Impairment of Assets Accounting Research Assignment (Essay Sample)

Impairment of assets
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Executive summary
Financial markets are important for an economy as it facilitates movement of funds from savers to spenders. Flow of money is always paramount to the development of an economy. There are many players in the financial market who trade together all with an aim of making profit. If not controlled, some parties would act unfairly so that they can have the advantage over others, thus need of a regulator. In Australia, ASIC plays the role of regulator of financial markets. All parties must follow the regulations that are placed in the market. ASIC enforces these regulations and ensures everyone follows them.
This report will analyze the role of ASIC in financial markets and summarize their findings from 31 Dec 2015. The report will also critically analyze the complexities involved in testing mining assets for impairment. The impairment written down values for Doray Minerals Limited will also be discussed. Lastly, this report will handle the major issues to be considered when carrying out an impairment test. Analysis of secondary data from ASIC website and Doray Minerals Limited was done to come up with the findings.
The findings of these report show that ASIC have many roles in ensuring that the market do not fail such as administering information to the public as soon as possible and ensuring that companies comply with regulations. There are also many issues that arise when trying to accurately come up with the impairment value. There are several issues one has to address to carry out an impairment test like disclosures and forecasting cash flows.
Contents TOC \o "1-3" \h \z \u 1.Introduction PAGEREF _Toc481419080 \h 42.Role of ASIC PAGEREF _Toc481419081 \h 43.Complexities of testing mining assets for impairment PAGEREF _Toc481419082 \h 43.1.CGUs and segments PAGEREF _Toc481419083 \h 54.Impairment write down for Doray Minerals Limited PAGEREF _Toc481419084 \h 55.Five issues to be considered when reviewing impairment calculations PAGEREF _Toc481419085 \h 65.1.Disclosures PAGEREF _Toc481419086 \h 65.2.Forecasting cash flows PAGEREF _Toc481419087 \h 65.3.Key assumptions PAGEREF _Toc481419088 \h 65.4.Use of fair value less cost PAGEREF _Toc481419089 \h 65.5.Matching cash flows with related assets PAGEREF _Toc481419090 \h 76.Conclusion PAGEREF _Toc481419091 \h 7References PAGEREF _Toc481419092 \h 8
1 Introduction
ASIC plays an important role in the financial markets of Australia. It is the main regulator of the market and it ensures that all the players in the market follow the set regulations. This is mainly for the benefit of clients and investors. One of the regulations requires companies to carry out an impairment test for their assets. An impairment test helps a company state their assets using the correct figure hence giving accurate financial reports. In this report, impairment write-down of Doray Minerals Limited will be discussed. The last section of this report will also discuss the issues that are to be addressed when undertaking an impairment test.
2 Role of ASIC
ASIC plays an important role in ensuring that Australian financial markets are transparent and fair. This is underscored by the fact that consumers and investors have relevant and substantial confidence and knowledge (ASIC, 2016). It is the financial services, corporate and market regulator. ASIC maintains, facilitates and improves the performance of the financial system in Australia, as well as promoting informed and confident participation by the consumers and investors (ASIC, 2016). Another role of ASIC entails administering law effectively using the minimum procedural requirements, coupled with processing of information and store it quickly and efficiently. It ensures that the information from companies is made public as quickly as possible (PwC, 2016).
ASIC’s findings from the 31st December 2015 financial reports indicate that there are p`lems establishing the carrying amount of cash generating units, impairment indicators, rationality of cash flows and assumptions, disclosures and value in use assessments using unlikely cash flows (ASIC, 2016). According to PwC (2016), ASIC views disclosures to investors as significantly imperative. This is especially true given the subjective nature of assessments and calculations of impairment.
3 Complexities of testing mining assets for impairment
Firms face a number of issues when they undertake impairment tests which include; cash generating units (CGUs) and segments, difference between value in use and fair value, discount rates, and tax (Chow & Marcher, 2014). When testing an asset for impairment, it is usually sometimes difficult to establish the measure of value to be used when assessing an impairment. The measures that can be used are current cost, current market value, or sum of future cash flows.
1 CGUs and segments
When carrying out an impairment test, it is important to consider at what level should the impairment be tested. The level will be dependent on the asset being tested, as well as consider how it relies on other assets for cash flow generation. Majority of the assets often require other assets to support their carrying amount. When testing for impairment, such assets are tested together, with the smallest group of assets that can produce cash flows independently from other different parts of the company. This can be based on the geographical location, product, or customers of the business unit (Star, 2010).
If the allocation is done wrongly, value of assets, which are underperforming will be supported by other parts of the business with better cash flows.
4 Impairment write down for Doray Minerals Limited
Doray Minerals Limited did not specify any impairment charge in 2016. However, a critical analysis of the sharp decline of the value of their assets is an indicator that there is impairment. These assets are property, plant and equipment. This decrease is much larger than a decrease caused by depreciation of the assets. An impairment test is important to show the true value of the assets in the financial reports. The assets of Doray Minerals Limited declined from $49.778 million in 2015 to $38.792 million in 2016. The company will have an impairment loss of $10.986 million.
Doray Minerals Limited has to carry out an impairment test to establish the impairment of their assets. According to the disclosures by the company, a prolonged decline in the fair value of an asset below its cost is evidence of impairment. The impairment loss is calculated by the difference between the carrying amount and the present value of the forecasted cash flows discounting using the effective intereset rate used originally.
5 Five issues to be considered when reviewing impairment calculations
1 Disclosures
According to Chow and Marcher (2014), the disclosures should have the appropriate assumptions for the impairment calculations for every CGU disclosed in the financial report. The financial report of Doray Minerals Limited utilizes assumptions that reflect past experience as information from the previous year is given. Assumptions for CGUs are based on the significant assumptions of future production levels, market forecasts of future product prices, future exchange rate, and future cost of capital. Any changes in these assumptions may lead to reversal or new impairment charges.
2 Forecasting cash flows
The forecasted cash flows for Doray Minerals Limited are important to the calculation of impairment ...