Journal Contemporary Hospitality Management -Myassignmenthelp.Com

Question: Discuss About The Journal Contemporary Hospitality Management? Answer: Introducation Wesfarmers Limited is the company that has been available for the analysis purpose and throughout the study the annual report of the Wesfarmers Limited will be discussed with regard to the impairment testing. The company is Australia based and is listed in the Australian Stock Exchange having second largest place in the retail chains business and is big competitor to the Woolworths Limited. For making the deep analysis and current analysis, the annual report for the financial year ending 30th of June 2017 has been considered. The financial statements have to be read with the notes to the accounts of the company and therefore, the following assets of the company have been tested for the purpose of the impairment if any during the year: Note number 5 has laid down the impairment test for the trade receivables. The trade receivables are those from whom any amount is receivable and that too in the ordinary course of business not any special transactions. Note number 7 has laid down the second major head comprises of the property plant and equipment. It includes freehold lands, buildings, leasehold land improvements, plant vehicles and equipment and Mineral lease and development. Note number 8 has laid down the third major head for impairment testing is the Goodwill and other intangibles. The other intangibles include brand, contractual and non contractual relationships, software and gaming and liquor licenses. Note number 17 has laid down the other major head namely Non financial assets and note number 18 on Associates and joint Ventures and accordingly impairment is tested for the loss in investment Yes, the company has conducted the testing for impairment and that too in accordance with Australian accounting standard and has provided the details explanation of each and every testing done by them. As per the seventeen note of the financial report of the company for the financial year ending 30th of June 2017, following test has been done for the impairment: The group of the whole company tests the property plant and equipment, goodwill and other intangibles on an annual basis. The testing becomes more frequently in case of the intangibles having indefinite lives and accordingly the testing on at least annually or frequent basis have been mentioned. The testing is also required when an indication is there that the impairment that has been charged in the earlier period might have been changed in the current financial year. The group will identify and prescribe the cash generating units. The need of identifying the cash generating units will arise only when the individual assets will not be able to generate the cash flows on its own on independent basis rather uses the other assets to generate the profits. Also when the assets value in use so calculated cannot be simulated with the figures as obtained with the fair value. Thereafter, the recoverable amount of each of the asset or the cash generating units as the case may be is identified. Recoverable amount of an asset or the cash generating unit is the higher of the fair value of asset less cost of the disposing off the same which is defined as FVLCOD and the value in use. Value in use is nothing but the present value of all the cash inflows that the company estimates for future for at least five years. The present value is calculated by using the discounted rate or the cost of capital of the company. In case the cash flows are required for more than five years then the same is estimated using the growth rate of the company. For the calculation of the FVLCOD, the discounted cash flow way has been used instead of other methods. Now the recoverable amount so calculated is contrasted with the carrying amount of the asset and in case the carrying amount exceeds the recoverable amount of the assets or the cash generating units as the case may be then the impairment is booked otherwise the asset in consideration is not impaired and is recorded at the carrying value only. The other item of the asset which is tested for the impairment is the trade receivables. These include the balances of the sundry debtors and other loans and advances made in the normal routine of business. The trade receivables are check with different kinds of risk like liquidity risk, credit risk and financial risk. The test for the impairment is ongoing. It does not require being waiting for the balance sheet date of the year end. The test includes the checking and verification of the creditworthiness of the debtors as to whether they are in a position to generate the income and disburse the outstanding and accordingly impairment is booked. In the given case recoverable amount is identified using the discounted cash flow technique and this will exclude the short term debtors as the discounting effect in this case will not be so significant or material. This, in this mode, the company does the impairment testing. The accounting treatment of the impairment is similar to the depreciation and accordingly on the one hand it is charged to the consolidated statement of profit and loss account and on the other hand the impairment is deducted from the value of the assets so impaired as on balance sheet date. On looking of the annual report of the company, the note number two of the annual report of the company, following amount have been charged as the impairment and clubbed under the head of the expenses in the consolidated statement of profit and loss: S. No. Particulars Amount ($Million) 1 Plant, equipment and other assets 27 2 Freehold Property 22 3 Goodwill NIL Every company lists out the key estimates and the assumptions for following each and every calculation of expenditure or revenue like depreciation and impairment, etc and these are mentioned in the annual report of the company. In the given case, the company has lists out the key estimates and the assumption that the company has used in estimating the key assumptions and the estimates for impairment: The note number seventeen is related to impairment of non financial assets and in that the company has mentioned that the major key assumption has been taken in the fair value less cost of disposal calculations. The company has identified the two cash generating units namely Coles and Target. For both of the cash generating units, the method of fair value less cost of disposal (FVLCOD) has been used for the estimation of the recoverable amount. The assumptions have been made regarding the discounting rate and the growth rate. For Coles and Target the discounting rate assumed is 8.9% and 11.0% respectively. Both discounting rates are post tax and have incorporated a risk for the net post tax flows which the company has estimated to achieve in the future years. For Coles and Target the discounting rate assumed is 3.0% and 2.5% respectively. The growth rate has taken into consideration the growth rate of long term in average terms. For the purpose of Curragh cash generating unit, recoverable amount has been determined and different assumptions have been used for the impairment. These includes the following: Life so remained shall be off approximately 17 years Estimates of the long term coal price Foreign currency rates based on 27th of June 2017 Escalations may be around 2.5% per annum and Discount rate which shall be post tax will be 9.9%. Thus, these are the assumptions and estimates that are listed in the annual report of the company. Yes, the impairment testing process of the assets of the company is very subjective. The first instance where the subjectivity is highlighted is the use of the method of fair value less cost of disposal instead of using the value in use method for calculation of the impairment loss of the assets. Three cash generating units namely Coles, Target and Curragh have undergone the impairment testing on the basis of this method only. It depicts that the company is not confident itself in the estimation of the future cash flows or the budgeted plans because of which the value in use method has not been employed by the company. The result of this subjectivity is that the company will lose his faith as zero impairment has been booked for the current year. However, if company would have been gone by the value in use method, then the situation will be different. I have found the whole process of impairment testing as interest also and sometimes confusing also. Interesting because new method of calculation of the recoverable amount has been disclosed is fair value less cost of disposal (FVLCOD). On the other hand the same process is confusing also because some calculations and the detailed facts were missing due to which some explanations are in dark room like. For instance how the discounting rate has been calculated and so on. The new insight is the adoption of the different method of calculating the impairment which is fair value less cost of disposal (FVLCOD). Second insight is the different assumption for different cash generating units can be taken by the company. For instance, for Coles and Target different assumption have been placed and for Curragh different assumption has been placed. In the significant accounting policies as adopted by the company as mentioned in the annual report, it is mentioned that for the purpose of all fair value measurements the group has categorized the assets into three levels. These are: Level One - where fair value will be determined in accordance with the listed price in the market Level Two where fair value will be determined in accordance with other than listed prices Level Three - where fair value will be determined in accordance with unlisted prices. The following reasons helps IASB board in believing that earlier account standard does not reflect the economic reality:- The accounting treatment of the operating leases contracts which depicts that the financial transactions does not involved actual obligation of the company and the company is not liable to record them in their accounts while estimating the liabilities or obligations (Ely, 2015). The nature of transaction was generally hided in the form operating lease contract in place of the rentals or purchase contracts which shows that real transactions has been hide by the management of the company. Net assets position of the company has been wrongly calculated as the contingent liabilities will not taken into consideration irrespective of their amount involved (Day and Stuart, 2013). From the above, the statement made by the speaker in the meeting seems validated as the financial data has been manipulated by the owners of the company by using the ambiguity in standard or regulations governing lease contract. The following are the reasons which depicts that off the balance sheet liabilities are 66 times higher than the obligations reported in the balance sheet:- As the earlier standard motivates of recording of the operating lease obligations as continent liabilities as they are considered to be future obligations if the lease rentals not paid on time, the liabilities will increase day by day as the lease period expires. Only the actual obligations were reported in the former standard as liability on the face of the balance sheet which are generally very less in case of lease agreement as only financial lease was considered in this which were very less. From the above two pints it can be analyzed that actual liabilities were less and having only 1/3rd of the total obligations which are inclusive of contingent liabilities. So, at some point of time the off the balance sheet (contingent liability) will become 66 times larger than obligations reported on the face of the balance sheet for the entities for which lease standard was applicable. The following are the points on the basis of which the chairperson thinks that under former accounting standard the playing fields for some airlines companies were not made available:- The major players in the airline industry have been into the operating lease contracts and have captured the market by ignoring the finance lease on the other hand. Due to operating lease they are liable to mention the liabilities relating to the leases as contingent liability and that too in notes to accounts of the company rather than mentioning on the first page of the balance sheet or in the schedules forming part of the balance sheet. By doing so they have curbed their actual liabilities (Gross, 2014). When new company enters into the market then he has no by other means forced to adopt for the operating lease and hence the players of the field will be the major players of this industry and the others will remain as it is (Singer, 2017). Second reason is that the new entrants will take time to bring their financial statements to that level so that they can also give the competition to others and if this former standard prevails then there will be no level playing field among the companies in the similar industry. The reasons that as to why the Chairperson of the International Accounting Standard Board have mentioned that the new accounting standard on the leases will not be popular with everyone are as follows: At first it is very much clear that the new accounting standard on leases is majorly applicable on the listed companies. The new accounting standard will make the parties to the contract to make the full disclosure of their financial assets and financial liabilities (Knubley, 2010; Moore and Nagy, 2013). The lessee cannot escape by mentioning the contingent liability only and that too in the notes to accounts rather it will be recorded with full liability under the provisions of the new accounting standard (Lim, 2014). It will make the existing listed companies which covers half of the listed companies dealing into leasing transactions out of the business and thus will make the standard unpopular not among their business industry but also in some other business industry. With this, the accounting standard will not be so popular. As the new accounting standard on lease will bring about the more transparency about the financial position of the company as well as the financial performance of the company, the faith of the stakeholders including the banks, financial institutions, government authorities, employees and others will get increased. Through this faith and the more reliance on the financial statements of the company will lead the management of the company to make a more informative and corrective decision in an efficient and effective manner. Earlier, the company has been making the lease versus buy decision very fast and vague but now the decision will effective and efficient one as in the case of lease the assets and the corresponding liabilities are required to be checked. Similarly the investors of the company including the potential investors will have more faith and trust in the workings of the company on the basis of which the investors will be able to take an effective decision regarding whether to invest in the particular company or not. References AASB, (2016), Impairment of Assets available at https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf accessed on {23-01-2018}. AASB, (2016), Financial Instruments: Recognition and Measurement available at https://www.aasb.gov.au/admin/file/content105/c9/AASB139_07-04_COMPoct10_01-11.pdf accessed on {23-01-2018}. Company Official Website, (2017), Annual Report 2016, available on www.wesfarmers.com.au/ accessed on {23/01/2018}. Day, R. and Stuart, R., (2013), New lease accounting proposal: what it means and what companies can do to prepare.Financial Executive,29(6), pp.11-13. FASB, (2016), New Guidance on Lease Accounting available at https://www.fasb.org/jsp/FASB/FASBContent_C/NewsPagecid=1176167901466 accessed on {23/01/2018}. Ely, K.M., (2015), Operating lease accounting and the market's assessment of equity risk.Journal of Accounting Research, pp.397-415 Gross, A.D, (2014). The path of lease resistance: How changes to lease accounting treatment may impact your business.Business Horizons,57(6), pp.759-765. Knubley, R., (2010). Proposed changes to lease accounting.Journal of Property Investment Finance,28(5), pp.322-327 Lim, S.C., (2014), Market Recognition of the Accounting Disclosure and Economics Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings. Ma W, (2011), Impact on Financial Statements of New Accounting model for leases available at https://digitalcommons.uconn.edu/cgi/viewcontent.cgi?article=1194context=srhonors_theses accessed on {23/01/2018} Moore, S. and Nagy, A., (2013), CONTRACT STRUCTURING UNDER THE NEW LEASE ACCOUNTING RULES: THE CASE OF CUSTOM DESIGN RETAIL, INC.Global Perspectives on Accounting Education,10, p.81 Singer, R, ( 2017), Accountinq for Leases Under the New Standard, Part 1: Definition and Classification of Leases and Lessee Accounting.CPA Journal,87(8). Singh, A.,( 2011). A restaurant case study of lease accounting impacts of proposed changes in lease accounting rules.International Journal of Contemporary Hospitality Management,23(6), pp.820-839.