• Internal Code :
  • Subject Code : ACCG8123
  • University : Macquarie University
  • Subject Name : Accounting and Finance

Application of Professional Judgment on Impairment Testing

Executive Summary

The objective of the report is to project the role of professional judgment in accounting and the importance of accounting information. To undertake this study, Woolworths group an S&P/ASX constituent company and also complying IFRS & AASB standards is selected. The company is one of the premier companies in Australia and is known for customer satisfaction. The report deals with the impairment of assets and its value followed by the recommendation of action for improvement.



1. Two professional judgements made by the management

i. Estimation of Useful lives of tangible and intangible assets.

ii. Impairment loss

2. Detailed study of the impairment write down

3. Professional judgements that have been made in the impairment write-down process

i. Estimated cash flows

Recommended action

ii. Growth & discount rates

Recommended action

4. Critical analysis




The company has the best of technology and world-class employees and is a profit-making organisation. This report summarises the accounting estimates and policies used by the company mainly in impairment of assets/CGUs and its justification. The company takes a conservative approach in predicting its recoverable values of assets/ CGUs which is a fairly good idea in terms of global recession and trade wars.

1. Two professional judgements made by the management

i. Estimation of Useful lives of tangible and intangible assets.

The management purchases assets for business purposes inclusive of all cost like transportation, installation, taxes (if not recoverable) and any other cost. The assets face wear & tear over a period of time which is called depreciation also. For applying depreciation, two elements are required mainly depreciation rates in % and the estimated life of assets. Here comes the role of professional judgement and experience. The company has to predict the useful life of any asset carefully keeping in mind various factors like the number of machine-hours used in a day, number of shift used etc. This is the most complex calculation which requires expert advice and professional view. The depreciation rates are prescribed in accounting standards however the company can adopt its own depreciation rates also.

ii. Impairment loss

Impairment of assets is a scenario where the carrying value of an asset exceeds its recoverable value. The difference between the two values is called impairment loss (Barr 2015). The management has to be review assets carrying value and its recoverable value annually which is a complex task. The difference is showed in profit loss a/c and value of asset/ CGU is reduced accordingly. Both estimations of useful life and impairment is a matter of professional judgement and may differ case to case basis (AASB 108). The above two affects the profitability and value of assets in the financial statements.

2. Detailed study of the impairment write down

Yes, the company Woolworths have charged impairment loss in its 2019 financial statements and the total down impairment is $166 million. The company has charged impaired as branch expenses to the tune of $110 million to centrally held plant & equipment and rest $ 56 million to stores plant & machinery (Woolworths 2019). The board approved the writing down of assets in the second half-year of 2019. The recoverable value of assets went down to the tune of $ 166 million as compared to its carrying value (Woolworths 2019).

The assumptions made are part of the three-year strategic plan formally approved by the board. The undiscounted lease agreements amount to $ 2.5 billion. The assumptions adopted are a long term growth rate of 2.5% to the cash growths and tax rate of 13.9% (Woolworths 2019). The company also predicts an increase in online sale to its customers. The company also reduced its gross margin by 50 basis points to enhance the impairment loss increasing the charge from $150 million to $200 million (Woolworths 2019).

In the drinks department, the company also charged a down impairment of $21 million in its branch in Chinese wine called Summergate, relating to goodwill and intangible assets. The company also reversed a previously recognised impairment loss of $37 million in the books as it expected that recoverable amount will exceed its carrying cost and will be able to cover impairment loss as well (Woolworths 2019).

The recoverable amounts of cash-generating units (CGU) are calculated as per the cash inflows, any reduction and increment in cash flows of any CGU are allocated accordingly and goodwill is estimated accordingly while the recoverable values of plant, property & equipment are valued as per external valuations by the valuers (Woolworths 2019).

3. Professional judgements that have been made in the impairment write-down process

i. Estimated cash flows

For calculating the recoverable amount of assets concerning Big W, a value-in-use model was used by the company in which the basis used was the forecast of discounted future cash flows. A strategic three-year plan was the basis of these discounted cash flows. The cash flow forecast is dependent upon other assumptions such as expected gross margins, expected trading results (Deegan 2016).

Recommended Action

The professional judgement that has been used in above estimations cannot be judged with accuracy as it is based on predictions. But the same can be checked with the historical cash flows and also the historical profit trends and the past performance of the company to make it more accurate.

ii. Growth & discount rates

Cash flows have been assumed to grow at 2.5% and before tax rate discount rate of 13.9% which is a fair value keeping in the global scenarios and uncertainty in the business (Woolworths 2019).

Recommended action

The Company should keep in mind that the cash flows should be sufficient to cover all the revenue & capital expenses (Laux 2014). The decrease in the recoverable amount also increases the impairment loss which also affects the profitability (Cheung, Wright & Evans, 2010). Hence the estimation by the management should fair and correctly calculated. The rates are consistent with 2018 figures also.

i. CGU & its cost allocation: The recoverable amount of CGU is also decreased to be more on a conservative level. This shows that the company does believe in inflation figures just to please the shareholders. Goodwill is allocated to CGU that are performing better individually or in the group and the same is reduced when the cash flows decreases (AASB 136). Under impairment, the carrying value of CGU is first reduced and then other assets are reduced on a pro-rata basis. The policy seems to be correct.

ii. Impairment of assets: The Company have impaired both tangible & intangible assets to the tune of $ 166 million. The company prediction of recoverable values seems to be correct as the company has also reversed an impaired loss earlier made to the assets when it predicts the sale value of the assets will cover its carrying value. The company further justifies its impairment move by further reducing its gross profits by 50 basis points to justify an additional impairment charge.

4. Critical Analysis

The company uses professional judgement in calculating the recoverable amount of asset/ CGU which is as follows:

1. Expected Cash flows.

2. Long term Growth & discount rates.

3. Past business performances.

4. Business uncertainty & its implications.

Financial reporting is a tool to present financial information to its users in a formal & understandable manner. The losses & expenses are always predicted in advance and all gains & profits are recorded only at the time of occurrence. This is the fundamental requirement of financial reporting (Bellandi 2017). The management in preparing its accounts should try to include all the likely losses be it the recoverable values of its assets/CGU. The recoverable value of any assets is to be analysed by the management using their judgement and expertise.

The tangible assets like property are valued on external reports (Bellandi 2017). The company uses a span of 5 years to analyse its cash flow trends and further increment (current estimation 2.5% hike) which is on the conservative side. Also, the pre-discount rate to discount its cash flows is 13.9% is also correct. The company hence seems to adopt the correct way of impairment of assets/CGUs and follows the fundamental objective of financial reporting and also discloses all the elements attached with impairment policy.


The company Woolworths is a professionally managed company which is very rules compliant and also very accountable to the users of its financial statements. The company presents a fully descriptive annual report giving insights on all the accounting policies adopted in the preparation of financial accounts and all the key accounting estimates and judgements.


AASB 108, Accounting Policies, Changes in Accounting Estimates and Errors, https://www.aasb.gov.au/admin/file/content105/c9/AASB108_08-15.pdf

AASB 136. 2020, Impairment of Assets, https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf

Barr, M 2015, Accountability and independence in financial regulation: checks and balances, public engagement, and other innovations. Law & Contemp. Probs, vol. 78, no. 3, pp. 119–28.

Bellandi, F 2017, Materiality in financial reporting, Bingley: Emerald Publishing Limited. Cheung, E., Wright, S., and Evans, E 2010, An historical review of quality in financial reporting in Australia, Pacific Accounting Review vol. 22, no. 2, pp. 147-169

Deegan, C. M 2016, Financial accounting, North Ryde, N.S.W.: McGraw-Hill Education.

Laux, B 2014, Discussion of The role of revenue recognition in performance reporting. Accounting and Business Research vol. 44, no. 4, pp.380-382,

Woolworths AR 2019, Woolworths 2019 annual report & account, viewed 4 May 2020, https://www.woolworthsgroup.com.au/icms_docs/195583_2019-sustainability-report.pdf

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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