As a new accounting graduate, you have just joined the financial reporting unit of a listed company* when your manager, the Chief Financial Officer (CFO), approaches you with your first task.
In July 2020, Australian Securities and Investments Commission (ASIC) issued a media release (MR) 20- 157MR Focuses for financial reporting under COVID-19 conditions – one of the key focus areas for the annual reports are the reporting of asset values and financial position.
The ASIC Chair, James Shipton, said that “In the current environment, the quality of financial reports and related disclosures is more important than ever for investors and to maintain confident and informed markets” (Australian Securities and Investments Commission (ASIC) 2020, p.1). He further added that, ‘Entities with businesses adversely affected by the COVID-19 pandemic should focus on the reporting of asset values and financial position. Investors will expect clear disclosure about the impacts on an entity’s businesses, any risks and uncertainties, key assumptions, management strategies and prospects” (Australian Securities and Investments Commission (ASIC) 2020, p.1).
The board members of your company are concerned about the company's reputational standing in the market relating to the quality of financial information in the annual report and keen to ensure that asset values are appropriately reflected and disclosed in the company's latest annual report.
Therefore, the Board decided to have a review of the relevant accounting treatments and disclosures about impairment testing in the company's 2019 annual report and requested the financial reporting unit to provide recommendations on the treatments and disclosures for impairment in the company’s 2020 annual report.
Required
Based on the Board's decision, the CFO asks you to draft a business research report addressed to the Board of Directors on the following: a. Explain the potential role that different types of accounting theory (i.e., normative and positive accounting theories) play in developing consistent accounting principles.
b. Provide a detailed explanation of the impairment testing made by your company in the year ended 30 June 2019. Your explanation should include a discussion of
i. the asset/s that were subject to impairment testing;
ii. the type of estimations required to record the impairment;
iii. the amount of the impairment write-down, if any; and iv. relevant disclosures about impairment testing in the 30 June 2019 financial report.
c. Based on your findings in part b, critically discuss and recommend how your chosen company can enhance the treatments and disclosures for impairment for the year ended 30 June 2020 so that your company could provide clear disclosure about the adverse impacts on the company from the COVID19 pandemic.
d. Based on your findings in part c, discuss how the treatments and disclosures about impairment suggested by you for the year ended 30 June 2020 meet the fundamental characteristics of financial reporting as per the Conceptual Framework?
