Requirement when it is identified by organization such receivables

Requirement
i)

             Sims metal management limited conducts an
impairment testing annually for goodwill and other intangible assets. Testing
of impairment is conducted when there is objective evidence given by
circumstance or happening of any events. Whenever there exists indication that
it will be difficult to recover the carrying amount of other definite lives
intangible assets as indicated by occurrence of some events and prevailing
circumstances. Allocation of goodwill has been done for impairment testing. The
impairment testing for the cash-generating unit depicts excess headroom of A$
104.1 million for the year ending 30th June, 2016 (Simsmm.com 2018).

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Requirement
ii)

            Sims metal
management conducts the impairment testing of assets by reviewing the amount of
their carrying value and when there exists and indication that assts require
impairment. There is recognition of impairment loss when the estimated
recoverable amount is lower than the carrying amount of such assets. Recognition
of trade and receivables is done at fair value and measuring it subsequently at
amortized cost by deducting any provision of impairment. Trade receivables is
written off against impairment account when it is identified by organization
such receivables become uncollectible. For impairment purpose, the carrying
amount of property, equipment and plant are reviewed and as indicated by
existence of any objective evidence and thereafter there is recognition of
impairment loss.  Intangible assets and
goodwill are tested annually for impairment as indicated by circumstances and
occurrence of events. Assessment of impairment of assets are done by grouping
them at the lowest levels where the cash flows have been separately identified
and they are not dependant of cash flows generating from other group of assets.
Organization conducts annual testing of investment that is made in joint
ventures as indicated by the fact that their carrying value amount cannot be
recovered and there are any circumstances and events (Simsmm.com
2018).

Requirement
iii)

            Impairment
charge attributable to intangible assets and other goodwill for financial year
2016 stood at A $ 53 million. After the analysis of annual report of Sims metal
management limited, it has been ascertained that there has not been any impairment
charge for the financial year 2015 and 2017 in relation to assets and other
goodwill (Simsmm.com 2018). 

 

Requirement
iv)

            Sims metal
management limited makes use of assumptions for conducting impairment testing
of goodwill and other intangible assets. Projection of five-year cash flow is
done by organization for computing the value in use and this is based on the
budget after board approval for the year 2017 and 2018 respectively. Historical
average forms the basis of making four year forecast and takes into account
historical value for four years. Projections of five years incorporates margin
and price of commodity that are drawn from past experiences, estimates of
management relating to  inherent impact
on volume of future volatility and other factors relating to current and
expected future economic conditions. Organization also makes the application of
Gordon growth model for the determination of terminal value from the cash flow
of final year. Management makes best estimates in projecting the cash flow by referring
to results that are historical for determination of expense, income, cash flows
for each cash generating unit and capital expenditures (Simsmm.com
2018). Value in use of goodwill is determined by using expected future
cash flows. An estimation of CGU’s to intangible assets and goodwill
recoverable amount is required to be made for determining potential impairment
relating to it. Higher of any value in use and fair value less cost to sell
helps in determining CGU recoverable amount. Assumptions concerning growth
rates and discount rates are to be made for the calculations related to
impairment testing.

Requirement
v)

            The
existence of subjectivity in estimating and making judgment by management has
the possibility of considerably affecting the impairment testing of
organization. Moreover, it would also have difficulties in gaining accurate
inputs required for the impairment testing. Amount that is to be recovered
becomes highly sensitive when there is involvement of high degree of
subjectivity and assumptions cannot be made about terminal growth rate
verification. There is gaming in impairment testing methodology due to
manipulation of recoverable amount, as the management will be acting
opportunistically. Presence of high degree of subjectivity has the likelihood
of impairment testing outcome. It is ascertained after the evaluation of annual
report of Sims metal management limited that there is low prevalence of
subjectivity in testing of impairment of assets. Nevertheless, assumptions and
estimates concerning computation of value in use, discount rate and
determination of cash flow requires judgment of management and there is
possibility that value generated using such assumptions will fluctuate on
substantial basis. Moreover, impairment requirement is determined by impairment
status based on economic events and conditions and specific circumstances (Arrozio et
al. 2016). It is certainly possible that assumptions made by Sims
metal management limited about forward-looking statements will not be
appropriate owing to involvement of subjectivity.

Requirement
vi)

            Evaluation
of annual report of Sims metal management limited indicates that impairment
testing methodology of is interesting. The impairment charge of cash generating
unit was impacted by margin pressure that arises from volatility in the prices
of commodities and landscape of competitive market. There were reassessment of US
recycling solutions relating to cash flows and this has indicated the fact that
there is no recoverability of carrying amount of goodwill. There would be
fluctuation in the value of impairment charge recorded if the assumptions about
discount rate keep on changing. Calculations of value in use forms the basis of
estimating recoverable amount and it is performed independently by firm
valuating the assets. Impairment on investment is recognized by organization by
assessing recoverable amount of investments that are made in SA recycling (Simsmm.com 2018).

Requirement
vii)

            Analysis of
annual report of Sims metal management limited concerning impairment testing
depicts that impairment that is recorded in the financial year 2016 involves
impairment that are recognized are offset closely by reversing the impairments
that are recorded in the previous year (Simsmm.com
2018). It has been ascertained from the annual report that there has
been impairment reversal in relation to property, plant and equipment. An
insight that is gained regarding impairment is that value of impairment charge
fluctuates if there is any modification in discount rate while all other
assumptions remaining same.

             

Requirement
viii)

            Some of the
financial liabilities and assets that are involves in the preparation of
general purpose financial report is based on fair value. Net loss generated by
financial assets revaluation is measured at fair value. Designations of
investments in marketable securities are done as financial assets that are at
fair value. Last quoted price forms the basis of measurement of assets fair
value. Recognition of any alterations in fair value is accumulated in separate
resources as equity and done in the comprehensive income statement (Pavi? et
al. 2017). The estimated and carrying amount of fair value of
financial liabilities and assets of group is materially same. Determination of
financial instruments fair value that is not traded in active market is done
using broker quotes that are available readily. Organization makes use of
valuation methodology for classifying financial instruments that are measured
at fair value by using hierarchy (Simsmm.com
2018).

Assessment
Task Part B:

Requirement
i)

            The
existing lease standard that is IAS 17 is associated with several criticisms
that make investors difficulties in having a true and fair view of financial
position of reporting entities. For the classification of lease as operating or
finance, the standard allows lesser and lessees to evaluate the transactions. One
of the major flaws that are associated with the existing standard is that
organizations have incentives to make the classification of lease as operating
lease. This has the major consequence of key financial ratios of companies and
classifying lease contracts as operating lease finance is more favorable for
companies. Financial ratios such as return on assets and debt to equity ratios
will get worsen if the lease contract is classified, as finance lease as
against operating lease and this does not affect the two ratios (Czajor and Michalak 2017). If the
positive income is generated by operating lease might improve the return on
assets. It is noteworthy to take into account that costs and benefits of both
the lease whether financial and operating leases are equal. However, the benefits
provided by operating lease in terms of financial ratios are purely an
accounting illusion that is created in the investor’s eyes. IASB has made the
estimation that 85% of total amount of lease commitments out of US $ 3.3
million does not appear on balance sheets (Brouwer et al. 2015).
Therefore, actual liabilities of organization might be less than what is
presented on balance sheet and this is the reason why the existing standard did
not reflect true economic reality.

Requirement
ii)

            Providing
user with information about entities that helps them in making economic
decisions is the objective of financial report that is prepared under the current
lease standard. Leasing transactions are likely to be classified unfaithfully
under the existing standard.  The rue
debt structure of companies is not provided on the balance sheets because of
absence of value of operating leases. Information that is presented in the
balance sheets concerning leased assets and liabilities is not sufficient and
making accurate calculations for bringing some of lease commitments back to
balance sheet is difficult. Absence of operating lease on balance sheets for
impoverishing comparability between companies requires users to make the
adjustments in the balance sheets for operating leases (Nobes 2015).  For
ascertaining true debt structure, discounted amount concerning leases is added
back to balance sheet, which is not appropriate. This explains why the off
balance sheet liabilities were up to 66 times more than debt that is reported
on balance sheets.

Requirement
iii)

             The balance sheet of airline companies is
formed under different accounting model and there do not exist difference
between operating lease and financing lease. Complications in creating
difference between financing and operating leases are one of the controversies
that are associated with affecting financial position of airline companies. It
is so because either airline companies buy aircraft fleets or they lease the
fleets. This difference in lease accounting illustrates financial position of
such companies would be different. However, in reality, there exists
possibility that financial position of some airline companies is similar and
identical. Leasing structures and particular method of financing will affect
the individual airline companies (Karwowski 2016). Therefore, it can be said that there
were no level playing field between some airline companies.

Requirement
iv)

             The reason why the new lease standard will be
unpopular is attributable to several criticism associated with it. Debt
structure and balance sheets of companies would increase due to focus on
operating lease capitalization. There is a possibility of violating existing
debt covenants of business due to 100% increase in balance sheets. It is
indicative of the fact that companies will be required to make renegotiation of
debt covenants and this excludes agreements concerning leases (Joubert et
al. 2017). Furthermore, companies in receiving credits have raised
concerns. The impact of short-term leases would have absurd consequences on
their financial statements due to the implementation of the standard. Criticism
of lease burden is also because of considerable increase in administrative
burden and some of the common examples in relation to this are new IT systems,
educational efforts, and increased expenditures in the consultation fees and
changes in process and control systems. Complications and increased cost of
reporting is another criticism of new lease standard because organizations
having lot of lease agreement will need to invest time in management
information and investment in large amount of new IT systems (Osei 2017). It is so because, there will
be need of making estimations in detail relating to right to use assets and
lease liability.

Requirement
v)

            The
implementation of new lease standard will make financial reports of
organizations useful to investors and financial analysts and will facilitate
enhancement of comparison between them. 
However, benefit of enhanced comparability will be achieved at the
expense of organizations recognizing all lease agreements on their balance
sheets.  Lease accountings that are
classified unfaithfully will be addressed under this standard. Implementation
of the standard will no longer require investors to make rough estimations and
rough calculations for bringing back lease commitments on balance sheets by
computing substantial lease obligations. Facilitation of transparency regarding
the lease obligations will lead to better-informed decisions among investors (Edeigba and Amenkhienan 2017). There
will be more balanced lease versus buy decisions as adoption of standard will
lead to efficient allocation of capital and better decisions on part of
management.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References list:

Arrozio, M.M., Gonzales, A. and da Silva, F.L., 2016. Changes
in the financial ratios of the wholesale and retail sector companies arising
from the new accounting of the operating lease. Revista Eniac Pesquisa, 5(2),
pp.139-159.

Brouwer, A., Hoogendoorn, M. and Naarding, E., 2015. Will the
changes proposed to the conceptual framework’s definitions and recognition
criteria provide a better basis for IASB standard setting?. Accounting
and Business Research, 45(5), pp.547-571.

Czajor, P. and Michalak, M., 2017. Operating Lease
Capitalization-Reasons and its Impact on Financial Ratios of WIG30 and sWIG80
Companies. Przedsi?biorczo?? i Zarz?dzanie, 18(1, cz. 1
Practical and Theoretical Issues in Contemporary Financial Management),
pp.23-36.

Demir, Z. and Bas, E., 2017. THE EFFECT OF TAS 17 “LEASING”
STANDARD AND IMPLEMENTATION OF THE NEW IFRS 16 “LEASES” STANDARD ON THE AIRLINE
COMPANIES. PressAcademia Procedia, 3(1), pp.153-173.

Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS
Adoption on Corporate Transparency and Accountability: Evidence from New
Zealand. Australasian Accounting, Business and Finance Journal, 11(3),
pp.3-19.

Joubert, M., Garvie, L. and Parle, G., 2017. Implications of
the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of
Operating Leases in the Balance Sheet. Journal of New Business Ideas
and Trends, 15(2), pp.1-11.

Karwowski, M., 2016. The risk in using financial reports in
the study of airline business models. Journal of Air Transport
Management, 55, pp.185-192.

Nobes, C., 2015. IFRS Ten Years on: Has the IASB Imposed
Extensive Use of Fair Value? Has the EU Learnt to Love IFRS? And Does the Use
of Fair Value make IFRS Illegal in the EU?. Accounting in Europe, 12(2),
pp.153-170.

Osei, E., 2017. THE FINANCIAL ACCOUNTING STANDARDS BOARD
(FASB), AND THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) SINGS SIMILAR
TUNE: COMPARING THE ACCOUNTING TREATMENT OF NEW IFRS 16 WITH THE IAS 17, AND
THE NEW FASB MODEL ON LEASES. Journal of Theoretical Accounting
Research, 13(1).

Pavi?, I., De?man, N. and Sa?er, I.M., 2017, January. The
Influence of Changes in the Notes on Evaluation of Indebtedness and Other
Performance Measures–The Analysis of Lease Financing. In Vision 2020:
Sustainable Economic development, Innovation Management, and Global Growth.

Pwc.com.
(2018). online Available at:
https://www.pwc.com/gx/en/audit-services/publications/assets/a-study-on-the-impact-of-lease-capitalisation.pdf
Accessed 21 Jan. 2018.

Sacarin, M., 2017. IFRS 16 “Leases”–consequences on the financial
statements and financial indicators. The Audit Financiar journal, 15(145),
pp.114-114.

Sandblom, P. and Strandberg, A., 2015. The Value Relevance of
the Proposed New Leasing Standard. An event study of the European Stock
Markets’ Reaction to the proposed replacement of IAS17.

Simsmetalmanagementlimited.gcs-web.com.
(2018). online Available at:
https://simsmetalmanagementlimited.gcs-web.com/static-files/94983c52-add1-483f-a503-11028895c60b
Accessed 21 Jan. 2018.

Simsmm.com.
(2018). Annual Reports | SMM Investor Information | Sims Metal Management
Global . online
Available at: http://www.simsmm.com/Investors/Reports/Annual-Reports Accessed
21 Jan. 2018.

Warren, C.M., 2016. The impact of International Accounting
Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS
16). Property Management, 34(3).

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.

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