IASB Standards and Investor Transparency

CHAPTER 1: INTRODUCTION

The International Accounting Standard Board (IASB) is an autonomous standard presider of the International Financial Reporting Standards (IFRS) foundation, it stipulates the standards but aims at giving related information. IFRS has been embraced by various states, in almost all regions of the word, and it is mandatory that all listed companies ought to follow this guideline. As much as investors are not part of the management, they reserve the right of being informed by the organisation. Therefore, it is essential that the investors should have the capability of differentiating whether the financial statements prepared by an organisation is based on empirical evidence or it involves pure estimations. The intricacy of adopting IAS standards in various states is still an endless debate for various reasons. Among the essential aspects when executing the guidelines of IAS standard is the procedures used while testing impairment, due to the complication and difficulty to analyse this in a fair manner as mandatory by the principle. There is some doubt on whether impairment has the capability of giving a fair concept of the company. These doubts are expressed in the policies provide evidence for stakeholders and the financial market as it is characterised by controversies when it comes to documentation and quantifications. In recent years, intangible assets like goodwill are among the most fundamental assets in an entity. Goodwill is mostly defined as the extra value a business gets due to useful contacts, and reputation within the industry. Most stakeholders are mostly focused on goodwill information to have a strong comprehension of the organisational statuses when making verdicts on investments. Therefore, the practice of goodwill. Thus, the fact that the preparation of goodwill from a theoretical groundwork has resulted to noteworthy confusion and variation in practice after its significance has been recognised. Since goodwill cannot be measured and needs more work, an enhancement of the financial statements is needed to display a vivid representation of the assets and the balance sheet. Share of this problem for most groups is the evaluation of goodwill. Different thoughts about the evaluation of such abstruse terms have resulted to the current deliberation on goodwill, these notions failing to display a good perception of it.

Research Aims

The goal of this study to explore the challenges faced by businesses when using IAS 36 for fixed assets, by analysing if there is a gap between the standards and preparation financial statements. The aim and the explanation in this study have resulted to the subsequent research questions

How do companies apply the IAS 36, and what are the stipulations of the standards?

The study will cover companies using the IFRS standards and IAS 36 by another extension, with the focus area being fixed assets. It implies that goodwill will be investigated in conjunction with CGU. Besides, the attention is IAS 36, which implies that other principles linked with an assessment of fixed assets like IAS 16 are not included in this study. Disclosures will also be analysed through various financial reporting documents to inform stakeholders. Finally, because IAS 36 is a complete principle and the resources are restricted, the study will avoid looking at the reversal of impairment. The study will discuss the gaps that are attached to the impairment of fixed assets and explicitly reveals the exciting extents for entities within IAS 36.

CHAPTER 2: LITERATURE REVIEW

Literature review is a narrative review that includes current knowledge, methodological contributions, theoretical arguments, as well as objective findings related to a specific topic. Most of the reviews are simply secondary sources and rarely report any empirical or original work. In this context, IAS 36 "Impairment of Assets" which seeks to control the balance between the assets of the enterprise and the recoverable amount in general. Entities are primarily required to perform impairment tests, which play a pivotal role in indicating the impairment of the asset. The literature will include the meaning of IAS 36, the objectives, components and implications of applying IAS 36, the negative revisions to IAS 36 and the strict measure of adoption of IAS 36. IAS 36 addresses the treatment of impairment of assets and is intended to describe the procedures applied by an entity to ensure that its assets are recorded in an amount not exceeding their recoverable amounts. According to the terms of the standard, the asset is recorded more than its recoverable amount if it is carrying amount exceeds the amount to be recognized through the use or sale of the asset. If this is the case, the asset is described as impaired and the entity is required to recognize an impairment loss. The Standard also specifies when an entity should reflect an impairment loss and describes the disclosures.

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IAS 36 applies to:

"Land, buildings, machinery, equipment, investment property carried at cost, intangible assets, goodwill, investment in subsidiaries, associates, joint ventures carried at cost and assets carried at revalued amount under IAS 16 and IAS 38" (Iasplus, 2018)

Identification keys

Recoverable amount: "for an asset or a cash-generating unit is the higher of its fair value les cost to sell and its value in use" (Iasplus, 2018).

Fair value less cost to sell: "is the amount obtainable from the sale of an asset or cash-generating unit in in an arm's length transaction between knowledgeable, willing parties, less the cost of disposal" (Iasplus, 2018)

Cost of disposal:" are incremental cost directly attributable to the disposal of an asset or cash-generating unit, excluding finance cost and income tax expense". (Iasplus, 2018).

Value in use: "in the present value of the future cash flows expected to be derive from an asset or cash-generating unit" (Iasplus, 2018)

An Impairment loss: "is the amount by which the carrying amount of an assets or cash-generating unit exceeds its recoverable amount" (Iasplus., 2010).

Carrying amount: "is the amount at which an asset is recognized in the statement of financial position after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon". (Iasplus, 2018)

A cash-generating unit (CGU): “is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.” (Iasplus, 2018)

Corporate assets:" are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units". (Iasplus, 2018)

Determining the asset that may be impaired

At the end of each reporting period, the entity estimates the extent of impairment of the asset. If any such indication exists, the enterprise estimates the recoverable amount of the asset. Apart from any indication of impairment, the establishment also: An intangible asset with an indefinite useful life or an intangible asset that is not yet available for use on impairment is tested annually by comparing the carrying amount with its recoverable amount. This impairment test may be performed at any time during the annual period. Different intangible assets can be tested for impairment at different times. However, if this intangible asset is initially recognized during the current annual period, that intangible asset is tested for impairment before the end of the current annual period. Goodwill acquired from business combinations is tested for impairment at least annually. Where there is any indication that an asset may be impaired, the recoverable amount of the individual asset should be estimated. If it is possible to estimate the recoverable amount of an individual asset, the entity determines the recoverable amount of the cash-generating unit to which the asset belongs (the cash-generating unit of the asset). The cash-generating unit is the smallest group of identifiable assets that generates cash flows received and is largely independent of cash flows from other assets or groups of assets (Legislation.gov.au, 2018)

Measurement recoverable amount

The recoverable amount of the asset or cash-generating unit is higher than its fair value less costs to sell and its value in use It is not always necessary that each fair value is determined from the selling costs of the asset and its value in use. If any of these amounts exceeds the carrying amount of the asset, the asset will not be impaired, and it is not necessary to estimate the other amount. Fair value less costs to sell is the amount that can be obtained from the sale of an asset or cash-generating unit in a transaction on a commercial basis between knowledgeable and willing parties, less disposal cost. The value in use is the present value of future cash flows expected to be derived from the cash-generating unit or asset. Some elements are reflected in the calculation of the asset's value in use, for example the estimation of future cash flows that the entity expects to derive from the asset, expectations of possible changes in the amount or timing of these future cash flows, the time value of the money, Underlying doubts. Other factors, such as the liquidity that market participants may reflect in pricing future cash flows that an entity expects to derive from the asset (Alfredson et al., 2007) Estimates of future cash flows include projections of cash flows from continuing use of the asset and projections of cash flows incurred necessarily to generate cash flows from the continued use of the asset (including cash flows issued for the asset's preparation for use) directly attributable to the asset or allocated to the asset A reasonable and reasonable basis, and net cash flows, if any, to be received (or paid) for disposal at the end of its useful life. The estimated future cash flows of an asset are estimated in its current condition. Estimates of future cash flows should not include estimated future cash flows or future cash flows expected to result from future restructuring that the entity has not yet committed, the improvement or enhancement of the asset's performance and the estimated future cash flows include cash flows from or from financial activities, Receipts or income tax payments.

Recognition and measurement of impairment losses

If the recoverable amount of the asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the asset is recorded in the revalued amount under another standard (e.g. under the revaluation model in IAS 16 Property, Plant and Equipment). Any impairment loss for any revalued asset is treated as a revaluation decrease under that standard. An impairment loss is recognized for the cash-generating unit (the smallest group of cash-generating units where the goodwill or the asset is allocated) if the recoverable amount of the unit (a group of units) is less than the unit's registered value (a group of units). The impairment loss is allocated to reduce the carrying amount of the unit's assets (a group of units) in the following order, reducing the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and, accordingly, to the other assets of the unit (group of units) pro rata to The basis of the recorded value of each asset in the unit (a set of units).. However, an enterprise does not reduce the carrying amount of the asset to below its fair value less costs to sell (if identifiable, its value in use) if it is determinable and zero. The amount of the impairment loss to be allocated against that asset is allocated pro rata to other assets of the unit (for groups of units)

Goodwill

The purpose of impairment testing and goodwill acquired in a business combination is allocated from each acquisition date to each cash-generating unit or group of cash-generating units of the acquire that is expected to benefit from close co-operation, irrespective of whether the assets or liabilities Other financial assets of the acquire are allocated to those units or to groups of units. (Alfredson et al., 2007)

International Accounting Standard (IAS) 36 Overview

IAS 36 Impairment of Assets, referred to as IAS 36, provides guidance for impairment of assets, primarily to adjust the requirements that would consider the decline in non-financial assets. As noted by Capkun et al. (2012) and deepens the quality of business accounting as well as accounting for goodwill. Decision makers and researchers agree that IAS 36 as an impairment principle is consistent with both tangible and intangible asset testing, excluding assets normally covered by IFRS (Glaum et al., 2013; Capkun et al., 2012). Hussman and Schmidt (2008) explained that IAS 36 requires that assets should be managed or carried forward no more than the recoverable amount in order to achieve the objective. The Standard requires that all assets be subjected to tests, which require a large extent of impairment (Carlin, and Finch, 2009; Avallone, and Quagli, 2015). As Wiese (2005) and Cotter (2012) have pointed out, the understanding of IAS 36 attracts further study of the requirements that describe the standard before assessing the entity. First, a reference to the possibility of a decline in the asset's value is required where the recoverable amount can easily be determined (Cotter 2012). Second, the recoverable amount of goodwill in which intangible assets have an indefinite useful life, where measurements are made on an annual basis (Petersen and Plenborg, 2010; Avallone and Quagli, 2015). In addition, the standard becomes more practicable when an impairment loss is recognized or recognized as an expense in the middle of a loss or gain on assets carried at cost (Husmann and Schmidt, 2008; Avallone and Quagli, 2015). Finally, the impairment loss previously recognized for any asset, other than goodwill, requires a reversal in the event of any change in the estimate of the recoverable amount (Feleagă et al., 2012)

Historical background and development of IAS 36

As a precondition to IFRS, the precedent to IAS , the International Accounting Standards Board (IASC) was found in 1973 through an agreement between members of accounting organizations. As a private entity, IASC was considered independent and focused on achieving uniformity across accounting principles applied in companies and institutions for the preparation of Financial reports (Camfferman and Zeff, 2007). By 1998, IASC had 143 members of accounting institutions, representing 2 million accountants from 103 countries (Glaum et al., 2013). As Bricker (2010) and Garrido et al., 2002), IASC was not the only organization, both nationally and internationally, to try to harmonize accounting standards. Prior to the introduction of IAS 36, several organizations were working on the development of accounting standards that complemented the law. For example, in 1942, the English Institute of Certified Public Accountants defended accounting practices at the national level where the International Accounting Group Accounting practices throughout Canada, America and the UK regarding the growth of professional accountants. (Day, 2000; Cellucci, 2010). The additional mission entailed harmonization of the national accounting rules with IASC international standards bearing the name IAS with IASB standards adopting the initials IFRS. It is of note that the IAS-standards came in the spotlight in the year 2005, which implied that companies could be listed on the stock exchange where they were expected to adhere to new international standards as far as the consolidated financial statements are put into consideration (Feleagă et al. 2012). This formed the platform for international accounting standard 36 whose main objective was to prescribe significant procedures that any entity could apply for the purposes of ensuring that assets are carried at a value that does not exceed the recoverable amount. If the case is witnessed, the asset is regarded as impaired and the IAS 36 defines the entity as an impairment loss. However, IAS 36 is open to prescribed disclosures and the reversal of the impairment loss. IAS 36 demands an entity to consider details from both the internal and external sources before an asset could be valued. In 1997, development of exposure draft titled E55 impairment of Assets began. However, the real IAS 36 impairment of Assets is traceable to 1988 with setting operative for financial statements. In 2004, the IAS 36 was revised becoming effective on 31 March 2004 applying to the good and intangible assets acquired in business activities. The standards was later amended in 2008 to corporate the disclosure of estimates used in determining a recoverable amount by Annual Improvements to IFRSs 2007. Beginning on or after 1 January 2014, the amended standards on 2013 by Recoverable Amount Disclosures for Non-Financial Assets where it became a requirement to clarify disclosures took effect.

Components of IAS 36

The key objective of IAS 36 is to prescribe significant procedures that the entity would apply in ensuring that the assets are carried within the value that is never more than the recoverable amounts. In any case, that an asset is carried beyond the recoverable amount, then the asset stands to be impaired and the IAS 36 demands the entity to take note of the impairment loss (Feleagă et al. 2012). Several components, which reflect the financial standards that have been embraced over the recent years, support the objective of IAS 36. The first component includes the indicators of impairment that alludes to the fact that the entity may have indications of impairment upon the reporting date (Andersson, and Wenzel, 2014; Avallone, and Quagli, 2015). The same entity is required to consider details and information from internal and external environments. Some of the external factors include technological changes, market interest rates, legal factors, economic environment, and market capitalization among many other factors. Internal factors include physical damage to the assets, evidence of obsolescence and internal restructurings (Morricone et al. 2010). The second component is the recoverable amount, which is the fair value that comes lower than the costs to sell, as well as the value in use (Avallone, and Quagli, 2015). In the course of measuring the impairment, it is common that IAS 36 demands the asset-carrying amount should further be compared to the recoverable amount. The latter is essentially determined for every asset and in case the asset is unable to generate the cash flows that are independent of other assets, then the recoverable amount can be estimated from the cash generating unit (CGU). As another variable of IAS, CGU can be noted as the smallest identifiable sample or group of assets that are said to generate the cash inflows, which are essentially independent of all the cash flows linked to other assets, as well as groups of assets. Besides, the carrying amount is the amount that an asset can be recognized with especially after deducting the cumulative depreciation, commonly known as amortization and the impairment losses realized thereon (Avallone, and Quagli, 2015). As outlined by Mindermann and Brosel (2009), the corporate assets are those ones, which, apart from the goodwill, contribute towards the future of the cash flows behind the CGU that is under review and the rest of the generating units. Another component includes the costs of disposal, which entails the incremental costs that are commonly attributable to disposal of the cash generating unit or the asset without the income tax expense and the finance costs (Andersson, and Wenzel, 2014). In addition, IAS 36 involves the fair value, which is also the price received after selling an asset or the one paid to the transfer of liability that happens in an orderly transaction (Lhaopadchan, 2010; Alexander, 2012). The impairment loss, on the other hand, includes the reasonable amount through which the CGU and the carrying amount surpass the recoverable amount (Wirtz 2013). Lastly, the value in use is regarded as the present value behind the future cash flows that is commonly derived from the cash generating unit or an asset.

Implementing IAS 36

Scholars regard the transition to the IFRS standards as latest scale of compliance as far as the goodwill narrative is concerned (Boller et al., 2014; Wines et al., 2007; Carlin, and Finch, 2011). Jarva (2009) argued that Impairments over goodwill have worsen and increased in frequency in the face of a firm’s value. Paragraph 134 of the IAS 36, concentrates on impairment testing of goodwill, which is both problematic as well as challenging at the same time. Even the standard setters have gone ahead rejecting or declining the classic system because of amortization and capitalization (Mard et al., 2012; Otonkue et al., 2009). In the course of implementing the IAS 36, Albu et al. (2011) indicated that managers and business owners have developed a tendency of postponing the impairments of goodwill, a habit that leads to lack of quality across the disclosures. Most of the managers, especially in the telecommunications sector, are made to believe that impairments are likely to lead towards negative consequences such as lower compensations, lower stock prices, and lower ratings for bond credit. Many organizations across the global have not shown efforts of implementing or complying with standards set behind the disclosures and the IAS 36. Feleagă et al. (2012) argues regulators have failed to comply with the new standards in the accounting field following a possible decline in terms of performance of the company. Based on this, most of the managers become opportunistic while considering evaluation of the possible impairment tests. In their studies across the Australian and New Zealand firms, Petersen & Plenborg (2010), Carlin & Finch (2011), and Godfrey & Koh (2009) indicate that over 70% of the largest firms show low levels of compliance concerning the accounting standards associated to goodwill. Subsequent studies conducted across the Danish firms held inference that the standards are not tolerable and may take time before hitting full implementation (Bepari et al., 2014; Camodeca et al., 2013; Petersen, and Plenborg, 2010). However, the attention given towards implementation of IAS 36 further attracted a study of the Telecommunication Industry Accounting Group as indicated by Shields (2014). The studies conducted analysing implementation of IAS 36 focusing on the 350 blue chip companies across Europe as the telecoms industry made efforts of balancing the total intangible assets as well as the goodwill demonstrating the essence of asset impairment tests and annual goodwill (Dunne et al., 2008; Klimczaka et al., 2016; Yen, 2007). According to comprehensive annual reports presented by PricewaterhouseCoopers (2009), the goodwill impairment tests across thirteen companies showed that the impairment loss on the intangible assets amounted to £31 million with two companies reporting a possible average of £19 million impairment loss with the indefinite useful lives. Goodwill impairments were seen to be more significant with annual reports giving a different image of the industrial performance. Therefore, it is evident that goodwill, as an intangible asset, cannot be avoided in the modern economy, and the dynamics in the telecommunications industry and other industries. Hoogendoorn (2006) and D'Alauro (2013) highlighted that the implementation of IAS 36 leads to the implications of mandatory disclosures behind the impairment tests for the purposes of enhancing comparable information as well as enhancing transparency. However, in the course of the transition, some of the firms with reflection to the effects, costs, and complexity, which come along with the implementation process, have underestimated IAS 36 (Carlin, and Finch, 2010; Devalle, and Rizzato, 2012; André et al., 2018). Key complexities have been associated to identification of cash generating units as well as assignment of goodwill. Other complexities include selection of the method meant for the impairment test, calculation of the recoverable amount and identification of the appropriate assumptions. While the requirements of the IAS 36 look familiar, still the impairment review is challenging in the course of practice.

Impact of IAS 36 of firms’ performance

Numerous studies indicate that implementation and adoption of IAS 36 has been insignificant given that the scale has been too low. Currently, according to Devalle and Rizzato (2012) and D'Alauro (2013), researchers are focused on tapping into the reviews made by the companies and industries that are waiting to feel the positive effects of IAS 36. Nawaiseh (2016) concentrated on the Jordanian context as regards the impairment accounting and the profitability established from the measurements. The study found that companies, within the Jordanian context, showed insignificant positive relationship between the probability of the impairment loss recognition and profitability measured via the ROA (Nawaiseh 2016). This led to the conclusion that higher impairment recognition can only be noted if companies could associate it to higher profits. Nawaiseh (2016), based on the study taking Jordanian perspective, confirms that the relationship between impairment and ROE has constantly been negative with examples extracted from the Jordanian companies (ibid). The experience showcased by these companies indicates that most of them were worried of portraying the inability of generating a better performance if the impairment loss was to be realized (Andersson and Wenzel 2014). Furthermore, researchers have applied the pooled OLS and the Random Effect Model where the ratio of the impaired loss to the total assets keeps fluctuating across the studies. According to Yaacob and Che-Ahmad (2012), this attracted queries from the stakeholders concerning the impairment literature and opting for other methods that would report on the recoverable amount, the impaired assets and discount rates as well as the future cash flows. As pointed out by Kvaal (2007), most of the professionals and scholars are not contended with the research conducted around the impaired loss and the impact of IAS 36 (D’Arcy and Tarca 2016). Amid a crisis environment, most of the companies have a feeling that historical performance is likely to be less reliable in terms of judging the reasons behind the plan (Andersson, and Wenzel, 2014). Proponents of the standards contend that it has set in place steps aimed at reducing range of acceptable accounting treatments while establishing guidelines reflecting better firms’ financial performance and economic position. According to Barth et al. (2008), Ewert and Wagenhofer (2005), and Tennyson, O., & Akani, F. N. (2016), limiting accounting alternatives enhances reporting quality that reflect organization underlying economics hence eliminating opportunities to manage balance sheet amount and earnings. Ideally, this informs the investors decision-making process by taking action based on accurate information and data. Nevertheless, those with opposite opinion counter that introduction of the standards by either organization or country result in shift in system from rules-based to principles-based. This shift requires management to frequently make a decision concerning accounts particularly using own data and information (Jeanjean, and Slolowy, 2008). According to Chatham et al. (2010) and Glaum et al. (2013), applying judgment and discretion presents managing persons opportunities of reporting financial and accounting amounts with personal agendas. For instance, one can under report reducing data and information value to investors. In a study conducted by Van et al. (2005), the findings showed consistencies with this assert by indicating that firms adopting the standards had higher levels of earning management in comparison to those reporting under German accounting standards. Critics argue that many companies are scared that the IAS 36 might compel them to disclose more information that may end up being used against the company. In a case study conducted by Tsalavoutas et al. (2014), it could be found out that over 432 companies confused between the value in use as well as the fair value minus the costs of selling. Over 48 companies utilized the discounted cash flow analysis, which further disclosed more details about the cash flow estimations. Again, 449 companies made use of the post-tax discount rates, a practice that does not comply with the standards requirement. Tsalavoutas et al. (2014) revealed that most of the companies in Germany, Australia, and France rarely understand the parameters needed while computing the impairment loss or the impaired assets (Palea 2013). Such incidents paint a negative picture of the IAS 36 and may not convince other companies to adopt the standards (Palea 2013). This is because companies may end up giving more information that are sensitive and organizational secrets. The only outcome of the excessive information is to know the impaired assets, which is an undertaking that does not have a profitable backup. For companies that embrace the IAS 36 standard, Qasim et al. (2013) indicates that they only end up adjusting on the increased risk premiums, adjusted conservatism, reduced rates of profit growth, and the shorter forecast horizon. However, such adjustments have worsened the outcomes with companies left to account and compensate for the double counting errors with key scenarios seen in Britain and America. Glaum et al. (2013) points out that this paves way for the restrictive values, which are said to result into attribution of the disproportionate effects inclined towards sources of risks, and the circular processes assigned to conservative forecasts. Glaum et al. (2013) alluded to the fact that impairment loss has made companies to be worried of the awaiting reality, which increases the perception of decreased expected profit and performance of the company (Ding et al. 2007). This has further attracted the scale and the analytical angle of the financiers who keep perceiving and focusing on the downward growth rates and higher risk premium. The impounding risk of the avalanche effect is extremely clear as the impairment tests mislead companies in adjusting the cumulative risk with the intention of revamping the structures and the performance of the organization (Avallone and Quagli 2015).

As indicated by D'Alauro (2013), ill-sounding objectives of the impairment tests amid crisis management have worsen the issues. The tests insist on measuring deterioration of the company’s earning power due to the crisis establishing the gap between the companies’ permanent loss of value and the temporary profit drop ((Lhaopadchan 2010). The timeliness of recognizing accountability of losses has again attracted more questions than answers towards crisis management (Avallone, and Quagli 2015). Based on the perception of conservatism, which touches on remeasurement and accounting recognition, companies would always be set for bad news in terms of their earnings as compared to the good news a company would always want to hear. Based on the case study conducted by Qasim et al. (2013) in United Kingdom, the researchers noted that over 76% of the 500 UK firms listed as mergers and acquisitions have increasingly avoided testing goodwill with managerial discretion impeding the applicability of the standard. Qasim et al. (2013) added that IAS 36 could be a sign for negative changes in terms of technology, economy, and markets thereby positing a challenge to firms that have interest in a particular industry. The aspect of bad news behind the goodwill impairment is said to have affected 142 firms out of the possible 500 listed as mergers and acquisitions in UK. With a negatively painted picture, more companies are likely to shy off the tests with reasons aligned to a possible deterioration of performance and a possible business failure (Devalle et al. 2017). IAS 36 seemingly attracts what is referred to as asymmetric accounting as far as the timeliness of the earnings is put into consideration (Barbu et al. 2014). These include the reasons that make countries to retain the domestic accounting standards because of the consistent fight between institutions and the standards. Deming et al. (2007), after conducting studies in China, noted that IAS 36 insisted on the unnecessary transparency and implemented almost vague measurement rules that fought back the company’s earnings. Deming et al. (2007) must have implied that financial reporting rarely depends on the standards but the incentives noted by the companies in adopting the standards. Reports on incentives would rarely depend on the standards but certain economic and financial feature that reside behind the national enforcement bodies (Devalle et al. 2017). The same goes to the corporate ownership structures, the investor protection riles, legal origin, the nature of the financial system in the host country in case of a multinational companies and the judicial efficiency (Alexander 2012). The study on the American impairment reporting noted that high quality judicial systems are likely to attract timely reporting of any reasoned bad news as well as enforcement of the good news (Barbu et al. 2014; Shaari et al. (2017)). Therefore, IAS 36 is never expected to have better feedback due to the differences in the institutional structures about financial reporting (Wirtz 2013). Most of the EU countries argue that adoption of IAS 36 has triggered endless comparison of the accounting standards that do not stop with the scale of adoption and compliance, but the trending behaviour that are consistent with the national financial practices (Shaari et al. 2017). While some of the companies think that adoption and compliance to IAS 36 can trigger the economic value behind the firm’s assets, over 80% of the firms are still trapped in beliefs of the impractical requirements put in place by IAS 36 (Wirtz 2013). Based on the myriad number of companies that complain about the new standards, critics have cited the subjective estimates and judgments at the same time.

According to Mazzi et al. (2016), the unverified estimates are likely to lead to inflated net assets and impaired decisions that can lead to mismanagement of the earnings. Based on this assertion, the expected transparency will always be low. The report by ESMA further noted the quality of disclosures and the assumptions on judgments that normally underlie the impairment of the non-financial assets. Mazzi et al. (2016) indicated that lack of justification on the side of the discount rates, business plans and the missing disclosures could trigger the boilerplate language. The notable inconsistencies noted with CGU and the entire IAS 36 can lead to detrimental effects associated with decision usefulness, comparability, as well as transparency. Such findings can trigger the discretionary behaviour on the side of the financial statements as prepared by the Australian firms. Negligence of compliance further makes it hard for companies to adopt part of the requirements put in place by IAS 36 (Barbu et al. 2014).

The stringent scale of adoption of IAS 36

The nature and structures laid down by IAS 36 seems to set up a strict environment for the stakeholders who have relied on the impact of the financial standards amid the performance of their respective companies. Paul et al. (2014) noted that the study around IAS 36 is not different from the mandatory adoption of the IFRS in year 2005 following the conditional conservatism. Based on the 7251 observations made by Paul et al. (2014), it could be noted that over 16 European countries declined the set degree of the conditional conservatism. This follows the domestic GAAP believed to have shaped the regulations and institutions behind the national economies as well as cultures. The latter was abandoned as firms focused on embracing the principle based accounting standards. Adoption of IAS 36 has been regarded as stringent with conditional conservatism leading to induced aggressiveness towards recognition of the bad news compared to embracing good news. The impact of complying with the standards set by IAS 36, the impact is regarded as priori unclear and less prudent. The cross-country studies and the subsequent surveys noted the international institutional factors, as well as properties of accounting as noted in Canada, Australia, United Kingdom, and the United States. Further studies across the European firms as from 1987 to 1999 concluded that timeliness as well as conservatism became more pronounced in the face of legal tradition and increasing importance of enforcement and the equity markets (Wirtz 2013). Perhaps, IAS 36 must have influenced the asymmetric timeliness across 38 countries. This prompted high quality judicial systems. Cordazzo (2008) noted that companies exhibit different levels of compliance. While reports indicate an increase, though not significant, in terms of compliance, the journey to full compliance is still long. Failure to achieve full compliance and winning the goodwill of the key industrial players can be blamed on IAS 36 and its failure to attain the faithful representation, which is one of the fundamental qualitative characteristics of IFRS. Such a failure seemingly defines the difference in compliance across companies listed in Greece and Sweden.

The stringent conditions set by IAS 36 seem to differ with the economic environment and accounting traditions. Less developed countries have exhibited low compliance levels. The least complied criteria of the IAS 36 framework include subparagraph C and subparagraph D, which are associated with the disclosure of the significant value in use. The subparagraphs relate to the growth rates and description of assumptions (D'Alauro 2013). The subparagraphs are well described through the cost benefit theory. The latter indicates that most of the companies would be reluctant to disclose most of the sensitive details. This is because such companies are aware of the harmful effects that come with the disclosure of information. The stringent conditions put on top of the IAS 36 have reduced the scale of compliance noting the impairment loss (Wirtz 2013). The subjective assumption behind the recoverable amount has worsened the worries companies have towards complying to the requirements put in place by IAS 36.

CHAPTER THREE: RESEARCH METHODOLOGY

To achieve the objectives of the study, the study will use content analysis methodology to collect and examine data. Content analysis empowers the researcher to explore a vast quantity of textual information and to define its facets systematically, for example, the most used term to describe some liabilities in a balance sheet. Stemler (2015) defines content analysis as a systematic, replicable technique for condensing substantial information that was depicted in many words into fewer categories, that based on the objectives of the study and other rules preferred by the researcher. This, however, does not mean that content analysis is restricted to textual analysis (Vaismoradi, Jones, Turunen, & Snelgrove, 2016). Tiggemann& Zaccardo, (2018) wrote that content analysis could be applied to other areas such as analyzing art, coding actions, videos, financial statements, and any action. In this case, the study will use the content analysis methodology to analyze financial statements from 15 different companies using the IFRS accounting system. Using content analysis, the researcher will be able to sift through these financial statements systematically. It also allows inference to be established, which can be corroborated using other methodologies (Bengtsson, 2016). However, in this case, the study would not go to such extents. Despite, all these advantages, the method hugely relies on secondary sources, which means that the biases of the previous studies are likely to carry on the current research. This study will use content analysis to examining the financial statements of 15 countries that follow the IFRS system and conduct an impairment testing on their assets. The list of these companies was collected from the UK stock exchange, meaning that most financial statements that will be analyzed are either domiciled in the UK or are domiciled in other states and have been registered in the UK equity market. For the sake of authenticity and validity, the study used the most recently released financial statements of each company, which most of them ranged between 2015 to 2017.

Data Collection

The data, which in this case is the financial statements of 15 countries were derived from Annual Reports.com, a website that specializes in documenting from annual reports and financial statements of various companies in the United Kingdom. The URL to this website is http://www.annualreports.com/Companies?exch=9. The site has listed more than 100 companies operating in the UK stock exchange.

The Selection Criteria

The first selection criteria were that the company must be listed in the Global stock exchange; this is because the UK accounting systems and the stock market accommodate companies that use both GAAPs and IFRS. Therefore, to distinguish between the companies that used GAAP and IFRS, the researcher had to open all the financial statements of all the companies listed in the UK stock exchange. From the annual reports, one can identify whether the company uses IFRS or the UK GAAPs. The search results yielded 25 companies, and by use of randomized selection, the researcher was able to come up with 15 companies that conformed to objectives of the study. Besides, all the financial statements of the selected companies were selected in accordance with the IAS36 and have met the disclosure requirements as outlined.

Disclosure

According to IAS 36.126, “ Disclosure should be done by the class of assets:

Impairment losses documented in profit or loss Impairment losses reversed in profit or loss Which line items of the statement of comprehensive income Impairment losses on revalued assets documented in other comprehensive income Impairment losses on revalued assets reversed in other inclusive income

Disclosure by reportable segment

Impairment losses recognised Impairment losses reversed

Other disclosures:

If an individual impairment loss (reversal) is material disclose: [IAS 36.130]

Proceedings and conditions resulting in the impairment loss Sum of the loss or reversal Individual asset: nature and section to which it relates Cash generating unit: explanation, cost of impairment loss (reversal) by class of assets and section If recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy within which the fair value measurement is considered, the assessment systems used to quantify fair value less costs of disposal and the main assumptions applied in the assesment of fair value measurements grouped within 'Level 2' and 'Level 3' of the fair value hierarchy. If recoverable cost was estblished on the basis of value in use, or on the basis of fair value less costs of disposal using a present value system (disclose the discount rate)” (Reference; IAS 36.131)

Analysis

Berendsen PLC

The company’s consolidations and financial statement among other items are annually being evaluated at the headquarters of the entity. These consolidations include goodwill impairment, derived financial instruments, and hedge accounting. For Berendsen, the only intangible asset in the company is goodwill, which is further subjected to impairment assessment. Goodwill is treated as the surplus of the costs of a purchase over the market price of the business’s share of the net recognizable assets of the purchased subsidiary at the day of purchase. The company tests Goodwill yearly for impairment. To test Goodwill for impairment, the company allocates it to groups of cash-generating units. Generally, turnover and losses on the disposal of the company comprised of the present value of goodwill that relates to the unit traded apart from goodwill disregarded against investments (Berendsen PLC, 2015). As per the balance sheet of the business, the current value of goodwill is perceived to be an area of focus because of the judgment that helps in the approximating future cash flow and applying the required assumptions. The company does not subject assets that have an unknown useful life to amortization but are instead examined for annual impairment. Goodwill is an example of these assets with an uncertain useful life. Assets that are amortized are always reviewed for impairment when there are fluctuations in situations or events that show that the existing value might be recovered. The business acknowledges impairment loss as the value by which the asset’s existing value surpasses the value that can be recovered. The recoverable value is more of an asset’s market price, minus the price to sell and market price. For the sake of measuring impairment, the company groups its assets at the lowermost levels for which they are distinctly recognizable cash flows. Non-financial assets apart from goodwill that experienced impairment are examined for the possibility of reversing the impairment at every reporting day. The company examines on every reporting day if there is a sign that any CGU that has operational assets that might be impairment as per the stipulations of the IAS 36. The yearly goodwill impairment assessment is then conducted by associating the value of the group of CGU to which the goodwill relays to its recoverable price. The recoverable value of every operating section is determined on value-in-use designs, which the organization developed from estimate cash flows that are constructed on the previous financial performances, market data and its expectations of the impending market growth. The company uses valuations and pre-tax cash flow anticipations founded on the company’s recent three-year strategic plan for these calculations (Berendsen PLC, 2015). The significant assumptions within the strategic plan for every CGU can be summarised as; a sustainable revenue growth before the currency impacts of at least a GDP of +2%; a sustained margin improvement; and a vibrant underlying cash flow that reflects the group target range of 75%-90% of the sum of cash conversion after the targeted investments. Similarly, cash flows that are beyond the three years have been induced using an appropriated growth rate of 2%, because these are long-term businesses (Bredesen PLC, 2015). By analyzing both the balance sheet and the income statement, one can conclude that there is no reasonable variation that these assumptions can cause an impairment except as explained in the subsequent section since the remaining CGU have a distinct headroom in the modeling assumptions.

Debenhams Plc

In cases, where the company develops the software, and the developers have established that the software is technically feasible when completed and it would generate the necessary economic benefits, the company treats this software as an intangible asset, even if the software is still in its development process. The same rule applies to any intangible assets that are in the process of creation (Debenhams Plc,2017). These resources comprise of unswervingly attributable prices that render the assets into use and could comprise of capitalized borrowing expenses. Amortisation is given at the subsequent percentages per year to write off the prices of other intangible assets; minus the value, on a straight-line base from the day of purchase. Assets that possess an unknown useful life, for instance, goodwill and other intangible assets that have not yet been used, are not amortized but are tested every year for impairment. Assets that are subjected to amortization are also analyzed for impairment when measures or fluctuations in situations direct that the current price might not be recoverable. In case of an impairment loss, the company recognizes the sum by which the asset’s holding the value surpasses the value that can be recovered from its sale (Debenhams Plc,2017). The recoverable sum can be higher in an asset’s market price minus the costs to sell and applied value. For the sake of evaluating impairment, assets are assembled by stock, which is the lowermost level for which there are distinctly indefinable cash flows, which are the CGU Non-financial assets apart from goodwill that has been impaired are revised at every commentary year for the possibility of reversal of the impairment. Goodwill on acquisition of subsidiaries epitomizes the extra value of a purchase dived by the market price of the Group’s share of the net identifiable assets and contingent liabilities of the attained subsidiary (Debenhams Plc, 2017). The company groups goodwill on the purchase of subsidiaries, which later grouped in intangible assets. The company does not amortize goodwill, but tests it for impairment every year, or when there is a prompt event. In this situation, goodwill signifies the goodwill for a range of sites, which have been assigned to CGU to help in testing for impairment testing from the United Kingdom and other which is the lowermost level at which goodwill is checked for administration resolutions. Assets that have an uncertain useful life are not exposed to devaluation and are assessed every year for impairment. Assets that are prone to devaluation are checked on for impairment at whatsoever point instances or variations in situations illustrate that the conveying worth might not be recovered. An impairment loss is perceived as the sum by which the assets conveying the value surpasses the amount that can be recovered from their sale. The recoverable amount is the higher than an assets reasonable price minus the expenses to sell and the existing amount (Debenhams Plc, 2017). For the sake of evaluating assessment impairment, assets are clustered by stock, which is the most minimum dimension for which there is independently recognizable cash flow. Non-financial assets that are subjected to impairment tests are inspected at every commentary day for the possibility of reversing the impairment.

Brammer PLC

Goodwill is calculated as the surplus of the sum of a purchase over the market price of the group’s share of the net assets of the purchased subsidiary on the day of purchase. The company subjects goodwill to impairment appraisal, both yearly and in cases where there are events that might indicate that the existing cost of might is not recoverable. A statement is completed if the carrying amount is more than the recoverable cost. Any form of impairment is acknowledged proximately as an expenditure and is not later reversed. Cash generating units have their respective goodwill values for the sake of testing for impairment (Brammer Plc, 2015). The provision is made to the CGU that are supposed to benefit from the dealing grouping, in which the goodwill rose. Impairment of other assets such as equipment, plant, and property, including goodwill and other intangible assets are revised yearly to determine if the events or the variations in circumstances might lead to the loss of the existing value of the asset. In cases, such situations exist, the recoverable sum of the asset is then assessed as either the higher of the asset’s net selling value or its current price; the subsequent impairment is acknowledged as an expenditure in the consolidated income statement. The cost is estimated at the market price of the projected forthcoming cash flows, anticipated to result from the use of assets and their subsequent disposal profits. To quantify the current price of projected impending cash flows, the Group applies a discount percentage that is founded on the group’s approximated subjective mean of capital, together with any risk premium determined suitably. The projected future cash flow is applied in the impairment valuation represent the management’s best assessment of the expected future market situation and the current decision on the use of each asset (Brammer Plc, 2015). Assets are classified at the lowest levels, where there are distinctively recognizable cash flows for the company to test for impairment. Trade receivables are presented at the original amount minus provision for impairment. If there is sufficient proof that the company will not manage to collect all accounts receivable, a requirement for impairment is made in the financial statements. The variance between the book value and the estimate of the recoverable amount is the amount of provision produced (Brammer Plc, 2015). The group makes goodwill impairment review at cost less amortization, which is also reviewed for possible impairment. As per requirements outlined AIS 36, impairment review should be conducted by comparing the expected value of an asset with the goodwill and the related operating assets, which is considered as the net existing value of discounted impending cash flows anticipated to result from the assets. Goodwill is then assigned CGU to the groups.

GlaxoSmithKline

The company evaluates all non- current assets for impairment on the carrying values either as single items or the entire cash-generating unit where it is anticipated that the asset is subject to impairment. In addition, goodwill and other intangible assets that have unknown useful lives are subjected to impairment testing every year. In the income statement, a provision for impairment is made for the respective year (GlaxoSmithKline2017). For impairment losses, a reversal entry is made if the loss is as a result of impairment on other non-current assets excluding goodwill if an alteration in estimations applied to calculate the recoverable sum. In financial statements, goodwill and other intangible assets are stated at cost minus impairment and are expected to have an indefinite useful life. The business meets the disclosure requirements outlined in IAS 36.

Fortune Oil PLC

Fortune Oil PLC also has a set committee that examines the existing value of property, plant, equipment as well as intangible assets that can be impaired. It thereafter reviews the organisation’s statement, which outlines the origin for the full asset’s impairment, and the establishment completed in regard to the Group’s iron ore venture. As part of the valuation, the committee checks the management’s intent to conclude development actions in light of opposing project economics (Fortune Oil PLC, 2014). Through this, it serves to approve the difficulties of the market and the key deliberations like supporting the method taken. Valuation of the recoverability of the Group’s non-current assets carrying value may be judgmental although it requires estimates of future cash flows. It can happen because of organisation’s assessment of impending business projections and operative verdicts, as well as forthcoming costs, product prices, and suitable discount rates (Fortune Oil PLC, 2014). The result of impairment valuations can differ significantly as compared to the application of different assumptions. From the impairment assessment during the period, Group’s Armenian Iron Ore Venture was entirely impaired. The company’s goodwill tends to arise on the acquisition, hence the need for a business to recognize the asset at the purchase date. The company measures the surplus of the acquired value of any non-controlling interests in the holding company to the market value of the corporation’s formerly held equity interest. This is presented as the net of the acquisition-date that gives the sums of the perceptible assets and the liabilities. The carrying sum of the company’s assets reviews is shown in the balance sheet, and it depicts the date, which can be used to determine whether impairment exists (Fortune Oil PLC, 2014). If there is an existence of assets impairment, the asset’s recoverable amount can be used to generate the estimates. Recoverable value is often higher than the market value which mostly costs less. In order to assess value in use, the projected forthcoming cash flows are withdrawn to give a market value using a pre-tax discount rate, a reflection of the existing market.

Premier Foods PLC

The company reviews non-financial assets including goodwill and inventories annually to determine its value which is presented in the financial statements which are done founded on the management assumptions. To conduct an impairment review, the company groups the assets into small groups of cash generating units and impairment review in done every year. The company’s management team also checks if the disclosure requirements in IAS 36 have been adhered to. Property, plant, and equipment are subjected to impairment review if there is proof that their respective book value cannot be recovered fully. In cases where there is an impairment loss, the assets are reviewed to determine if a reversal is essential (Premier Foods Plc, 2017). The impairment loss is taken to the income statement in its respective financial period. Provision for impairment is also made for trade and other receivables and offered in the financial statements at cost less impairment provision; this is only done when it is clear that the establishment is not capable of recovering all amounts due as per the standings of the trade receivables.

Keller Group

The company reviews the fair value of its intangible assets not including goodwill at the end of each year to ascertain if the assets have incurred an impairment loss. Whether there is any evidence of such an occurrence, the recoverable value of the asset is calculated to establish the value of the impairment loss (Keller, 2017). Such assets apart from goodwill include licenses, software, trademarks, and patents. The Group does an annual test to confirm whether goodwill suffers any impairment in relation to the accounting policy previously set to curb business risks. The group has a responsibility to estimate the recoverable value, which is founded on the computation of the value-in-use. Such controls may involve assumptions and the most important is the forecast revenues as well as operating margins (Keller, 2017). Consequent to the previous acknowledgment, goodwill is presented at cost minus accumulated impairment loss. Impairment testing is done annually to check for any impairment losses in accordance with IAS 36; if impairment loss has occurred, the amount is taken to the income statement in the respective year.

Hargreaves Lansdown

The company’s committee looks into the measurement of the recoverable amounts of CGU, the company’s goodwill, and assets apprehended for sale at the end of every 12 months before submitting the financial statements to auditors. Measurement of recoverable amounts involved the identification of the appropriate CGU and the distribution of goodwill. The valuation of impairment encompasses rules on the predictable operating cash flows from the CGU, the discount percentage used in the calculations as well as the comparison of the cash flows to the carrying amount of goodwill (Hargreaves Lansdown, 2016). The organisation looks into carrying amounts and cash-generating units containing goodwill and makes several key assumptions and judgment. Goodwill undergoes testing annually for impairment. It is presented in the financial statements at cost minus accrued depreciation if any. In cases, Goodwill is allocated to cash-generating units but rather than being amortized with the cash generating units it is tested for impairment in the respective accounting period. Other intangible assets with indefinite useful lives are also recognized at a cost minus accrued impairment losses in any reviews show the presence of impairment losses. Trade and other receivables recognized at their respective market value. Following the primary recognition, their measurements occur at amortized cost less any impairment losses (Hargreaves Lansdown, 2016). An establishment for impairment of trade receivables takes place where there is an indication that the business might not be capable of collecting the values because of the agreed terms of the receivables in question. The carrying value of the Group’s financial assets, other than inventories and overdue tax assets appears at every balance sheet year to estimate if there are signs of impairment. In case such evidence occurs, the value of the recoverable assets estimates impairment loss when the carrying value of an asset or its CGU surpasses its recoverable value. Impairment losses’ recognition proceeds in the Income Statement. Impairment losses predictable in regards to CGU to diminish the carrying value of any goodwill assigned to a CGU (Hargreaves Lansdown, 2016). In regards to other assets, an impairment loss reversal occurs when there is a sign that the impairment loss might no longer occur and there has been a variation in estimations applied to establish the recoverable value.

McBride PLC

In accordance with IAS 36, the company testes its assets for impairment every year. such assets include goodwill which is billed to other CGU. Other intangible assets which have indeterminate useful lives, owned by the company are also subjected to impairment review annually. The value of goodwill presented in the financial statements is the cost minus any impairment loss recognized (McBride plc, 2017). The same is applied to other intangible assets which are stated at cost minus accrued impairment loss. An asset is impaired to the point that its present value amount is more than the recoverable value, which shows the higher of the asset’s price in use and its market price minus costs to sell. An asset’s value in use shows the existing value of the forthcoming cash flows that the company expects to generate from the use of the asset continuously. where it is impossible to make an approximation of the recoverable amount of a specific asset, the recoverable value is calculated for the CGU where the asset belongs. Goodwill on a stand-alone basis does not generate cash flows (McBride plc, 2017). Therefore, impairment testing is done at the cash generating unit level where it belongs. For other non-financial assets, impairment is tested first before testing impairment on goodwill. Impairment losses are taken to the income statement if there is any sign that the carrying value surpasses the recordable quantity of assets which are subject to impairment review. A reversal entry is done if there have been changes in the previous estimates for recoverable amounts of the assets, but for goodwill, no reversal is made.

Tesco

For the case of Tesco Company, it is agreeable that the disclosure of the net impairment as an incomparable item is in agreement with the Group’s strategy in extraordinary items. Intangible assets like software and pharmacy licenses, carry out measurements originally at acquisition cost to improve the asset. Development expenditure incurred in a separate project capitalizes on specific criteria, which entails the asset created to produce forthcoming economic aids (Tesco Plc, 2018). Intangible assets achieved in business are stated at the market value at the purchase date. Subsequent original acknowledgment, intangible assets with fixed useful lives occur at a rate less provision for amortization. Company’s goodwill dictates for a review of the asset impairment at least yearly. It is through measuring the recoverable value of each CGU, and this is related to the company’s goodwill and goals. In most cases, the recoverable amount is always higher than the value in use. It exists where there are pointers of impairment of prior impairment for investments in joint projects as well as the associates or other investments (Tesco Plc, 2018). At this point, the organization does an impairment assessment for the placement constructed on the higher of value in use and market price less the value of disposal. In the event there exist indicators showing impairment of assets, the company management can perform an impairment test as per the provisions of IAS 36. From the test, it can be possible to determine recoverable amounts for cash-generating units which can either be higher than fair value less or higher than the cost of the asset of disposal and value in use. The value in use is mostly premeditated from cash flow prognoses founded on the company’s years of internal estimates. The predictions may extrapolate to five years and can be found on management’s expectations (Tesco Plc, 2018). It also goes for beyond five years founded on a projected long-term rate of development. The company discloses all impairment losses and gains in their final financial statements.

The Oxford Biomedica

The company reviews the value of non-financial assets and intangible assets on a yearly basis to test for impairment. The purposes of assessing asset impairments are to help in grouping assets at the lowest levels, which have recognisable cash flows. Impairment losses occur when the amount by which each asset estimation surpasses its recoverable value. impairment losses identified are taken to the declaration of inclusive income (Oxford Biomedica, 2016). The group owns intangible assets for buying of intellectual property rights, patents, and goodwill. in cases where there is an indication of a perpetual material weakening in the value of an intangible asset, the company carries out impairment review on the assets. the process is primarily based on the approximated discounted future cash flows. Such estimates may sometimes vary from the actual results due to the assumptions used and market changes. changes in the market environment and business prospects profoundly affect the chances of having impairment on assets. At the end of every year, the organisation evaluates all the business’s investments in subsidiaries and other ventures to check for impairment. In cases, where there are significant and continuous changes in business or a shortfall in the market which may result in a fall in market capitalization, the stakeholders initiate an impairment review in accordance with IAS 36 and make a disclosure of the same in its financial statements and adjusts the carrying value of the group’s investments (Oxford Biomedica, 2016). At the close of the year, the directors assess the need to write back a part or all any impairment which had previously been recognized on its investment in subsidiaries.

Serco Group PLC

In Serco Group PLC goodwill measures, the surplus of the fair value is documented as an intangible asset when it is possible to achieve its control. There is both positive and negative goodwill; which are recognizable in the statements of income. However, goodwill never generates free cash flows thus to perform required tests for impairment, uses (CGUs) which benefits from the acquisition (Serco Group PLC, 2017). The Group assesses the carrying value of its tangible and intangible assets (plus goodwill) at every reporting time, plus any other assets within the possibility of IAS36 Impairment of Assets, to measure if there is any sign that those assets have experienced an impairment cost. Recognition of trade receivables is originally at cost and afterward at amortized cost without the provision for impairment. This helps in determining the cash equivalent to the recoverable amount Serco Group Plc, 2017). A requirement for asset impairment may arise from the evidence that some businesses are always unable to collect amounts due. Identification of the gages of assets impairment encompasses a high level of the verdict as well as an understanding of the factors that lead to the value change of the asset. During the reporting time, the previous assessment assists in determining the availability of indicators, which entails the performance of the corporate and any variations to the markets where the business operates (Serco Group Plc, 2017). It seeks to lessen the risk related to the decision made by ensuring that there are processes and guidance for the internal review committee.

Unilever Plc

At the Unilever Company, an impairment review is conducted on intangible assets, goodwill, and financial assets. According to Unilever, goodwill is a function of an accounting plan for business amalgamations. Its measurement is corresponding to a cost less sums provided for impairment. The Group’s CGUs captures product groupings and goodwill is grouped as a CGU for the sake of impairment review. Property, plant, and equipment can be subjected to assessment for asset impairment especially when the events or conditions direct that this is essential. When there is a signal of the existence of an impairment, the assets or cash-generating unit’s recoverable worth can be obtained as estimates whereas the impairment loss can be determined in the income statement. Every 12 months, the Unilever Group evaluates if there is an indication that financial assets are impaired. A substantial reduction in price lower than the price of an asset commonly designates that an asset has deformation (Unilever,2016). If impaired, financial assets given its estimated cost, which must be equal to its recoverable amount. Unilever measures its goodwill at the purchase time and is the market value of consideration paid, desirable non-controlling interests, and the market price of any formerly held equity interests minus the net recognition value of the recognizable assets and liabilities. Goodwill is exposed to a yearly assessment for impairment in accordance with our accounting policies. It also examines the limited life intangible assets, which mostly include the patented and non-patented knowledge, licenses, and software as well as intangible assets attained from the Group corporations (Unilever, 2016). The assets involve capitalization and pay off on a straight-line basis in the income statement over the time of their projected useful lives, or the period of permissible rights.

Grafton Group

The company impairs its assets every year or at any other time where there is an indicator that impairment has occurred. Goodwill is assessed for impairment using a value-in-use (“VIU”) model. goodwill is associated with assets which can not be identified and recognised separately. Goodwill is assigned to the CGU of the group at the date of acquisition and is stated at cost minus accumulated impairment loss. In cases where the carrying value surpasses the recoverable value, an impairment arises and is taken to the income statement which can be reversed later if changes occur, except for goodwill which is not reversed at all (Grafton Group, 2017). The carrying value of intangible assets is also reviewed for impairment in respect to market changes in each reporting date. The company’s property plant and equipment are also reviewed at the end of the financial year to ascertain whether there is any impairment in accordance with IAS 36 (Grafton Group, 2017). Any amendments and reversal made must be clearly disclosed in the final financial statements.

Bellway

Impairment of assets is carried out annually, and items are presented at cost minus impairment loss which has accumulated over time. Such assets include PPE and investment property inventories are also subject to impairment and are presented at the lower of the net realisable value and cost. Evaluations are carried out annually to check for any impairment on land; this is conducted by approximating the market value in comparison with the booking amount of the land. the company makes a provision for amounts that cannot be recovered (Bellway, 2017). The company meets the disclosure requirements as per IAS 36 as it recognises and reports any impairment losses on the assets subject to impairment review.

Summary Table

CHAPTER 4: DISCUSSION AND RECOMMENDATION

Gaps in IAS 36 and how they can develop to make the standard more defined

Indicators for Impairment Test

IAS 36 states that many external and internal signs show that an asset can undergo impairment; such factors should be considered at every accounting period. However, practically most companies lack such schedules regarding impairment of assets and only carry out such tests when obvious indications take place. Companies face difficulties in knowing when it is necessary to carry out impairment testing because as per IAS 36, It is not mandatory for companies to carry out impairment testing on fixed assets every year thus most companies tend to wait for the market indicators before testing for impairment (André, Dionysiou, and Tsalavoutas, 2018). If this happens critical aspects of changes in market conditions are omitted, and companies risk overvaluing its assets if it fails to carry out impairment testing.

Delay in the Impairment Area

IAS 36 species the indication that organizations are not allowed to reschedule impairment tests so that they are sure that the impairments are stable, however, practically a lot of time is taken by companies to initiate impairment testing, and most companies do not carry out impairment test instantly if a sign is presented. When the market conditions are normal, companies do not pay attention to impairment. A delay which is acceptable in order to stabilize the volatility in accounting (D'Alauro, 2013). This results in a gap between the regulation and its practice because companies lack the knowledge on the exact time to report impairment yet the regulation stipulates that impairment should not be postponed.

Impairment Loss or Depreciation

The regulation states that a company must always consider the method of depreciation used and the useful life of the assets regardless of whether the company reported an impairment loss or not. The significant difficulty here is the fact that depreciation falls under IAS 16, but firms are mandated to deliberate it when using IAS 36 Yet the two regulations affect financial statements differently. Practically it is difficult to different issues that fall in the two standards and stipulated in the theoretical framework (Street, 2002). Companies ignore the aspect of impairment loses because they do not occur frequently and concentrate on depreciation if this happens depreciation is accelerated, and the financial statements are not really presented since some costs have been rescheduled. In practice, differentiating between deprecation and impairment is very difficult.

Value in Use

The regulation and the evidence collected indicate that the value in use is frequently used by businesses which is a complicated area because of its biases and prediction of the future. Practically companies calculate forthcoming cash flows on the same basis as the administration, and the management intends to manage the business in the most efficient ways hence the forecasts are regarded as dependable (Andersson and Wenzel, 2014). Nevertheless, companies seem to diverge from IAS 36 because the estimates are not amended prior to calculating the value in use. Companies face problems in identifying cash flows which may lead to complications in adjusting the forecasts, and this leads to more biasness, and the primary question is if the forecasts are reliable after adjustments as per IAS 36.

Difficulties or Biased Information

The regulations state that the management best judgments shall establish the estimates; hence the management takes advantage of this. Sometimes the management tends to account in a certain way to attain a particular goal if this happens there is a risk of presenting inaccurate. It is challenging to identify manipulation in practice, and at times companies may report errors involuntarily due to problems in applying IAS 36 (Hartwig, 2015).

Reforms that can be done

Cortesi, Montani, and Tettamanzi (2009) wrote that IAS 36 ought to be reviewed with the aim of giving clear standards that will give principles that help users, auditors and accountants and supervisors to change a shared understanding of the real elements of conducting the applied features of undertaking the events applied to make sure that assets are conducted at no more than their recoverable amount. Secondly, the determination of testing impairment necessities and develop direction that defines what the assessment revolves around and what it does not. Tsalavoutas, André, and Dionysiou (2014) also stipulated that IFRS needs to develop a modified unitary framework that includes explicit alterations to eliminate the prevailing restriction on ViU in respect to the imminent rearrangements and asset improvements and substitute those limitations with direction on when it would be rational to contain such cash flows in a prototypical used to test impairment. Besides, the use of a Fair Value Less Costs of Disposal (FVLCD)- type framework for the resources to be inclined of within a specific financial reportage period (Devalle and Rizzato, 2017). The system should also permit the application of a post-tax discount rate and allow the application of market-based norms within the cash flow framework like the curve for commodity prices and the rates used in foreign exchange. IFRS should also consider redefining the policies on what comprises of a CGU or groups of CGU to reinforce the association with how a business result is perceived and decisions are reached with the internal structures. Lastly, the agency should enhance disclosure proposal by providing additional guidance on the meaning of significant supposition being those to which the impairment system is most subtle, to inspire the disclosure of more information (Kasperzak and Wassermann, 2009). The organisation should also consider revising the disclosure requirement of IAS 36 to give more comprehensible principles of the disclosure, irrespective of the model used to determine the recoverable amount. IFRS should consider incorporating a new disclosure objective that would help in giving information to help stakeholders comprehend the succeeding performance of the needed business, concerning the business sensitivity feature of the material being disclosed.

Recommendations

From the data collected, it is clear that goodwill does not have a standard measurement unit, and is based on the estimates made by a company. This also means that the impairment of goodwill is significantly affected by the assumptions that the business makes about the future. In cases, where a business resorts to using IAS 36, the value of goodwill ought to be documented when they believe that the future cash flows of some assets will reduce. Using an old framework of amortisation over a certain period on goodwill, the business will always record the same amount of cost in the income statement in a defined period of a maximum of 20 years. However, in the reformed system of goodwill accounting, a business may not record any asset impairment in the economic boom period. In the economic recession period, companies could document substantial impairments, which could have significant adverse effects on the income statement. If the company predicts a negative cash flow, the organisation needs to conduct impairment assessments, which impacts the income-statement even more than its effect through the recession. From this perspective, this phenomenon is that the new framework established by IAS 36 goodwill accounting system are contributing to increased volatility in the market than if one is compared to the old amortisation system. The new system could create even lower downs in the recession and economic booms, and in such a manner the volatility is affected. Therefore, it can be concluded that the old system worked better or gave a better picture of reality, but it does not relatively give companies much freedom. A business entity can fit in substantial impairments in recession time, and then successive make new acquisition when the market improves. Sikström and Volvo (2013) discuss the same phenomenon. His arguments discuss that the obliterated amortizing rules on acquired goodwill have resulted to increased outcomes in the income statement from the entities, which will lead to overstated outcomes in the companies listed, till the hangover reaches time. The current IAS 36 framework leads to a judgment of the acquired goodwill value annually, the reason for such, is that the company would not get twisted value that is too high.

Signs for Impairment Assessment

IAS 36 stipulates various external and internal signals that an asset could be impaired; these are a minimum that an entity could consider at every reporting phase even though empirical evidence from the analysis in the methodology section reveals that entities do not have similar procedures in respect to testing asset impairment, which is only conducted when there are evident indicators of impairment. Besides, entities do not consider all the indicators in the IAS 36, when considering if an impairment loss is essential. The analysis form of this research reveals that it can be challenging for an entity to distinguish the time to assess for impairments. The fact that IAS 36 does not need yearly impairment assessments of fixed assets and therefore corporations have no strict procedures, which implies that these entities would inaccurately delay impairment tests to understand how marketing factors will develop. Essential features that lead to change could be missed if the company does not consider all factors.

Impairment Area Delay

IAS 36 gives clear guidelines on the concept that business is not allowed to postpone their impairment tests to make sure that impairments are permanent. However, empirical evidence collected in the study revealed that it takes a long period to prompt an impairment assessment and that businesses do not continuously undertake an asset impairment assessment immediately an impairment indicator is realised. Besides, entities do not take much consideration on the impairment indicators when the market is booming as compared to when the market is in a depression. A postponement in the documentation of impairment is justified by IAS 36 to counteract volatility bookkeeping. It is also evident that there is a slit between the directive and practice in this zone, which reveals that it is very challenging for business entities to predict when impairments ought to be documented. Nonetheless, reduced unpredictability in the financial statement could raise the importance of stakeholders in the long-run, but contrary, the directive should be equally executed so that its effects can be equivalent between businesses and with a specific firm over some period.

Depreciation

The theoretical context discusses if an impairment loss is acknowledged or not; the entity should deliberate on the residual useful life and the depreciation system. The process of depreciated is guided by IAS 16, but most business still applies these guidelines when using IAS 36 because depreciation and impairment are related. It is essential to acknowledge that the two values have various impacts on the financial statement. If impairment loss or variations in depreciation explains the financial event best can be established by examining to what extent the qualitative features are encountered, for example, realistic depiction is difficult to differentiate these characteristics in theory; however, it is not always perceptible to draw the difference in practise. It is also a challenge to reveal the gap between the directive and practice in this sphere. However, this part ought to be deliberated upon more. From the analysis conducted it was somehow evident that most companies try to avoid losses from an impairment, because their probability of occurrence is low, and thus one can be seen as surprising or failure. In cases, where the company accelerates depreciation rather than acknowledging impairment losses deliberately, the accounting is not embodied because the costs are suspended. The aggregate cost will ultimately be equal, but the accrual will not be accurate. It is worth citing that the hypothetical framework does not highlight the border between impairment and depreciation in practise; this could be because other spheres in IAS 36 that are more problematic to use. Based on these analyses it is evident that IAS 36 needs a significant extent of idiosyncratic assessment and the difference between impairment and depreciation is a challenging zone.

Fair Value Less Cost Disposal

The literature review shows that it is a challenging task to obtain the net selling price for a company-based asset because no there is no dynamic market for these assets. Though, if there is no market for an asset, the fair value less costs of discarding are possibly among the most irrelevant and discounted cash flows would restore to reflect the worth of the asset to the corporation. Though, in case there is no market for a specified asset the fair value less cost of clearance probability is virtually irrelevant, and the discounted cash flows could be reflected better the value of the asset.

Value in Use

Both the literature review and the data collected revealed that the value in use is mostly used by businesses, as much as it is a tricky area because of its prejudice and estimation about the future. The procedure of calculating the value in use comprises various steps, which reflects the value of a company’s assets. From the financial statements analysed in the methodology section, it was clear that businesses base their estimations on upcoming cash flows on similar prediction as for their internal administration. Even so, most entities tend to stray from IAS 36, because some of these estimates are not attuned before the calculations of the value in use. For example, the organisational variations, which are not hitherto mandated are involved, as well as the enhancements of assets. Companies have also experienced difficulties trying to recognise and insulate cash flows, which can confuse the modifications of the predictions and could also lead to more prejudice. Besides, it is also a complicated task for external parties like stakeholders and auditors to manage the consistency of projected cash flows because it could be extremely idiosyncratic.

Cash Generating Units (CGU)

After a company identifies the occurrence of reliable indicators, and therefore an impairment test should be conducted, challenges might arise in regards to the assets that ought to be included in the assessment process. IAS 36, guides that CGU should be demarcated on the lowermost likely level. The data collected revealed that most firms do not have the time to reflect on their levels of CGU regularly and the CGU are typically defined at an equivalent level as the companies’ market. Therefore, it is not clear whether in a practical sense the CGU is practically determined by the lest possible level. Even if IAS 36 had comprehensive data in regards to CGU, it could be complicated or time-consuming to recognise CGU on lest levels than the current market. The resolve of CGUs at the same level of the market could increase reliability because they already exist, while contrary, it could result to the evasion of impairment losses. Businesses could undertake proficient assessment and interpret their data because IAS 36 is theoretically created. Nonetheless, the theoretical background states that accounting could be prejudiced if the management has the necessary enticements to evade impairment because of high levels of CGU. IAS 36 dictates that the allocation of CGU could be defined similarly from one time to the other unless a change is justified. A fundamental query is if entities let their CGU be on too high levels since they would want to evade losses that could occur due to impairment, or because of the challenging process of identifying lower levels. Goodwill is a multifaceted area that cannot be analysed more; however, it is essential to indicate that the CGUs’ determination affects the goodwill assessment. As per the stipulations of the theoretical framework, goodwill can be allocated to various or one CGU. Subsequently, if CGUs are determined at very high levels or are not measured keenly, it could directly impact on the impairment of goodwill.

Biased Information

Biased information can be given when calculating impairment, which could lead to the administration taking advantage of the regulation because IAS 36 stipulates that the estimation could be constructed on the assessment of the administration, which could be less idiosyncratic. The theoretical outline discusses the idiosyncratic basics within IAS 36 rise the probability of giving imprecise measurement due to the motivations given to management. However, if the management has the goodwill of report accurately, then the framework will not have a challenge. The extent for bias can lead to glitches, especially if the administration has the intentions of reporting in a particular way to achieve a pre-defined goal, to keep bonuses or dividends on a high study level. If this is true, then it is not the superlative valuation, and therefore evidence is not adequately embodied. Though, imperial evidence collected revealed that the impairment can never be applied to manipulate accounting; businesses have learned from others that biased accounting can affect the performance of the organisation. However, it is challenging to detect accounting manipulation in a practical situation.

CHAPTER FIVE: CONCLUSION

The challenges faced in IAS 36 could be because of the standard required particular valuations, which has led to a state where firms do not execute this directive uniformly. IAS 36 is principle-based and meant to cover conceivable actions for various industries. It is a vulgarisation of genuineness, which leads to a strain between those who made the standards and the practitioners who execute these principles. Because of the difficulties faced when executing IAS 36 some processes have been established in this sphere. Besides, the slit between the theory and practice in various areas could be because of the reality fluctuates quicker than the regulations of bookkeeping. Even so, the essence of intangible assets could remain to be of inordinate significance since businesses are likely to have fixed assets. It is believed that the evaluation of fixed assets is not as challenging as the evaluation of intangible assets, although the two sorts of assets can be constructed on predictable forthcoming monetary benefits, and therefore the similar difficulty could rise. Further studies need to be conducted on the recognition of impairment losses and how they vary between companies in an industry over time, for example, because of financial ability or problems with the application. Hence, future studies ought to investigate the reaction of stakeholders to impairment losses

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