Get ready now for international standards and impairment of assets, says Greg Pound, chief accountant, ASIC.
Your company board and audit committee should be well aware of the decision announced by the Financial Reporting Council to work towards implementing the International Financial Reporting Standards in Australia for financial years commencing on or after 1 January 2005.
The issue now is how far that general awareness is translating into practical strategies.
The chairman of the Australian Accounting Standards Board has expressed the view that boards and audit committees should have a standing agenda item dealing with the transition to 2005 international standards. This is good advice. You should not underestimate this task, especially given the proposed requirement for comparative figures to be presented according to the international standards for the first reporting period.
Australia's move to international standards means companies must carefully analyse the new requirements and thoroughly review company systems and processes.
While many AASB standards have been harmonised with the existing international standards and any changes will be minimal and straightforward, other planned changes will be more complex and introduce new requirements.
Many of the proposed changes have already been foreshadowed in exposure drafts issued by the International Accounting Standards Board and AASB in Australia. Others will be forthcoming. The expectation is that all international standards that will apply in 2005 will be issued by March 2004.
ED109: Impairment of assets
Your company should start now to look at how the proposed standards on impairment of assets will change your financial reporting processes. You will find these proposed standards in AASB Exposure Draft 109 (Request for comment on IASB ED 3 "Business combinations"; IASB ED of proposed amendments to IAS 36 "Impairment of assets" and IAS 38 "Intangible assets").
For example, these standards may require your company to collect information not previously required.
The proposals are more rigorous than the current requirements under AASB 1010 Recoverable Amounts of Non-Current Assets and will apply to all assets, current and non-current (with limited exceptions). Assets not considered as impaired under existing Australian requirements could be impaired under the proposed international standards. For example, when similar rules were introduced in the US, some entities experienced significant write-downs, particularly in relation to goodwill and identifiable intangibles.
A company's assets should be carried at their recoverable amount. If an asset is carried at more than its recoverable amount, it is impaired, ie its carrying amount exceeds the higher amount of what is expected to be recovered through sale or use. Any impairment loss is recognised as an expense, unless the asset has been revalued, in which case the loss is taken to any existing revaluation reserve relating to that asset.
The proposed main changes to ed109:
1. Applying to which assets?
The proposals apply to impairment of all assets, except:
- assets arising from construction contracts
- deferred tax assets
- assets arising from employee benefits
- self-generating and regenerating assets that are measured at their net market value
- assets measured at net market value as required or permitted by another Australian accounting standard, eg AASB 1023 or AAS 26
- assets in relation to the extractive industries, exploration and evaluation costs carried forward
- assets in respect of an area of interest before any activity in that area of interest entering the development stage.
2. Indication of impairment
At each reporting date, there will be an assessment of whether an indication of impairment exists. If so, the recoverable amount must be estimated at the individual asset level. To assess, consider external and internal factors such as:
- significant decline in market value
- significant changes in technology, market, economic or legal matters, obsolescence or physical damage
- market interest rates and restructuring plans.
If you have evidence of impairment, your company must then determine the recoverable amount for each specific asset. If you cannot identify net cash flows, then you need to determine the value in use for the asset's cash-generating unit.
A cash-generating unit is the smallest identifiable group of assets that generate cash inflows from continuing use, that are largely independent of the cash inflows from other assets or groups of assets.
3. Recoverable amount
Net selling price is best evidenced by an arm's length sale arrangement, market price less costs of disposal where there is an active market, or recent transactions for similar assets.
Value in use is determined by reference to discounted net cash flows, using a pre-tax rate that reflects the time value of money and the risks specific to the asset. Note that AASB 1010 does not require discounting of cash flows but only disclosure of whether discounting has been applied.
To estimate cash flows, the information you need includes:
- reasonable, supportable assumptions of economic conditions
- approved budgets and forecasts
- a supportable basis for cash flow projections beyond the normal budget/forecast period, generally using a steady or declining growth rate.
The proposed disclosure requirements are extensive, in terms of impact on net profit/loss, including reportable segments and where losses for an asset or cash generating unit are material.
What do you need to do now?
Your board and audit committee need to carefully study Exposure Draft 109 and determine how your existing financial reporting systems need to change to meet the proposed new requirements. Indeed, this issue should be kept alive as a standing item on the board's agenda.
Your company should also be considering whether there will be any implications for company corporate governance policies and practices, especially for possible continuous disclosure reporting, once the implications of new standards become clear. Specifically, you should be:
- setting up the process for implementing an indicator of impairment for each relevant asset and, where an indicator of impairment exists, determiningow the recoverable amount of an asset will be established
- identifying which assets have specific cash flows and which are part of cash-generating units
- identifying the corporate assets that are to be allocated to cash-generating units; and
- developing the internal financial reporting procedures that will generate the information necessary to meet the additional disclosure requirements.
In dealing with the move to international accounting standards, your board must manage the regulatory risk.
Failure to plan and have a conversion process to meet the 2005 deadline may result in your company breaching the financial reporting requirements of the Corporations Act.
As we believe that compliance with the standards is essential to quality financial reporting, we will be proactive in enforcing those standards to help protect investors and promote market confidence.
While we have the power to grant relief from the financial reporting requirements of the Act, it would, in my view, be difficult for a company to support a case that compliance with the accounting standards in place would result in a misleading financial report, be inappropriate or impose an unreasonable burden. While individual cases will be evaluated on their merits at the time, failure to plan, monitor and implement appropriate change, given that companies have been on notice since July 2002, would not be strong grounds for relief.
Some of the accounting standards expected to be in place for 2005 have yet to be issued as exposure drafts or finalised. Your company should be monitoring and reviewing these matters on an ongoing basis to ensure you direct resources promptly.
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