Reporting International Financial Standard -Myassignmenthelp.Com

Question: Discuss About The Reporting International Financial Standard? Answer: Introducation From the analysis of annual report of Crane Group limited, it can be seen that goodwill has been subjected to an impairment test on annual basis and they are tested whenever there is an indication resulting from events and circumstances that it requires impairment. Any excess amount of goodwill should be written off in the period of determination. Over the useful life of assets, amortizations of intangible assets are done. If change in status of impairment is indicated by occurrence of any events and circumstances, then impairment testing is conducted by organization more often than annually. Crane group limited also conducts impairment testing annually for intangible assets with indefinite useful lives and the potential for impairment is indicated by circumstances and events. Moreover, reviewing of definite lived intangible assets are reviewed for impairment when there is indication that particular assets requires impairment. During the fourth year, annual impairment testing is perf ormed by company. Company has reviewed long-lived assets when it is indicated that particular assets carrying value cannot be recovered as depicted by circumstances and events (Cranegroup.com 2018). The assessment of annual impairment is performed by organization by comparing respective carrying value of assets with their fair value of reporting units. When the estimated net book value of reporting unit is more than fair value is less than, goodwill is regarded to be potentially impaired. Establishment of fair value is done by discounting future estimated cash flow at an estimated cost of capital. In the recent impairment assessment, cost of capital considered for estimating future cash flow varied from 9% to 12%. Furthermore, organization has applied hypothetical and reasonably possible 10% decrease in fair value for evaluating the sensitivity of calculations of fair value on the impairment testing of goodwill. Crane group limited did not require impairment charges during financial year 2016, 2015 and 2014. Organization is required to make assumptions and estimates in light of certain accounting policies adopted and this have an impact on reported amount of liabilities and assets. Assumptions involved some inherent uncertainties such as judgment of management in applying the analysis of goodwill impairment. Reasonable assumptions and estimates are made by organization for calculating fair value of reporting units. Anticipated net increase or decrease in costs and current structure of costs forms the basis of assumption of profit margin (Cranegroup.com 2018). There is periodical reviewing of assumptions and estimates and the impact of revisions are reflected in the financial statements. Impairment testing of organization has the possibility of getting impacted by subjectivity and extent of estimates and involvement of subjectivity in the impairment process has the possibility of creating difficulties in obtaining accurate inputs. Presence of higher degree of subjectivity makes the measurement of amount to be recovered is highly sensitive that lead to assumptions that cannot be verified about terminal growth rate. Methodology of impairment testing would be gamed by recoverable amount manipulation and it will have the consequence of manipulating recognition timing. The outcome of impairment testing is influenced by presence of high degree of subjectivity, as the management would act opportunistically (Cascino et al. 2016). From the analysis of annual report of Crane group limited, it can be ascertained that there exist low degree of subjectivity used in the impairment testing assumptions. The purpose of impairment testing involves goodwill allocation to cash generating units and in the event of occurrence of restructuring, goodwill is reallocated. However, management is making estimates and assumptions in determining the discount rate and cash flows and this would cause substantial fluctuations in values generated. Furthermore, impairment status of organization is dependent upon circumstances and economic events that create the requirement for impairment. Crane group management have made assumptions about forward looking statements depending upon future events that might not be accurate (Cranegroup.com 2018). The impairment testing of Crane group limited is surprising as depicted from the analysis of annual report of company. It was so because the information about impairment testing is not presented in detailed way and there are no technical procedures in conducting impairment testing. Annual report of Crane group depicted that it adopted hypothetical changes in fair value of each reporting unit and the sensitivity of fair value is evaluated by carrying out sensitivity analysis. Assessment of impairment requires making estimates of valuation of assets and other items (Mayo 2017). After the analysis of annual report of Crane group limited, it was ascertained that impairment testing of assets is done by organization not necessarily on annual basis. Impairment testing can be conducted when there is an indication of carrying out impairment as depicted by some circumstances and occurrences of some events. Unlike some other similar companies, annual impairment testing is performed by company during fourth quarter. Impairment assessment conducted by company more recently ranges between 9% to 12% and the inherent risk of each reporting unit is tested (Cranegroup.com 2018). Judgment of management in applying in applying to the analysis of impairment of goodwill also comes with inherent uncertainties. Moreover, long-lived assets are reviewed for impairment when the amount is not recoverable. Therefore, the surprising insights that have been gained after evaluating the annual report of company is that impairment is carried out on annual as well as quarterly basis if ind icated by events and circumstances. The fair value of reporting units to which goodwill is attributed and assigned are evaluated as per the provisions of accounting policies employed by company. Determination of existence of impairment is performed by comparing the carrying value to fair value. Establishment of fair value of reporting unit is done by discounting estimated future cash flow at cost of capital that varies and by making reasonable assumptions. It is believed by company that there do not exist any events and occurrence that has the impact of reducing the fair value of definite and infinite lives of intangible assets. Marking of financial instruments contracts are done on current basis and realizing the loss or gains that are recognized in other expenses or income. Any changes in derivatives fair value have their recognition in the comprehensive income statement (Cranegroup.com 2018). A clear picture of financial position of reporting entity is not provided under the existing lease standard, as there is application of different accounting models for different transactions. Actual amount of liabilities of business might be more than what is represented in the balance sheet under existing standard. The current accounting for lease do no requires operating lease to be disclosed on the balance sheet and hence many leased liabilities and assets are not represented on the financial statements of reporting entity. It has been estimated by IASB that out of US $ 3.3 million worth of lease commitments all over the world, 85% of it does not appear on the balance sheet (James 2016). Hence, financial analysts and investors seeking information from balance sheets will not be provided with appropriate information and they do not reflect true figures. The lack of proper information about financial obligations and it absence on balance sheet will lead to understatement of liabilit ies. It is so because organizations having thousand worth of assets under the commitment of operating leases is not incorporated in the financial metrics. Actual financial position of company in terms of its several financial metrics is not depicted by the new standard (Horton 2018). Based on the information available on the balance sheets, investors make adjustments and thereby it does not reflect true economic reality. Former accounting standard does not make it mandatory to make presentation of operating lease on balance sheets and does not record the associated liabilities. Various financial metrics of organization such as outstanding liabilities, EBIT, net income and operating cash flows does not reflect their actual value because of absence of lease commitments on balance sheet. Organizations make lease accounting on balance sheets virtually and both operating and financing leases are not disclosed in the balance sheets (Choubey 2016). This would make total assets and liabilities arising from lease commitments to be accounted for by organization and they are not presented on balance sheet. However, companies reflect total amount of debts that is attributable which would be considerably lower than total leased assets and liabilities. It is the reason why the off balance sheets liabilities is more than the total amount of debt presented on balance sheets. The controversies associated with former accounting standard concerning lease is related to the complications of creating difference between financing and operating leases. Operating leases are more required to make disclosure on their balance sheet and this is the reason airline companies was no level playing field. Most of airline companies carry out their operations by buying their aircraft fleets and some other lease fleets (Hoyle et al. 2015). This is indicative of the fact that there exists considerable difference between financial positions of such airline companies. While, it is possible that such companies financial positions are identical. Airline companies incorporating different characteristics such as economics, pricing and risks lease Aircrafts and this is the reason there is no level playing field between such airline companies. Standard implementation is regarded as lengthy process and for controlling to track and account for leases require developing new process. Management is required to aggregate and collect necessary information needed for disclosures. Allocation and identification of no lease and lease components are also required. There would be fundamental change in accounting treatment of leases by lessee and assessment method of lease liabilities would change. Since there will be increased reported liabilities and assets as most of leases would be brought on to balance sheets. Moreover, there is no distinction between leases that are on balance sheet and off balance sheet operating leases under IFRS 16. This leads to introduction of single on balance sheet accounting model that is identical to current finance lease accounting. Some other reasons responsible for making new accounting standard for lease unpopular is increased complexities and costs in reporting (Plotnikov et al. 2017). It has been pe rceived that many reporting entities would fail covenant testing if there new lease standard becomes effective and for the lessee, organization will appear more leveraged that they are in actual terms (Hoskin et al. 2016). Organization is required to review their current leasing activities for implementation of standard and it will be time consuming for them to collect and gather data. New accounting requirements concerning leases brought by the implementation of new leasing standard would end the guesswork and rough estimates made by investors when computing the substantial lease obligations of company. There would be much needed transparency as there will be proper disclosure of lease liabilities and assets and this is indicative of the fact that there will be no longer lurking of off balance sheet lease financing (Warren 2016). Moreover, new standard will help in facilitating comparison between those that borrow for buying and those that leases. Organizations are required to make disclosure of their leasing commitments and hence there will be more transparency for liabilities that are disclosed in the balance sheet. Disclosure of leased liabilities and assets will help in brining a more flexible source of finance and expenditure related to capital (Cheng 2015). There will be better allocation of capital, better decisions by management and creating a new awarenes s about the method of leasing done by company. Furthermore, the model of current dual accounting will be eliminated by the implementation of this standard and it will help in creating distinction between off balance sheet and on balance sheet operating leases. References list: Cascino, S., Clatworthy, M., Osma, B.G., Gassen, J., Imam, S. and Jeanjean, T., 2016. The decision usefulness of financial accounting information: an experimental interview study of institutional investors Cheng, J., 2015. Small and Medium Sized Entities Managements Perspective on Principles-Based Accounting Standards on Lease Accounting. Choubey, S., 2016. IFRS 16 Leases. The MA Journal, 51(2), pp.91-94. Commerce, P., 2014. Advanced Financial Accounting. Cranegroup.com. (2018).Crane Group. [online] Available at: https://cranegroup.com/ [Accessed 17 Jan. 2018]. Crawley, M. and Wahlen, J., 2014. Analytics in empirical/archival financial accounting research. Business Horizons, 57(5), pp.583-593. Horton, J., 2018. Advanced Financial Accounting and Reporting: Theory, Practice and Evidence. Routledge. Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education. Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill. 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. Johnson, K., 2014. Lease accounting: a look into the proposed standard. Matherly, M., 2015. ACCT 305-01-02 Financial Accounting Reporting I. Mayo, W., 2017. GAAP: An Analytical Study of Financial Accounting Standards (Doctoral dissertation, University of Mississippi). Plotnikov, V.S., Plotnikova, O.V. and Melnikov, V.I., 2017. O teoreticheskikh aspektakh Mezhdunarodnogo standarta MSFO (IFRS) 16 Arenda[On the theoretical aspects of the International Standard IFRS 16 Lease]. Mezhdunarodnyi bukhgalterskii uchetInternational accounting, (1), pp.2-15. Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3). , ?.?. and , ?.?., 2015. InteractIon and dIfferences In management and fInancIal accountIng. , (6), pp.9-14.