed standards of accounting as it is widely accepted due to tracking all types of assets.
Along with this, the use of fair accounting method enables the firm to survive in the difficult economy because it allows for asset reduction within the market where the business is facing difficulty in surviving in the downward economy (Christensen & Nikolaev, 2013). So, the board should adopt the director’s proposal.
Question 2
The purpose of impairment testing is to assure that the assets are not carried at an amount exceeding the recoverable value. By using the revaluation method, the carrying amount of assets can be increased or decreased as per the changes in fair value.
There is a relationship between the fair value and recoverable value as they are different. If the revalued asset’s recoverable amount is ignored, there may be the risk to the entity due to the exceeding value of asset’s fair value than its recoverable amount (Devalle, and Rizzato, 2012).
It will happen when the recoverable amount of the asset is a fair value less disposal costs. On revaluating the asset to fair value, the carrying amount of this asset is overstated by the amount of disposal costs.
At the same time, the impairment testing is done on an annual basis while revaluations can be done after a long period like 3-5 years. If the impairment losses are ignored during the revaluation process, the risk of overstatement may be increased that may cause false presentation of the financial position of the company.
Impairment testing is effective to test when the assets lose the value. For example, intangible assets like goodwill are tested for impairment on an annual basis.
So, it can be stated that impairment is relevant to assets that are carried under the revaluation model and these assets need to be tested under impairment (Darrough et al., 2014). There is a need to bother testing land and buildings for impairment.
Question 3
3 (a) Assets at fair value
AASB 13 standard is used to define fair value as the price that is received to sell an asset or paid to transfer a liability in the previous transaction. From the annual report 2018 of Medibank, it can be evaluated that the financial assets are measured at fair value through profit or loss, land and buildings.
All these financial assets include Australian equalities, international equalities, property, infrastructure and fixed income. These are the listed and unlisted securities held by the Medibank health insurance fund backing the insurance liabilities and reported at fair value on initial recognition (Annual Report, 2018).
In addition, other investments in listed and unlisted securities held for trading have the purpose of selling in the short term as they are measured at fair value.
3(b) Disclosures regarding the fair value measurement of assets
According to AASB 13/IFRS 13 Fair value Measurement, there is a need to consider the characteristics of the asset or liability when measuring the fair value. These characteristics include the condition and location of the asset and restrictions on selling or using the asset.
The assets which are measured based on the fair value can be either a stand along asset or a group of assets. It is required for the firms to present disclosures regarding the fair value measurement of assets.
From the annual report 2018 of Medibank, it can be determined that there is proper disclosure of impairment of assets based on the fair value in the annual report (Annual Report, 2018).
As per this disclosure, the assets other than goodwill are tested for impairment whenever changes in conditions show no possibility of recovery of the carrying amount.
An impairment loss will be recognized o exceeding the asset’s carrying amount than the recoverable amount (Annual Report, 2018).
In the assessment of the value-in-use, the future cash flows, which will be estimated, are discounted to their present value with the use of discount rate showing the current market conditions of the time value of money and risk specific to the asset (Taplin et al., 2014)
At the same time, the income statement also shows the disclosure of the fair value assessment for the land and buildings. In the income statement, revaluation of land and buildings held at fair value is given (Chen et al., 2013).
Along with this, the balance sheet statement of Medibank also shows the disclosures regarding the fair value measurement of assets. In the column of current assets, it is given that financial assets are revalued at fair value through profit or loss (Annual Report, 2018).
Apart from this, in Notes to the consolidated financial statements, note 1 also shows the disclosure of the fair value measurement of assets. This note 1 is related to the basis of preparation showing the measurement of the financial assets based on fair value through profit or loss.
The land and buildings are measured at fair value, and claims liabilities are measured at the present value of expected future payments. In addition, note 7 also reflect the fair value measurements of assets showing the financial assets measurement at fair value.
According to this note, the investments in listed and unlisted securities held by Medibank’s health insurance fund are considered under the financial assets which are masured at fair value (Annual Report, 2018).
Moreover, the investments in listed and unlisted securities for the trading are also measured at fair value on initial recognition. These assets are carried at fair value, and the profits or losses are considered within the net investment income in the income statement (Chea, 2011).
However, the other financial instruments being trade receivables and payables are not determined based on fair value.
In the annual report, the fair value of these instruments is not disclosed because of their short-term nature, and it is assumed that the carrying amounts of these instruments are approx their fair values (Carmichael et al., 2012).
Along with this, there is no disclosure regarding the measurement of the non-recurring assets at fair value as it did not measure any financial assets or liabilities at fair value on a non-recurring basis.
3(c) Assets are tested for impairment
In order to ensure the accurate value of the assets in the balance sheet, it is required to determine or evaluate the fair value of the assets currently. For this, the impairment test is applied to the long term depreciated assets.
It is effective to conduct because of the impact of changes in the value of assets due to the effect of any internal and external factor causing less worth as compared to starting value in the financial statement.
Impairment is related to the unexpected and sudden decline in value of the assets of the organization (Abughazaleh etal., 2012). It is used for the assets on which accounting charges depreciation.
At the same time, this test can also be conducted on selling any physical assets to determine the accurate value of the assets at the time. In addition, in the financial market, the investors also conduct the impairment test to buy an asset to make the decision whether it should buy or not.
If the recoverable amount of the asset is less than the carrying amount, then there is a possibility of the impairment loss. In this situation, the asset is written down to the recoverable amount.
According to AASB 136/IAS 36, if the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to the recoverable amount. This reduction is known as impairment loss (Devalle and Rizzato, 2012).
3(d) Disclosures regarding the impairment of assets
According to AASB 136/IAS 39 Impairment of Assets, it is required for the firms to present disclosure for the impairment of assets. From the annual report 2018 of Medibank, it is revealed that there is an impairment allowance for the trade receivable as it is recognized that is written off against the allowance account.
Any impairment loss on trade receivables is considered within other expenditures in the income statement of the company. Apart from this, there is also a disclosure for the impairment of the fixed assets which are depreciable.
For this, it is presented in the balance sheet of the company that the property, plant and equipment are impaired (Annual Report, 2018). There is an impairment accounting policy for the impairment test of the long term assets.
In addition, there are also disclosures for impairment of intangible assets as the goodwill and intangible assets have an indefinite useful life that is not subject to amortisation and are tested annually for impairment or frequent basis on finding related to changes in conditions indicating impairment in assets (Annual Report, 2018).
The firm recognizes the impairment losses by measuring the exceed value of the asset carrying amount than its recoverable amount. For Medibank, there is impairment for the intangible assets including goodwill, software and customer contracts and relationships.
The software intangibles are carried at cost less accumulated amortization and impairment losses (Annual Report, 2018). So these assets are also measured for impairment.
At the same time, the customer contracts and relationships are also carried at their fair value at the date of acquisition less accumulated amortization and impairment loss (Darrough et al., 2014).
In the annual report 2018 of the company, it can be determined that the impairment test is conducted for only fixed assets of the firm. The firm has the property, plant and equipment as fixed assets in its balance sheet. These assets are considered by Medibank for the impairment test.
The value of fixed assets including plant, property and equipment has declined from the year 2017 to the year 2018 for Medibank (Annual Report, 2018) as the impairment test can be conducted for the measurement of impairment of these assets for the organization (Camodeca et al., 2013).
In addition, the basis for measuring the assets is fixed assets, so the impairment test avoids the other assets in the balance sheet.
At the same time, the parent Entity Financial Information Accounting Policy of the firm also discloses that investments in subsidiaries are accounted for at cost less accumulated impairment losses as these investments are also measured for the impairment test in the financial statements of Medibank.
Medibank shows the impairment test for the trade receivables, fixed assets and intangible assets. The organization uses the revaluation model for measuring the impairment loss of assets.
It measures the assets at fair value and treats the impairment loss as a downward revaluation and accounts for as in AASB 116/IAS 16 Property, Plant and Equipment. So, this downward revaluation is categorized under the expense until there is an increase in the previous revaluation for the specific asset.
It compensates the loss and is recognized in other comprehensive income (Chen et al., 2014).
References
Abughazaleh, N., Al-Hares, O. and Haddad, A., 2012. The value relevance of goodwill impairments. UK evidence.
Annual Report 2018. [Online] Available at: https://www.medibank.com.au/content/dam/retail/about-assets/pdfs/investor-centre/annual-reports/Medibank_Annual_Report_2018.pdf (Accessed: 1 April 2019)
Camodeca, R., Almici, A. and Bernardi, M., 2013. Goodwill impairment testing under IFRS before and after the financial crisis: evidence from the UK large listed companies. Problems and perspectives in management, 11(3), pp.17-23.
Carmichael, D.R., Whittington, O.R. and Graham, L. 2012. Accountants’ handbook, financial accounting and general topics. USA: John Wiley & Sons.
Chea, A.C. 2011. Fair value accounting: its impacts on financial reporting and how it can be enhanced to provide more clarity and reliability of information for users of financial statements. International journal of business and social science, 2(20).
Chen, L.H., Krishnan, J. and Sami, H., 2014. Goodwill impairment charges and analyst forecast properties. Accounting Horizons, 29(1), pp.141-169.
Chen, W., TAN, H. T., & Wang, E. Y. 2013. Fair value accounting and managers’ hedging decisions. Journal of Accounting Research, 51(1), pp.67-103.
Christensen, H. B., & Nikolaev, V. V. 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Darrough, M.N., Guler, L. and Wang, P., 2014. Goodwill impairment losses and CEO compensation. Journal of Accounting, Auditing & Finance, 29(4), pp.435-463.
Devalle, A. and Rizzato, F., 2012. The quality of mandatory disclosure: the impairment of goodwill. An empirical analysis of European listed companies. Procedia Economics and Finance, 2, pp.101-108.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. UK: Pearson Higher Education.
McDonough, R.P. and Shakespeare, C.M. 2015. Fair value measurement capabilities, disclosure, and the perceived reliability of fair value estimate: A discussion of Bhat and Ryan (2015). Accounting, Organizations and Society, 46, pp.96-99.
Taplin, R., Yuan, W., & Brown, A. 2014. The use of fair value and historical cost accounting for investment properties in China. Australasian Accounting Business & Finance Journal, 8(1), p.101.
