Advanced Financial Accounting And Reporting - Myassignmenthelp.Com

Question: Discuss about the Advanced Financial Accounting And Reporting. Answer: Requirement The evidence of impairment of individual trade receivables leads to recognition of provision for impairment loss. It can be ascertained from the latest annual report of WHK limited that trade receivables have been tested for impairment. Total amount of trade receivables that have been impaired stood at pre tax value of $ 5.4 million. Cash flow from impairment for trade receivables for year stood at $ 2223000 in year 2011 compared to $ (341000) in year 2010 when there was negative cash flow generated from impairment (Delisted.com.au 2018). Assessment of impairment of all assets is done by evaluation of conditions that are regarded particular to the group and any specific assets that might lead impairment. Impairment triggers that existed at reporting date is not considered by management and organization does not carry impairment of such assets. Impairment of assets is performed annually by making any adjustment in actual run off and trail run off (Macve 2015). Impairment testing of goodwill is conducted by WHK limited in three ways. In first method, allocation of carrying amount of goodwill is attributed to the cash-generating unit. Determination of recoverable amount of goodwill for all cash-generating units is based on value in use. Allocation of goodwill is done to such units if that has been acquired through business combination identified through country of operations and business segments (Bohuov 2015). Impairment testing for goodwill is conducted annually according to accounting policy. Determination of recoverable amount of goodwill is done for all cash-generating units that is based on value in use calculations using the projections of cash flow. Forecast of cash flow is performed by making the assumption such as growth rate, discount rate and gross margins. Aggregate carrying amount of cash generating unit cannot exceed recoverable amount if there is any possible changes in key assumptions. Value in use calculations forms the basis of recoverable amount of cash generating units. Organization conduct evaluation of conditions those are specific to particular assets such as economic environment, demand financial and professional services and any possible changes in legislation (Lin et al. 2017). Impairment of intangible assets such as goodwill is assesse according to accounting policy adopted by standard. Assets are tested for impairment on annual basis by making adjustment for any differences in experiences of actual run off and trail run off. Recognition of impairment loss is done in the statement of profit and loss. WHK limited recognized the provision of impairment of assets such as trade receivable when there is indication that it will not be recovered in future. Loss related to impairment is discounted at effective interest rate by making comparison between the present value of estimated future cash flow and carrying amount of assets (Horton 2018). Existence of any subjectivity in estimates of organization will help in accuracy of an impairment testing. The recoverable amount of assets in organization is determined by making judgments in respect of parameters and input. In this aspect, it is required by organization to carefully consider international accounting standard. Possibility that assets will be subjected to impairment is influenced by economic climate of specific regions and jurisdictions. WHK limited complied with accounting policies and standard while carrying out impairment of assets. Therefore, it can be said that impairment reporting process of organization is subjected to low degree of subjectivity (Krivogorsky 2015). However, key assumptions, estimates, and disclosure of uncertainty estimation are prone to subjectivity. Assumptions and estimates about impairment testing differ from one organization to another. Understanding the process of impairment testing of WHK limited seems to be interesting as it depicts all the factors that should be considered in evaluation of impairment of assets. Analysis of annual report of WHK limited depicts that accuracy impairment test is affected by many internal as well as external factors. Involvement of subjectivity involved in carrying out impairment makes the outcome of impairment of assets considerably different and this is done by not adhering to accounting standards and policies (Wong and Joshi 2015). It can be evaluated from analysis of annual report of WHK limited that organization has conducted impairment of trade receivables. Organization conducts impairment or impairment testing when there is objective evidence that it is not possible for the group to collect receivables. Generally, when there is likelihood that group will not be able to collect receivables, the make the provision of doubtful debt (You 2017). However, group in the current annual report dates 2011 has made provision for impairment related to trade receivables. Therefore, new information has been gained in respect of impairment provisions. Financial report of organization is prepared in accordance with Australian accounting standard that is issued by International Accounting standard board. Financial liabilities and financial assets of organization are held at fair value recognized through loss and profit. Measurements of financial assets are done at fair value and the cost of business combination is allocated to fair value of assets assumed at acquisition date. Determination of fair value is done by model of binomial valuation by making assumptions (Lim et al. 2014). One of the most important activities of any organizations is lease and majority of leased assets are not reported on balance sheet of lessee under existing lease standard. Critics of existing standard is attributable to the fact that users are not provided faithful representation of leasing transactions and thereby failing to provide with user requirement. Lease are classified as capital and operating lease and existing standard only requires to account for capital lease liabilities and assets on balance sheet. Different economics are involved in variety of lease transactions and absence of their disclosures does not reflect economic reality to users (Lee et al. 2014). Amount of leases presented in the financial report can be substantial and lack of transparency leads to provide deceptive information to investors. Existing accounting lease standard requires disclosures of only capital lease assets and liabilities and operating lease assets and liabilities are not obliged to be disclosed in the financial report of reporting entity. It is certainly possible that an organization will have thousand of lease assets and liabilities that are not depicted in financial metrics. This would lead to understatement of total amount of liabilities. This makes total liabilities mentioned in reported balance sheet of entity multiple times lower than liabilities that are off balance sheet. Moreover, calculations of substantial obligations to lease is done by making assumptions that results in lack of accuracy and thereby transparency (Vimpari and Junnila 2017). All the discussed factors make off balance sheet liabilities 66 times higher than on their on balance sheet. Financial position of airline companies can be difficult to be evaluated by investors. Reason is attributable to the fact that the financial position of company buying assets and leasing assets might be actually different. However, in actual scenario, the financial position of companies is significantly different from companies leasing most of its aircraft fleets and companies buying most of its fleet. Evaluation the financial leverage and operational flexibilities of these companies becomes difficult for investors (James 2016). Therefore, it can be said that there is no level playing field between airline companies under current lease standard. There will be wider implications for organizations adopting new accounting standard in terms of change in internal control and systems of doing business. Adoption of new standard requires additional cost for business, as they need to upgrade their system in an attempt to gather adequate knowledge. Several criticism against new standard include higher costs as balance sheet of lessee will appear more leveraged. Furthermore, management is required to assess knowledge adequacy concerning the implementation of new accounting standard for lease. Implementing the new standard would lead to alteration in financial metrics. Organization will be required to incur additional costs and thereby reducing the total amount of profits reported (Smyth 2015). Under new lease standard, lease term will require judgments in terms of relevant facts, recognition of lease liabilities and circumstances identification. Organization will exercise leasing options that will lead to reasonable uncertainty concerning economic reality. All the relevant actors pertaining to lease accounting in an organization such as contract based, assets based, market based and entity based and considered. Leasehold accounting will be improved significantly in terms of calculations, contracts terms and conditions, practice concerning lease and underlying assets relevance concerning operations of lessee. Economic reasons associated with leases will also be considered in new accounting standard. Under the existing standard, investors are required to make a rough estimate about operating lease accounts. New standard will not require investors to make estimate and do rough calculations for adding back lease liabilities or assets to balance sheet (Macve 2015). Moreover, ne w standard for leases will facilitate comparison between companies and smaller companies will receive more benefits. All this will assist investors in having informed decisions while making investment to any reporting entity. References Bohuov, H., 2015. Is Capitalization of Operating Lease Way to Increase of Comparability of Financial Statements Prepared in Accordance with IFRS and US GAAP?.Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis,63(2), pp.507-514. Horton, J., 2018.Advanced Financial Accounting and Reporting: Theory, Practice and Evidence. Routledge. James, M.L., 2016. Accounting for Leases: A Case Exploring the Effect of the New Lease Accounting Standard on the Financial Statements.Journal of the International Academy for Case Studies,22(3), p.152. Krivogorsky, V., 2015. ACCTG 501 Advanced Financial Accounting. Lee, B., Paik, D.G. and Yoon, S.W., 2014. The Effect of Capitalizing Operating Leases on the Immediacy to Debt Covenant Violations.Journal of Accounting and Finance,14(6), p.44. Lim, S.C., Mann, S.C. and Mihov, V.T., 2014. Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings. Lin, K.C. and Graham, R.C., 2017. How Will the New Lease Accounting Standard Affect the Relevance of Lease Asset Accounting?. Macve, R., 2015.A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge. Smyth, C., 2015. Lease lapses, development collapses.Park Watch, (262), p.4. Vimpari, J. and Junnila, S., 2017. Valuing retail lease options through time: Volatility spread between different types of retailers.Journal of Property Investment Finance, (just-accepted), pp.00-00. Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia.Australasian Accounting Business Finance Journal,9(3), p.27. You, J., 2017.The Impact of IFRS 16 Lease on Financial Statement of Airline Companies(Doctoral dissertation, Auckland University of Technology).