The report has been prepared from the perspective of an accountant employed within Qantas Limited for the audit committee of the company. The audit committe of the company has met with the external auditors for prudently reviewing the impact of the Covid-19 pandemic on the measurement and recognition elements of its financial statements. This report is addressed to the CEO of the company and has provided an explanation of the reporting decisions that the management has undertaken for ensuring compliance with the AASB 136 impairment of assets. In addition to this, it also identifies and discusses the challenges encountered by Qantas in reviewing the measurement and recognition of the relevant accounts impacted by AASB 136. It also evaluates the probability of engagement of Qantas management in big bath accounting through impairment of assets as a result of Covid-19 from the lens of agency theory. It also examines whether the management should identify an alternative profit measure for excluding the impact of Covid-19 pandemic.
Part 1: Explanation of Reporting Decisions of Qantas Management in Compliance with AASB 136 Impairment of Assets
Part 2: Discussion of Challenges faced by Qantas in Reviewing the Measurement and Recognition of Relevant Accounts Impacted by AASB 136 for the 30 June 2020 financial year.
Part 3: Evaluation from the Agency Theory Lens.
Part 4: Evaluation of an Alternative Profit Measure by Qantas Management for Excluding the Impact of Covid-19 Pandemic.
The present report is developed in for conducting review of the measurement and recognition elements of the financial statements of a selected company, that is, Qantas Limited. The main purpose is to identify the emerging issues and changing circumstances that have impacted the businesses during Covid-19 pandemic to be presented to the Australian Securities and Investment Commission (ASIC). The Australian and global economies have faced enormous disruption due to this pandemic and has severely impacted the Travel and Tourism Industry sector. This assessment serves as a business report for the company’s Audit Committee, suggesting the impact of COVID-19 on its business with alternative profit measures and an impact on impairment of assets as per AASB 136.
The objective of this standard is to prescribe the procedure that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of asset. If this is the case, the asset is described as impaired and entity is required to recognize an impairment loss. The standard also specifies when an entity should reverse an impairment loss and prescribes disclosures (PricewaterhouseCoopers, 2020).
On the basis of 2019 Annual Report of Qantas, the specific reporting decisions for the following accounts shows whether there is any impact or not to ensure compliance with AASB 136 – Impairment of Assets.
The standard AASB 136 shall not be applied in case of inventories, in accounting for the impairment of assets. Hence, there is no impact of impairment of assets on Inventories (Bloom, 2013).
The Annual Report of the company for F.Y.2019 shows Impairment losses on Receivables as compared to its financials from F.Y. 2018. The provision for impairment losses in the year 2019 shows an increase of 2M$ as that of the year 2018. Hence, there is an impact on receivables of the company in the F.Y. 2019 (Qantas Airways: Annual Report, 2019).
Amortization and impairment both relate to the value of a company's intangible assets, which are reported on the balance sheet. Impairment occurs when an intangible asset is deemed less valuable than is stated on the balance sheet after amortization (Dagwell and Lambert, 2015).
The company is required to conduct a test for assessing the impact of impairment on intangible assets. In the given case, Qantas did the impairment test of its CGU’s which includes Goodwill and other Intangible assets, which did not show any impact. Hence, as per company’s annual report of 2019, no impairment was recognized for the identified CGU’s during the year ended 30 June 2019.
In-fact, the total goodwill and total other intangible assets with indefinite useful lives of the company has increased by 2M$ each in the year 2019 (Qantas Airways: Annual Report, 2019).
The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed. To determine whether an item of property, plant and equipment is impaired, an entity applies AASB 136- Impairment of Assets.
As per the Annual Report of the company, the company has not conducted any test of impairment of Property, plant and equipment. There were no such indications to the company, as to conduct a test of impairment from its internal as well as external sources.Hence, there is no impact of impairment on property, plant and equipment (Qantas Airways: Annual Report, 2019).
The two challenges that will be encountered by Qantas in reviewing the measurement and recognition of relevant accounts impacted by AASB 136 for 30 June 2020 financial year are:
The need for impairment testing
A company must test non-financial assets for impairment when there are any indicators that the assets may be impaired.
Even if there are no impairment indicators, companies must undertake annual impairment tests of-
Matters to consider
Impairment testing often relies on estimating the value of assets by discounting estimated future cash flows using appropriate discount rates. Although calculations supporting impairment or valuation of significant assets can be complex, company can review the cash flows and assumptions used in calculations for material assets, bearing the knowledge of the business, the assets, the environment in which the company operates, and the future prospects of the business.
The extent to which directors can rely on management’s work on impairment will vary depending on the circumstances (IFAC, 2019).
Considerations may include:
Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.
It is recommended to the management of the company that it should report an alternative profit measure for excluding the impact of COVID-19 pandemic impact, in addition to the mandated net profit and loss. This is because Qantas own substantial assets and relatively low ROA on substantial absolute profits (Deloitte, 2020).
Hence, it can be said that, Qantas management should report an alternative profit measure that excludes the impact of the COVID-19 pandemic impact, in addition to the mandated net profit and loss.
As per Consolidated Interim Financial Report of Qantas, subsequent to 31st December, 2019, due to evolving situation of Coronavirus, the Qantas got affected by the same and the unprecedented travel bans imposed by various governments. As a result, there has been a fall in demand and intakes. In this response, company had announced plans to reduce capacity across the domestic and international network. There had no material effect on consolidated interim financial report as at 31st December, 2019 (Qantas Airways Limited, 2020).
The other alternative measures that might be considered are stated as follows:
The business report concludes that due to COVID-19 Pandemic, the company should also engage in “big bath accounting” via conducting test of impairment of assets: receivables, intangible assets and Property, plant and equipment in compliance with AASB 136. This standard does not apply on impairment of inventories. Hence, shall not apply on it. The findings of the report focuses on the impact of Coronavirus pandemic on the business of the company and to mitigate the challenges by taking into consideration alternative profit measures available to the company.
ASIC. 2020. Impairment of non-financial assets: Materials for directors. [Online]. Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/directors-and-financial-reporting/impairment-of-non-financial-assets-materials-for-directors/ [Accessed on: 8 July 2020].
Bloom, D. 2013. Double Accounting for Goodwill: A Problem Redefined. UK: Routledge.
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IFAC. 2019. The Financial Reporting Implications of COVID-19. [Online]. Available at: https://www.ifac.org/knowledge-gateway/supporting-international-standards/discussion/financial-reporting-implications-covid-19 [Accessed on: 8 July 2020].
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PricewaterhouseCoopers. 2020. Key disclosures under AASB 136 Impairment of Assets. [Online]. Available at: https://www.pwc.com.au/assurance/key-disclosures.pdf [Accessed on: 8 July 2020].
PwC Ireland. 2019. COVID-19: The increased risks of aircraft impairment. [Online]. Available at: https://www.pwc.ie/issues/covid-19/increased-risks-aircraft-impairment.html [Accessed on: 8 July 2020].
Qantas Airways Limited. 2020. Interim Financial Report. [Online]. Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/2020HY/HY20-Interim-Financial-Report.pdf [Accessed on: 8 July 2020].
Qantas Airways. 2019. Annual Report. [Online]. Available at: https://investor.qantas.com/investors/?page=annual-reports [Accessed on: 8 July 2020].
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