Consequences for Competitors due to Impairment Cost - Case Study Example

Table of Contents Impairment 2 Reasons for conducting impairment test 2 Assets subjected to Impairment 2 External Influence that drove Foster’s towards impairment test 3 Assumptions for an impairment test 3 Effect of assumption on Foster’s & its competitor 3 Cash Generating Unit of Foster’s subjected to impairment 3 Material Impairment Cost 4 Consequences for competitors due to impairment cost 4 Profit Margin for Foster’s 5 References 7 Impairment Impairment is a process where the correct value of an asset is realized by making the necessary changes in the carrying amount of an asset which is done by calculating the fair value of an asset (Deegan, 2010). This helps to ensure that the fair value is provided to the user of the statement thereby helping to improve the decision making process for each individual. Reasons for conducting impairment test Impairment test is required to adhere to the accounding standards and norms prescribed by the Accounting Standard Board in the International Accounting Standard 36 which is related to Impairment of Assets. The main purpose for conducting an impairment test is to ensure that the “value of the assets which has been impaired signifies its carrying value which is very similar to its recoverable value and is higher than face value less cost of sale and value in use” (KPMG, 2010). This signifies that the carrying value of the asset should not be more than what the business expects to realize by selling it in the market or through use. Assets subjected to Impairment Assets which are subjected to impairment are as follows (IAS 36, 2011) Land Building Plant & Machinery Investment carried at cost Intangible Assets Goodwill “Investment in subsidiaries, associates, and joint ventures which are at cost” “Assets which have been revalued under IAS 16 & IAS 38” External Influence that drove Foster’s towards impairment test Foster was looking towards impairment test because of the following reasons The demerger plan unveiled by the company made it important for them to calculate the fair value of their assets so that the valuation is correct and provides the stakeholders the correct vale (Urban, 2010) Chances of a quick turnover and slow down in sales also resulted in the company to calculate the impairment cost of the assets (Durie, 2010) To ensure consistency and transparency by providing the correct value of the assets to the stakeholders and users of financial statement Assumptions for an impairment test While doing an impairment test for an asset the following assumptions are made The asset will be used in future (IAS 36, 2011) The asset has not been used before in case of intangible asset (IAS 36, 2011) Goodwill needs to be written off which has been acquired while purchasing an asset (IAS 36, 2011) Effect of assumption on Foster’s & its competitor The assumptions while condusting an impairment test will help Foster’s and its competitors to identify the correct vaule of the assets that can be realized. It will facilitate Foster’s and its competitors to identify the areas of strength of each company and will help them to plan their action accordingly. This will help them understand the financial position better as an upto date present view of the assets will be reflected. Cash Generating Unit of Foster’s subjected to impairment The following cash generating units of Foster’s were subjected to impairment teas Brand (Annual Report, 2010, p. 62) Goodwill (Annual Report, 2010, p. 62) The above mentioned cash generating unit which comprises of intangible assets were subjected to an impairment cost of $759.9 million for goodwill and $305.7 million for brand (Annual Report, 2010, p. 67). Material Impairment Cost Foster’s materials were subjected to impairment cost as it has been stated in the annual report that the company had an impairment cost in materials (Annual Report, 2010, p. 12). Foster’s had an impairment cost of $1,291.6 million before tax which was a major reason for the materials to be negative (Annual Report, 2010, p. 12). The material impairment cost for Foster’s has been an area of concern and has resultd in the profits to be substantially low thereby hampering the path of growth. Consequences for competitors due to impairment cost The impairment test for Foster’s will help the competitors and others associated with the company as they will be able to identify the changes that has taken place. One of the major ares it helps the company and the competitors is towards reporting. The report submitted in Australia helps the society as it provides valuable information. The financial reports contain “both the financial and non financial information to improve their strategy”. (Robert & Michael, 2010) The non financial information provides valuable information to the society like the organisations efforts to curb pollution, the impairment taking place, their contribution towards the society and other areas where the company is working to improve the condition of the society. (Robert & Michael, 2010) This provides the needed information and helps the society to identify areas which will help them. This will be of great help to the competitors and others as the annual report will signigy the impaiment that has taken place in the company. The financial report presentation also helps to identify the core areas. This are of vital help to the society as it provides an overview of areas where the organisation is working. Also the detailed description of transactions provides transparency. Any change in the policies or strategies is mentioned. Even, a major decision taken by the organisation is provided with. This helps the society to get a guideline of changes that is about to follow. Changes that has taken place in Foster’s due to impairment test will be signified which will help the competitors understand the stand of the company and will help them to predict their future actions. The society also comes to know the future opportunities and areas where the government along with the organisation is working for the society. The report on proper evaluation helps to find vital information. Still, there are certain areas which need to be worked upon. Improving this will help to gather more momentum and provide the society with more information. This will be of immense help to the competitors as they will be able to identify the areas that Foster’s look to integrate in the future and they can develop starategies to counter those. Profit Margin for Foster’s Net Profit Margin: “It is defined as the profit generated per dollar of sales and is calculated after all the direct and indirect expense has been considered”. (Kennon, 2010) Organisations prefer this to be high. It is calculated as “Profit before taxes / Sales X 100”. The calculation of the ratio for Beer and wine segment looks as follows Calculation of Net Profit Margin for Wine Segment Net Profit Margin for 2010 = Net Profit after Taxes / Sales * 100 = 904.7 / 2497.5 *100 = 36.22 Net Profit Margin for 2009 = Net Profit after taxes / Sales * 100 = 815.2 / 2459.3 * 100 = 33.15% Calculation of Net Profit Margin for Beer Segment Net Profit Margin for 2010 = Net Profit after taxes / Sales * 100 = (1061.4) / 1904.7 *100 = 55.73% loss Net Profit Margin for 2009 = Net Profit after taxes / Sales * 100 = (37.4) / 2156.3 * 100 = 1.74% loss Comparing the performance of the beer and wine segments indicates dis-similarity between the two. It is seen that the net profit has increased for wine segment 2010 as compared to 2009. This is a good factor and reflects efficiency to maintain the indirect expense. The ratio for wine segment has improved signifying better management and control of cost. Comparing the performance of the beer segment indicates widespread dispersion. It is seen that the net profit has fallen and is negative for both in 2010 and 2009. This is a bad sign and shows inefficiency in maintaining the indirect expense. When we look at the broader picture, it shows that wine segment have ensured better management policies and reduced expenses to earn a higher return. A comparison of the performance of the beer and wine shows that the companies have been able to generate profits but the return in less. Companies in this type of business rely more on volume to ensure a growth in profits. This is making the company look towards demerger and look towards different marketing strategy as using the same medium has backfired and the company hasn’t been able to ensure that the same mechanism provides the same benefit for both (Stevens, 2010). References Annual Report. 2011. Foster’s GroupLimited 2010 Annual Repord.pdf Durie, J. 2010. Tired & emotional over Foster’s future as stock takes a hit. The Australian Deegan, C. 2010, Australian Financial Accounting, McGraw –Hill Irwin, 6th Edition, Sydney IAS 36. 2011. IAS 36 Impairment of Assets, Summaries of International Financial Reporting Standard, retrieved on April 5, 2011 from http://www.iasplus.com/standard/ias36.htm KPMG. 2011. Impairment Testing, Corporate Finance, KPMG International Kennon J, 2010, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company Robert, G. & Michael, P. 2010. One Report: Better strategy through Integrated Reporting, Harvard Business Standard Working Knowledge Stevens, M. 2010. Joyless Johnston keeps brewer sober. The Australian Urban, R. 2010. Foster’s suffer $464 million hangover, as wine continues to seep money. The Australian Read More