Corporate Accounting Assignment
Hao Cheng 3781727
Yang Siyu 3778363
Tutor: Ghazaleh Shokrollahi
Thursday 10 a.m. – 11 a.m. 1 p.m. – 2 p.m.
Fosters, the beverage giant of Australia has been all over the news recently, as the company has reported a huge loss and the stock price keeps falling. All of these problems might be brought by its troublesome wine business. This report will try to explain why Fosters is under this infaust circumstance by answering the eight following question.
Question 1: Why is an impairment test considered necessary?
Impairment test is considered necessary nowadays since economic environment is changing rapidly and all companies are subject to increased scrutiny by auditors, regulators and even investors for accurate and timely reporting of impaired assets. Volatility and ever changing nature in the financial markets has resulted in the necessity of impairment test. Therefore, companies have to be required to test goodwill and other intangible assets, such as goodwill, brand name, financial assets, and investments for potential impairment on an interim basis. We know goodwill is an important part of total value of company. If any company acquires any other company, goodwill would be a vital indictor to determine the acquisition value. Thus, impairment of intangible assets such as goodwill is extremely important for any accountant.
Question 2: Which assets are subject to impairment testing? In the example of Fosters Ltd, the continuous loss from the sales in Australia, the US and Europe made Fosters hope a quick takeover, which requires an impairment test for the other companies to value Fosters’ acquisition cost. The following steps should be followed to determine the acquisition cost. Firstly, the fair market value of net assets with book value of net assets should be considered, which must be done annually each year. This is the first step to test for impairment of goodwill. Secondly, if fair market value of net assets is greater than carrying value or book value of net assets, there is no impairment for the intangible asset in this year. If the carrying amount of a reporting unit exceeds its fair value, intangible assets such as goodwill suffers impairment loss, and if the carrying amount of goodwill exceeds its implied fair market value, an impairment loss equal to this excess is recorded. “we can assist in the valuation of all assets and liabilities of the Reporting Unit (including any unrecognized intangible assets), a process analogous to a purchase price allocation exercise, in order to facilitate management's determination of the implied fair value of goodwill of the subject Reporting Unit. Additionally, our professionals have significant experience at providing valuations for purposes of International Financial Reporting Standards (IFRS) in accordance with IFRS 3 – Business Combinations, IAS 36 – Impairment of Assets, and IAS 38 – Intangible Assets.”(Penman, 2009)
Question 3: What were the external influences that drove Fosters to undertake an impairment test? Some external influences that drove Fosters to undertake an impairment test are as follows: First, it continuously reported huge loss in the sales worldwide and the decline of stock price to $5.99 per share make the company to undertake an impairment test. Secondly, the words from the auditors resulted in a $1.3 billion write-down in the value of the wine business. Third, the company has to change its constitution to allow it to resume paying dividends because o its full-year loss of $464.9 million after the wine business write-down. Fourth, the company has to undertake an impairment test to give response to media rumour and speculation. Also, it could give reasons for Mr Johnson’s optimism of the...