Blue Holdings Limited
Name : Arbad
Financial Accounting (HA3011)
Task Part A:
Assets tested for impairment
Blue Holdings Limited tests each and every asset of the firm and the cash
making unit. The Group examine that either any sign of the impairment subsists. Firm tested assets held for sale,
other assets, firms CGU (cash generating unit) and Receivables for impairment.
These are the specific assets that are highly associated with risk and need
impairment every year.
2. Method for impairment testing used
is basically testing the difference between the two costs of an asset, the
asset recoverable amount and book value. When the books value of asset is
greater than the recoverable amount than it needs impairment for the
calculation of correct amount of an asset either tangible asset or Intangible
asset. Impairment cost must be included in firm’s financial report as an
expense. The fuel price is set with according to forward curve adjust for
refining margin and hedge position. The exchange rate is applied of previous
spot rate. Future cash flow depends upon the previous five-year financial cash
flow records prepared by the members of board of directors. Estimated future
cash flow is discounted to cash flow. All the assets are set to the book value
and then to the recoverable amount to compare the difference between them. If
the book value increases the recoverable amount then the impairment takes place
in Virgin Australia group. Firm allocates assets which are intangible for
impairment with indefinite useful life. The carrying value of goodwill of
firm’s each CGU is compared to previous year carrying value. Increment of
decrement is reported as firm’s profit and loss every year. Tangible assets are
calculated by checking the recoverable value and book value of each asset and
then compared whether recoverable amount or book value is greater. If book
value is greater than recoverable value then the difference is reported as loss
and if recoverable amount is greater than book value then reports the
difference as profit. Assumptions are highly focused in checking the
requirements and eligibility for impairment.
3. Impairment expenditures during period
the complete judgments of tangible as well as intangible assets by the senior
staff and members of board of directors it is found that both tangible and
intangible assets should be impaired. After the completion of calculation of
impairment profit and loss, following amendments and recording takes place in
the report of firm. The goodwill carrying value of goodwill related to each CGU
of firm is reported. Virgin Australia domestic is 234.1M $. Tiger air Australia
53.2M $ and velocity as 3.5M $. Total as 290.8 M $. Tangible assets impairment
is also recorded in books of firm. The firm calculates the growth rate, pre-tax
rates and post-tax rates. The recoverable value of Virgin Australia
International CGU exceeds by carrying value. The recoverable value of Tiger air
Australia CGU exceeds by its carrying amount. Management, after focusing
assumption for this influence, reported the excess amount as impairment profit
4. Key estimates and
assumptions used by firm
4.1. The board of directors and senior members of firm expect
the market, total no passengers, Revenue generates by whole process, variable
and fix cost of firm.
Prices of firm are estimates according to the Brent forward curve adjusted for
positions of hedge and margins of refining.
4.3. The exchange rate is set as per prevailing spot rate of AUD and USD.
4.4. Load factors and average net fare are set according to previous judgments
of historical experience and the different market fluctuations and estimations.
Fleet plans are highly focused for load factors and average net fares.
Competitors are also focused regarding fare for the stability of demand of customers.
4.5. Future predictions of cash flow are based upon best estimations of
managers and senior staff for better growth of company financial position.
Note: These assumptions are
focused for the calculation of impairment as these influence prices but are not
part of impairment test.
5. Subjectivity involvement in impairment testing
There is no subjectivity involved
in impairment testing process. As we have seen through financial report of
Virgin Australia group that there is no change in company’s CGU (cash
generating units). No such changes in levels of performance, services or demand
of customers or the introduction on new such competitor. According to the
report there are no such changes in interest rates, exchange rates or fare
rates. By the help of such data we can say that there is no subjectivity
involved in impairment method.
6. Facts from the impairment testing
facts that I got from the
impairment testing of Virgin Australia group are surprising in a way that the
goodwill of CGU’s of the firm in previous year and this year are exactly same
.Confusing in manner that the growth rate of firm previous year and this year
are same and interesting in a way that if there is no change In growth, the
response of board of directors about the performance of company and related
individual which are somehow linked to the firm.
7. Insight gained about
the impairment method
From the impairment method and
process of the firm, I get the insight that the impairment process for a
company is very significant task. It can influence the interpretation of users
of financial statement because it can change the figures of financial statement,
it is highly risked area to impair the assets and good will. It can change the
results of financial statements in such way that the users can make a different
perception of the company. Materiality of the components of financial
statements can be influence just by the impairment. The consistency in
measurement of impairment is also necessary to gain actual results for the
financial records. Just by changing the procedure of recording the technical
area of financial statement, the decision making of the directors for future
can be influenced. It is very highly responsible person task to impair the
assets, prove read all calculations and cross check the info collected for
impairment from different departments to verify the correctness of collected
8. Fair value measurement
The fair value measurement is the
method of calculation of values which are free from error, neutral, unbiased. Fair
value is measured by the calculation of each and every thing regarding to
specific item like accrual and prepayment, bad and doubtful debts, allowances
etc. fair value is the value which can be reported in financial statement
without hesitation which cannot change the materiality and understanding of
components which are part of financial report, by the help of true and fair
view of financial statement one can interpret the position of company and
decide to invest, lend or go for credit term. Impairment also requires fair
values of every item so to calculate the amount of impairment in efficient
manner and maintain records in presentable and sustainable form. In audit the
figures which are not true and fair are first identified and processed to take
them to the fair view and then the further amendments take place. According to
the assignment I conclude that the impairment is required to make the report
presentation with fair values through that the higher staff can check the
changes required by the firm of more investment required in the company. any
implementation in firm is expected through the financial report. If the
financial report does not show the true and fair view the future indications
and implementations can go wrong and prior to the change of profit into somehow
loss for the company.
Task part B:
The chairperson of the IASB (International Accounting Standard Board) thinks
that the previous accounting standard for leases not reflects reality of
economics because eighty five percent of the leases are termed as the operating
leases and are not recorded in the firm’s balance sheet. Leases can create real
liability. During the financial crises, some retail stores were gone toward
bankruptcy because they cannot implement quickly to the new economic reality.
In this way the chairperson of International accounting standard board thinks that
the previous accounting for leases did not reflect reality of economy. IFRS 16
is amended to reflect the economic reality.
2. In previous accounting, most
firms lease liabilities were sixty-six times greater than their debts that were
recorded in the books of firm. The lease obligations are sixty-six times more
than liabilities that are written in the books of the firm. This is caused
because of the financial crises and during that era the bankruptcy of the
retail chains. the reason for bankruptcy is that the retail stores were unable
to quickly go through to the new reality of economics. Instead the current accounting
for leases mislead to comparability.
3.The Chairperson of the
International Accounting Standard Board (IASB) argue that the former standards
of the accounting for the lease accounting purpose there were no playing level
field among some firms because an airline which aircrafts are leased look very
different from its competitor that buys approx. All of its aircrafts even
though their obligations for leasing are real familiar.
4. All leases are
recognized as an asset in balance sheet and liabilities as leases. The new
accounting standard will reflect the economic influence. These changes are
expected to reflect on the half of listed companies. These changes are most of
the time controversial and can be met with warning of effects of economics and
the cost of changes of system. The changes are uncertain and are implemented in
a long term so it will become unpopular among everyone.
5. The reasons why the chairperson
of International Accounting Standard Board would say that the visibility of all
leases lead to better informed investment decisions for understanding of the
investors and to more balanced lease verses buy decision by management are
showing of economic decisions in the balance sheet of firm for the prediction
of the firm’s position after the specific interval and to avoid the misleading
data that go toward bankruptcy of a retail chain store.
leases are recognizing as assets and liabilities as to understand more and make
decision accordance with the economics. The 85% of the leases are labeled as
operating leases and are not recorded in financial statements.
IASB 2016. The IASB Chairman
discusses lease accounting Available at https://www.iasplus.com/en/news/2016/04/hoogervorst-leases,
Accessed on 17thJanuary 2018.
Cotter, D., 2012. Advanced
financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall.
Altamura, J., Johnston, R.,
Pandit, S.S. and Zhang, H.H., 2014. Operating leases and credit assessments. Contemporary Accounting
Research, 31(2), pp.551-580.
Weil, R.L., Schipper, K. and
Francis, J., 2013. Financial accounting: an introduction to concepts,
methods, and uses. Cengage Learning.
De Villiers, R.R., andMiddelburg, S.L., 2013. Determining the
impact of capitalizing long-term
operating leases on the financial ratios of the Top 40
JSE-listedcompanies. The International Business & Economics Research
Journal (Online), 12(6), p.655.