Analysing Intermediate Financial Accounting Australian Securities and Investment Commission (ASIC) - Example

Name: xxxxxxxx Tutor: xxxxxxxx Title: A Report on Intermediate Financial Accounting Australian Securities and Investment Commission (ASIC) Course: xxxxxxxx Institution: xxxxxxxx Date: xxxxxxxx Table of Contents Table of Contents 2 2.0 Introduction 3 3.1 Asset impairment 5 3.2 Disclosures of estimates and accounting policy judgments 7 4.1 Impairment Testing of Investments in Bottlers’ Agreements and Intangible Assets with Indefinite Lives and goodwill 8 4.2 Impairment tests for brand names with indefinite lives 8 5.0 Potential gap between the CCA’s current practice and the accounting standards requirements 9 6.0 Recommended actions to satisfy the potential ASIC reviewers 10 1.0 Executive Summary This business report provides the Coca Cola Amatil (CCA)’s Chief Financial Officers (CFO) feedback on the investigations carried out in relation to the points mentioned by Australian Securities and Investments Commission (ASIC). Basically, this concerns asset impairment and the related disclosures through comparing in details the current reporting practice, though, based Specific requirements of the accounting standards are highly considered in the report. This include, the write-downs of the various indefinite and life intangible assets which comprise of goodwill, impairment testing, identification and allocation of the cash generating units as well as goodwill to cash some generating units. There is also report on the application of unrealistic assumptions used in calculation of recoverable amounts such as discount rates and the expected growth rates. The CCA Company plans to respond the requirements that a member of the Board of Directors encountered on the general press release of ASIC accounting regulations. This is aimed at reducing the upcoming anxiety about the company’s reputation incase ASIC reviews the 2010 financial reports of CCA which may cause some non-compliances with the accounting standards public. For example, if ASIC makes referral to its Financial Reporting Panel. Therefore, the Board shares the concern raised by one of its members and decided to commission the company’s Chief Financial Officer (CFO) to come up with a business report on ASIC’s new regulations. 2.0 Introduction Given the existing economic conditions which may cause some readjustments of asset values, write downs as well as debt refinancing, Australian Securities and Investments Commission (ASIC) has primarily focused on reviewing whether a financial report of a given company qualifies for appropriate recognition in addition to the measurement of assets and liabilities. It also plans to determine if the financial reports of various companies contain the required disclosures and explanations. It is in this regard that one member of Board of Directors within the Coca Cola Amatil (CCA) Ltd became concerned to share general press release of ASIC (ASIC, 2011). Following the recent Board meeting, the member expressed her concerns about ISSUE NUMBER 4 of ASIC which focused on the points of asset impairments. This is because she recalled a heated discussion about asset impairment and Cash Generating Units (CGUs) that was in one of their last board meetings, reporting that decisions were made on how to maintain the accounting profit of a company. This has caused anxiety concerning the company’s reputation incase ASIC reviews their 2010 financial reports and decides to make any non-compliance with the public accounting standards. This may include ASIC’s referral to its Financial Reporting Panel. As a result the CCA’s Board shared her concern, and thus decided to commission the company’s CFO to provide a business report on ASIC new regulations. In this report, the CFO provides feedback of the investigations carried out on each the points focused by ASIC regarding asset impairment and the associated disclosures. A detailed comparison is made on the current reporting practice in regard to the 2010 annual financial report of the company. Specific requirements of various accounting standards are examined. This includes write-downs of goodwill, impairment testing as well as the identification of the cash generating units and disclosures concerning impairment testing (Tarca, 2010). 3.0 ASIC requirements according to the respective accounting standards related to asset impairment and related disclosures ASIC has drawn attention to various focus areas for its directors in 2011 financial reports. This is in relation to its released results on a review of the financial reports for December 2010. It has emphasized on a number of requirements for which the company Boards as well as those in charge of the preparation of financial reports need to focus on future reporting period. ASIC Commissioner Michael Dwyer argued that ‘It is vital to provide investors as well as other users of the financial reports with relevant and adequate financial information that aid them in decision-making (Street, 2011). 3.1 Asset impairment For any reviewed financial report, ASIC discovered that write-downs were far below one per cent of the overall value of indefinite and life intangible assets with the inclusive of the goodwill. For a period of 12 months to 30 June 2010, ASIC discovered that the write-downs were 6%. Thus, it continues to identify some issues associated with impairment testing, for instance, the identification of Cash Generating Units (CGU), allocation of the goodwill to CGU in addition to the application of unrealistic assumptions in order to calculate the recoverable amounts that includes discount rates and the expected growth rates. ASIC’s review reported that most of the entities failed to apply methods required by its accounting standards in the task of impairment testing, use of cash flow information. This means that discount rates seemed not to be reasonable in regard to the historical cash flows, information found in the market and future expectations. Therefore, directors are called upon to ensure that there is adequate ‘in-house’ expertise to effectively and efficiently perform the impairment calculations as well as make use of the requirements standards (ASIC, 2011). Assets are expected to be allocated to the cash generating units found at the lowest levels to make sure that cash flows directed from a single group of assets meets the ASIC requirements. Cash generating units are required to be larger compared to the primary or secondary segments that are used for segment reporting. On the other hand, goodwill must be measured at the lowest level of groups of units where monitored internally. This means that Goodwill need to be allocated to some of the units expected to benefit from them in time of acquisition. ASIC discovered various entities excluded the material disclosures that concerned their impairment testing which includes the key assumptions, allocation of goodwill to each cash generating unit as well as sensitivity analysis for the changes made within the key assumptions. Goodwill must be tested for annual impairment. However, ASIC insist that in order to test for impairment, goodwill should be allocated to every acquirer's cash-generating units that are expected to profit from the combined synergies, regardless of whether the rest of other assets or liabilities related to acquire are assigned to such units (Street, 2011). 3.2 Disclosures of estimates and accounting policy judgments The needs of user information must be considered and significant disclosures be made to provide a proper understanding of a company’s business and the risks faced. This includes information that should be utilized by management. For instance, disclosures of the specific information for important accounting policies which have the most effect on the company’s financial report on measurement and the sources of estimation uncertainty. This is because some of the entities do not make the material disclosures of considerable judgments in the use of accounting policies as well as the sources of estimation uncertainty. Such disclosures need to be very specific to the entity and associated assets, liabilities, income and expenses (Deegan, 2005). Disclosure of the major assumptions for value through the use of calculations, for instance, discount rates and the growth rates, reports on the explanations of the forecast periods that are beyond five years, and the sensitivity analysis, are considered essential for user confidence within the reported asset values. Therefore, it becomes important to disclose the security for borrowings, debt maturity profiles given the reduced liquidity as well as debt refinancing opportunities (ASIC, 2011). 4.0 Current accounting practice of CCA Limited regarding asset impairment and related disclosures 4.1 Impairment Testing of Investments in Bottlers’ Agreements and Intangible Assets with Indefinite Lives and goodwill Investments in the bottlers’ agreements (IBAs) and the intangible assets considered to have indefinite lives are identified for each group in cash generating units (CGUs). CCA carries out impairment testing by comparing the recoverable amount of an asset to its floating amount. The recoverable amount is achieved as the greater of the fair value less costs to sales made, and the value in use. CCA carry out its impairment testing based on a value in use, although, it assesses the fair value less to costs of sales made to ensure that a higher value that arises from any basis is excessive compared to the asset’s carrying amount (Carlin et al., 2007). On the other hand, value in use is determined using the discounted cash flow model that covers a 15 year period with the right outstanding value towards the end of that particular period, for each CGU. The method uses the cash flow forecasts that are longer than five years so as to minimize the reliance on outstanding values based primarily on the business plans delivered to and approved by its Board. Pricing is determined based on a three year business plans discussed and reviewed by the Board. However, beyond the two periods, pricing is determined by referring to the long-term inflation forecasts (Carlin et al., 2007) 4.2 Impairment tests for brand names with indefinite lives Value in use for the CCA brand names is calculated based on a “relief from royalty” of the discounted cash flow methodology that covers a 10 year period with the right residual value at the end of this period. The methodology uses the notional after tax royalty of the cash flows longer than the five years so as to minimize dependence on the residual values based primarily on a three year business plans that is prepared by management. For example, Sales are determined based on a three year business plans that is reviewed by management. Beyond the three periods, sales are determined based on the business plan targets as well as management expectations. However, royalty rates are achieved based on the market rates by comparing brands adjusted for the costs associated with the maintenance of the brand. Discount rates utilized are normally the weighted average cost of the capital or after tax for the Group within each of the CGU in any applicable risk adjusted (Alfredson et al., 2005). 5.0 Potential gap between the CCA’s current practice and the accounting standards requirements CCA ltd is not always updated on the new and changing ASIC requirements on asset impairment and the related disclosures that are required in assessing its current Investments in bottlers’ agreements (IBAs) and the Group’s cash generating units (CGUs). The company does not have a stable discounted cash flow methodology to measure the value in use of Impairment Testing of Investments in Bottlers’ Agreements and Intangible Assets with Indefinite Lives and goodwill and brand names with indefinite lives. This leads to the application of unrealistic assumptions used in calculation of recoverable amounts such as discount rates and the expected growth rates (Alfredson et al., 2005). 6.0 Recommended actions to satisfy the potential ASIC reviewers The Coca-Cola Amatil Ltd should review and update its written Certificate to the Board to ensure that it satisfies the company’s Statutory Accounts. This is to ensure that CCA complies with the ASIC Accounting Standards as well as other mandatory reporting requirements within all the material aspects related to the financial position and performance of its operation. ACC ltd should give explicit attention should be given on the current ASIC requirements on asset impairment and the related disclosures , assessing its current Investments in bottlers’ agreements (IBAs) and the Group’s cash generating units (CGUs). The management should ensure that its risks and internal financial controls related to the financial reporting body that implements the set in place policies and procedures applied by the Board, operate effectively and efficiently with all material aspects (McGee, 2006). 7.0 Bibliography Alfredson, K., et al., 2005, Applying International Accounting Standards, Wiley. ASIC. 2011, ASIC focuses attention on 30 June 2011 financial reports. Retrieved September 28, 2011 from, Carlin, T.M., et al., 2007, Goodwill Impairment - An Assessment of Disclosure Quality and Compliance Levels. Large Listed Australian Firms. Deegan, C., 2005, Australian Financial Accounting, 4th ed., McGraw-Hill Irwin. Eddey, P., N, Arthur & Knapp, J., 2001, Accounting for Corporate Combinations and Associations, 5th ed., Prentice Hall. McGee, R., 2006, Adopting and implanting International Accounting Standards, Regulations and Financial Reporting. Ed Greg Gregriou and Mohamed Gaber. Elsevier Ltd. Street, D.L., 2011, International Convergence of Accounting Standards: What Investors need to know, University of Dayton. Tarca, A., 2010, International Convergence of Accounting Practices: Choosing between IAS and US GAAP, Journal of International Financial Management and Accounting, 15(1), 60-90. Read More