Assests Impairment in Myer Holdings

Evidence to support impairment testing of assets. Asset impairment testing is an important element of Myer Holdings Limited’s financial reporting process. The Australian Accounting Commission has stated that the number of cases of impaired assets is increasing, even though most companies do not recognize any impairment losses (AASB, 2004, p. 12). The asset impairments found were not material and suggest compliance issues and additional review of the company. Financial reporting is expected to comply with accounting standards when looking for evidence of impaired assets such as goodwill, equipment, real estate, and intangible assets (Bond and Wells 2016 p.1). In case there are indicators of impaired assets, the company should determine if the carrying amount of assets are more than the recoverable amount. The determination covers intangible assets that have not been amortised. Specifically, AASB 136 requires that the value of a non-financial asset be written to its recoverable amount if the value is below the carrying amount.

There are numerous indicators of evidence for impaired assets in Myer Holdings limited. The first involves examining whether during the accounting period; an asset’s market value has reduced significantly than expected due to time factor and usage. As Myer’s current assets is 105 877 000, a significant decline compared to 2016 asset value of 140 014 00 (Myer holdings limited. 2017). This comes at a time when the company seeks to unveil a new store to take on Amazon (Greenblatt, 2017 p.1). The inventories on the other hand reduced from $ 406 134 in 2016 to $ 403 113 in 2017 while the derivable financial instruments went down from $ 549 00 to $ 411 000. In total, Myer Holdings assets have reduce from $584 723 000 in 2016 to $ 545 046 in 2017. In this case, the market value of the assets reduced significantly, suggesting an asset impairment problem. The net tangible ordinary assets for Myers holdings per security were $0.25 in 2016 and increased to $0.28 in 2017. In this case, however, the market value of tangible assets of ordinary shares increased. If the ordinary shares had reduced, the asset would be considered impaired. The next indication is based on significant and adverse changes on the asset that have taken place or is projected to take place in the future in the legal, technological and economic aspects in which the asset operates. The third evidence can be traced by looking at increased interest rates and market rates on returns on investment. If the increased rates can affect the discount rates used to calculate the value of a set and therefore decrease the assets recoverable amount, then the entity has been impaired. Additionally, an asset is impaired if the carrying amount of the net assets is greater than the market capitalization.

Another indicator for impairment is observing evidence of physical damage of an asset and the presence of significant changes in assets. A lot of these changes include idle assets, discontinued operations and availability of measures to dispose the asset before the expected date and reassign the usefulness of an entity as restricted. The last evidence is the availability of internal reporting which indicates that the performance of the asset will be worse than expected. Internal reporting that may serve as evidence for asset impairment include: the cash flow involve in acquisition is higher that the initially budgeted amount, the actual cash flow from the asset are worse that those budgeted, there is a decline in planned net cash flow, and when there is operating losses related to the asset.

Processes required to be addressed in determining asset impairments

There are several processes involved in impairment testing to consider. The company should have a culture and incentive that supports assessment of both the organization and its assets. The company management must show sufficient uncertainty in the value of assets, and the staff has sufficient qualifications, skills and time of business prospects. The organizations cash flows have previously been tested for reliability, there are efficient internal influences over the impairment process and work is sufficiently documented. Other flexibility that the management options include:

Reasonable cash flows and assumptions in regard to economic market conditions and funding costs;

Similar discount rates not recognized for different cash flow general nits even when the risks are different;

CGU’s are not identified at a high level.

Information needed in determining asset impairments

Details on assets requiring annual testing provide key information needed in determining assets impairment. Specifically, one should consider whether the company has identifiable intangible assets with indefinite usefulness, goodwill that requires annual impairment testing and the availability of intangible assets not for use. Since company is listed, the market capitalization should hence be less than the net assets indicated by the financial position for the asset to be impaired. Also, the indicators of the overall value of Myers cash general unit have to be less than the value of related assets. Additionally, information regarding financial performances indicating the decline or increase of CGU performance is needed, together with prospects of significant changes in the business and its environment. Changes in the business can be seen from a decline in the market and fall in the price of goods and services, excessive supply in markets for products in sourcing of materials, increased cost of production and exchanges in rates that affect costs.

It would be difficult to determine asset impairment without information on fair value estimation. It is the selling price of an entity that buyers are willing to pay. Information for fair value can be retrieved form price sin active markets. Given that it’s usually had to get market prices, fair value can be estimated based on the most relevant information available. The present value is commonly used for estimating fair value, although other methods are available:

Other key details the impairment management should consider to include;

The difference between market capitalization and the net assets;

The performance of CGU and whether it has declined or increased in previous years and is it projected to decline;

The possibilities of changes in business in the future;

Whether prior forecast were met or not;

Whether there is a decline in the market prices for goods sold by Myer holdings, market surplus and emergence of the new competitors;

Increase on production costs;

Availability of early plans of asset disposal.

Flexibility in the determination of asset impairments

AASB 136 provides requirements that give management a lot of flexibility in determination of asset impairments. By meeting some of these requirements, Myer holdings can reverse an impaired loss for an asset or CGU in the previous years. First, the management should asses reporting date to make sure an indication of impairment loss recognised in prior years other than goodwill is not available. If Myer holdings identify such an indication, the recoverable amount of that asset must be estimated. If an impaired loss recognised in the previous period for an asset other than goodwill does not exist or has decreased, it may indicate that the remaining life of the asset or has not been reviewed using the right standards. The impaired loss recognised in prior periods can be reversed if there has been significant change in estimates used to determine the recoverable amount.

One key evidence of impaired asset is weather the disposal cost are negligible or not (International Financial Reporting Standards 2008 p. 2). If they are not negligible, the fair value minus costs of disposal of the revalued asset is necessarily less than the fair value (AASB, 2004 p. 14). Thus, the asset is impaired if its current book value is less than its revalued amount. An impaired loss is usually seen as an expense for assets carried at a cost. There are several indicators in Myer Holdings that serve as evidence of impairment losses, which can be categorised as external or internal sources.

References

AASB, a.s., 2004. Financial instruments: recognition and measurement. Measurement, 47, p.79.

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.

Greenblat, Eli. 2017. Myer unveils new store format to take on amazon, the Australian

International financial reporting Standard. 2008. Impairment accounting – the basics of ias, 36.

Myer holdings limited. 2017. Half-year financial report Myer holdings limited; for the half-year ended 28 January 2017.