Units and Generate Economic Resources System †Assignmenthelp.com

Question: Discuss about the Units and Generate Economic Resources System. Answer: Introduction Impairment of the assets refers to any deduction in value of assets owned by the company. These assets are referred as the cash generating units and they generate economic resources in future for the definite time period. This accounting report aims to carry out the analysis that will examine implication of impairment of assets in the Myer Holdings Limited. IAS 36 deals with the impairment of assets and provides detailed provisions on how the impairment of assets is done. According to this standard the carrying or writing value of the assets must be greater than its recoverable amount (Collings, 2015). This report will guide through the need, process and data required by the Myer Holding Limited to carry out the impairment testing for their respective CGUs. Evidence that provides need to carry out the impairment testing of CGUs or Assets in context to Myer Holdings In order to find out which CGUs or Assets are needed to make the impairment, there is needed to make division of assets into tangible and intangible assets. Below are the some points that provide the information on whether it is required to carry out impairment or not with respect to Myer Holding Limited. Assets recognition and change in value: After making the analysis of the financial statements of the Myer Group it can be said that the flow of assets has been relatively same and there was no proof that there has been any decline in the value of assets over the past years. As there is no major change in the value of assets it can be said that there is no indication of impairment of assets (Hussey, 2010). Carrying value of the assets: Carrying value of assets means the value that the asset carries in the balance sheet. In order to make reference to impairment testing it is necessary to check any change in value at the end of year as compared with the previous year. It has been found that there is no such change in the value of assets in the past years (Myer Holdings Limited 2016 Annual Report, 2016). Assets turnover ratio: Assets turnover ratio means value of total assets to the total revenue of the company. This ratio shows any change in total assets in relation to the revenue. It has been evaluated that there was similar asset turnover ratio during the past few years that indicates that there is no requirement to carry out the impairment testing (Myer Holdings Limited 2016 Annual Report, 2016). In order to determine the impairment of assets the Myer Holding has used the discounted cash flow model. As indicated in the annual report of the company in year 2016, the value of goodwill is being taken as $27.1 million and life of the goodwill has been as taken as indefinite. The goodwill is being the most important of the business, it cannot be dividend on individual basis to each Cash Generating Units of the group, and so whole amount of the goodwill is being distributed to the business as whole. In order to carry out the impairment of goodwill there is need to find out the recoverable amount that such asset will provide in future years(Myer Holdings Limited 2016 Annual Report, 2016). For this purpose value in use of the goodwill is compared with the recoverable amount of goodwill and any difference is termed as impairment amount which has to be deducted to measure the actual carrying value of goodwill for that year. For the rest of assets impairment is carried through same meth od but the life of assets has been taken on the basis of their productivity. In order to calculate the discounted cash flow from the assets, management has used projections over the five years on the basis of the financial budgets and growth rate. To find the cash flow projections company has used major assumptions like sales growth and gross profit margin. Sensitivity analysis has been performed at the given level of cash flows over the carrying value of assets and this analysis indicates that there are no changes in the key assumptions taken by the management. Overall analysis of the impairment shows that carrying amount of the assets is not more than their recoverable amount. All the details procedure and policies are being disclosed by the company in their annual report (Myer Holdings Limited 2016 Annual Report, 2016). Some other non current assets are reviewed for the purpose of impairment testing on the basis of change in value noticed and it has been found that there is carrying value of these assets. It has been analyzed that there is no impact on the cash flow from main CGUs of the company due to any change in other non current assets. Information needed to carry out the impairment process The Myer Holdings Ltd has incorporated the use of AASB 136 and IAS 36 for reporting the impairment of its nonfinancial assets. The Group for asset impairment testing needs to possess information about carrying value and recoverable amount of assets. The recoverable amount of an asset is the amount higher of its fair value less costs to sell and the value in use. The asset or a particular CGU of the group is impaired if the carrying amount of the asset is greater than its recoverable amount. The Group at each reporting date needs to measure the carrying value and recoverable amount of assets for identifying their impairment. The information about the indicators determining the asset impairment needs to be gathered by the Group through both external and internal sources (Impairment accounting the basics of IAS 36 Impairment of Assets, 2011). The external sources include market interest rates, changes in technological, social and legal environment of the entity and its market capitaliz ation. On the other hand, internal sources include internal structure of the entity or physical condition of the assets. However, goodwill is subjected for impairment testing, whether there shows an indication of its impairment or not on an annual basis. The CGU of the asset to be impaired is determined for comparing the carrying value and recoverable amount for that particular CGU. The goodwill is allocated to a group of CGUs if it cannot be assigned to an individual CGU (Myer Holdings Limited 2016 Annual Report, 2016). The loss arising from the asset impairment is recognized as an expense in profit or loss for assets carried at cost. The impairment loss in the case of revalue asset is primarily recorded against its previous revaluation gains. The Group also needs to determine the projected value of future cash-flows that is estimated to be realized from an individual asset or a CGU through the use of VIU approach. The estimated value of future cash flows from an asset develops the basis of its impairment testing. The information required by Myer for asset impairment can be summarized by the help of following diagram: Impairment of assets is the ongoing procedure and company has to perform it every year. There is change in value of assets year by year and company has to perform the impairment testing in each year to determine the recoverable amount of the assets. As company uses the set format to determine the assets that are needed to be impaired and if any assets has been found needs to impair than its recoverable is being measured through proper channel fixed by the management. So it can be said that every set of procedures needed to impair the assets are well written and sincerely followed by the people in management (Impairment accounting the basics of IAS 36 Impairment of Assets, 2011). Assumptions needed to carry out the impairment process are taken on the basis that is mentioned in IAS 36 Impairment of Assets. As all the process is effectively followed by the management in determining any change in carrying value of assets, it makes very flexible to the management. Conclusion The above analysis reflects that impairment of assets is not the major issue for the management as all the process goes very smoothly as mentioned in IAS 36. It is advised to the management to follow ongoing procedure to carry out the impairment of assets. References Collings, S. 2015. Interpretation and Application of UK GAAP: For Accounting Periods Commencing On or After 1 January 2015. John Wiley Sons. Hussey, R. 2010. Fundamentals of International Financial Accounting and Reporting. World Scientific Publishing Company. Impairment accounting the basics of IAS 36 Impairment of Assets. 2011. [Online]. Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed on: 26 August, 2017]. Myer Holdings Limited 2016 Annual Report. 2016. [Online]. Available at: https://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2016.pdf [Accessed on: 26 August, 2017].