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Essays on Analysing Intermediate Financial Accounting Australian Securities and Investment Commission (ASIC) Report

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Specific requirements of the accounting standards are highly considered in the report. This includes the write-downs of the various indefinite and life intangible assets which comprise of goodwill, impairment testing, identification, and allocation of the cash-generating units as well as goodwill to cash some generating units. There is also a report on the application of unrealistic assumptions used in the calculation of recoverable amounts such as discount rates and the expected growth rates. The CCA Company plans to respond to the requirements that a member of the Board of Directors encountered on the general press release of ASIC accounting regulations.

This is aimed at reducing the upcoming anxiety about the company’ s reputation in case ASIC reviews the 2010 financial reports of CCA which may cause some non-compliances with the accounting standards public. For example, if ASIC makes a referral to its Financial Reporting Panel. Therefore, the Board shares the concern raised by one of its members and decided to commission the company’ s Chief Financial Officer (CFO) to come up with a business report on ASIC’ s new regulations.   2.0 Introduction Given the existing economic conditions which may cause some readjustments of asset values, write-downs as well as debt refinancing, Australian Securities and Investments Commission (ASIC) has primarily focused on reviewing whether a financial report of a given company qualifies for appropriate recognition in addition to the measurement of assets and liabilities.

It also plans to determine if the financial reports of various companies contain the required disclosures and explanations. It is in this regard that one member of the Board of Directors within the Coca Cola Amatil (CCA) Ltd became concerned to share the general press release of ASIC (ASIC, 2011). Following the recent Board meeting, the member expressed her concerns about ISSUE NUMBER 4 of ASIC which focused on the points of asset impairments.

This is because she recalled a heated discussion about asset impairment and Cash Generating Units (CGUs) that was in one of their last board meetings, reporting that decisions were made on how to maintain the accounting profit of a company. This has caused anxiety concerning the company’ s reputation in case ASIC reviews its 2010 financial reports and decides to make any non-compliance with the public accounting standards.

This may include ASIC’ s referral to its Financial Reporting Panel. As a result, the CCA’ s Board shared her concern, and thus decided to commission the company’ s CFO to provide a business report on ASIC's new regulations. In this report, the CFO provides feedback on the investigations carried out on each of the points focused by ASIC regarding asset impairment and the associated disclosures. A detailed comparison is made on the current reporting practice in regard to the 2010 annual financial report of the company.

Specific requirements of various accounting standards are examined. This includes write-downs of goodwill, impairment testing as well as the identification of the cash-generating units and disclosures concerning impairment testing (Tarca, 2010). 3.0 ASIC requirements according to the respective accounting standards related to asset impairment and related disclosures ASIC has drawn attention to various focus areas for its directors in 2011 financial reports. This is in relation to its released results on a review of the financial reports for December 2010. It has emphasized a number of requirements for which the company Boards as well as those in charge of the preparation of financial reports need to focus on the future reporting periods.

ASIC Commissioner Michael Dwyer argued that ‘ It is vital to provide investors as well as other users of the financial reports with relevant and adequate financial information that aids them in decision-making (Street, 2011). 3.1 Asset impairment For any reviewed financial report, ASIC discovered that write-downs were far below one percent of the overall value of indefinite and life intangible assets with the inclusive of the goodwill. For a period of 12 months to 30 June 2010, ASIC discovered that the write-downs were 6%.

Thus, it continues to identify some issues associated with impairment testing, for instance, the identification of Cash Generating Units (CGU), allocation of the goodwill to CGU in addition to the application of unrealistic assumptions in order to calculate the recoverable amounts that include discount rates and the expected growth rates. ASIC’ s review reported that most of the entities failed to apply methods required by its accounting standards in the task of impairment testing, use of cash flow information.

This means that discount rates seemed not to be reasonable in regard to the historical cash flows, the information found in the market, and future expectations. Therefore, directors are called upon to ensure that there is adequate ‘ in-house’ expertise to effectively and efficiently perform the impairment calculations as well as make use of the requirements standards (ASIC, 2011). Assets are expected to be allocated to the cash-generating units found at the lowest levels to make sure that cash flows directed from a single group of assets meet the ASIC requirements. Cash generating units are required to be larger compared to the primary or secondary segments that are used for segment reporting.

On the other hand, goodwill must be measured at the lowest level of groups of units where monitored internally. This means that Goodwill needs to be allocated to some of the units expected to benefit from them in time of acquisition. ASIC discovered various entities excluded the material disclosures that concerned their impairment testing which includes the key assumptions, allocation of goodwill to each cash-generating unit as well as sensitivity analysis for the changes made within the key assumptions.

Goodwill must be tested for annual impairment. However, ASIC insists that in order to test for impairment, goodwill should be allocated to every acquirer's cash-generating units that are expected to profit from the combined synergies, regardless of whether the rest of other assets or liabilities related to acquiring are assigned to such units (Street, 2011).

References

Alfredson, K., et al., 2005, Applying International Accounting Standards, Wiley.

ASIC. 2011, ASIC focuses attention on 30 June 2011 financial reports. Retrieved September 28, 2011 from,

Carlin, T.M., et al., 2007, Goodwill Impairment - An Assessment of Disclosure Quality and Compliance Levels. Large Listed Australian Firms.

Deegan, C., 2005, Australian Financial Accounting, 4th ed., McGraw-Hill Irwin.

Eddey, P., N, Arthur & Knapp, J., 2001, Accounting for Corporate Combinations and Associations, 5th ed., Prentice Hall.

McGee, R., 2006, Adopting and implanting International Accounting Standards, Regulations and Financial Reporting. Ed Greg Gregriou and Mohamed Gaber. Elsevier Ltd.

Street, D.L., 2011, International Convergence of Accounting Standards: What Investors need to know, University of Dayton.

Tarca, A., 2010, International Convergence of Accounting Practices: Choosing between IAS and US GAAP, Journal of International Financial Management and Accounting, 15(1), 60-90.

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