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September 2014 Japan Business Services Newsletter ASIC focus areas - Asset values and impairment testing As many companies commence preparation of their 30 June 2014 Financial Reports we believe a timely reminder is required concerning annual impairment testing – both performance of testing and disclosure of this testing. ASIC continues to focus on asset values and impairment testing. In this edition we highlight the impact this is having on market participants and we also focus on one area of common error – Cash Generating Unit identification. What is happening in the Market? Over the last three years there has been a significant increase in the number of ASX100 companies reporting impairment as well as the quantum of the impairment charges being recorded. In the latest financial year, 57 of ASX100 companies recorded impairment compared to 47 in the prior year and of these charges, the average impairment charge was 5.2% of equity compared to 4.0% in prior year and 0.7% in 2011. Reviewing 2013 Financial Reports, EY has continued to see goodwill write downs, with goodwill continuing to be the most significant component of the overall composition of total impairment charges. As seen in Table 1 - similar to 2012, the next most significant category was PP&E write downs. Table 1 – Recent Impairment Trends among ASX100 companies Category Goodwill PP&E Other intangibles Equity accounted investments 2013 45% 33% 12% 10% 2012 49% 35% 11% 5% 2011 42% 44% 7% 7% Impairment in 2011 and 2012 was characterised by a small number of companies making very large write downs in both goodwill and PP&E. In 2013, the impact of a similar number of companies was not as significant on the overall impairment charge – the increase is as a result of more companies booking impairment (While overall the average impairment charge has decreased, the number of companies incurring impairment has risen). Table 2 below presents some interesting statistics for the ASX 100. Table 2 – Impairment statistics for ASX100 companies in Australia Category Number of companies recording an impairment charge Average impairment charge over equity 2013 57% (57 out of 100) 2012 48% (47 out of 97) 2011 36% (35 out of 97) 5.2% 4.0% 0.7% Our discussions with entities who have taken impairment charges suggests that as a result of declining economic conditions, the entities have made significant impairment write-downs of assets. As part of this greater focus on impairment, we have also seen entities improve their disclosures concerning impairment testing and fair values of assets. Also, the entities are making greater disclosure of key assumptions underlying asset impairment calculations. These disclosures are important to investors and other users of financial reports given the subjectivity of any calculations – if you are uncertain about your disclosures please consult your Auditor. Cash Generating Unit (“CGU”) Identification As a result of our work with our clients, EY has noted at there is an increasing focus on the identification of CGU’s both by businesses and ASIC. At 30 June 2014 there are three key issues amongst others that should have your full focus – these are areas of common error: ASIC focus areas - Asset values and impairment testing 1. CGUs set at too high a level of aggregation: It is important to challenge whether, too many assets have been aggregated into a CGU – remember a CGU is defined as the lowest grouping of assets capable of generating independent cash inflows – remember not a profit. The consequence of this is that entities may group assets together which should really be separate CGUs and while overall impairment is passed, it may be failed in one or more of the actual CGUs if they were correctly identified. 2. CGU groupings set too high: Does your business have goodwill? It is necessary to allocate this goodwill to CGUs individually or if not possible to groupings of CGUs – as long as this grouping reflects the level at which management monitors goodwill internally and is not larger than an operating segment. Entities should be challenging their goodwill allocation and assessing whether it should be allocated at a lower level (e.g., to a CGU group that is a component of an operating segment). 3. The effects of reorganisation and disposals: Have you disposed or reorganised of part of your operations? – Yes, then read on. When part of a CGU is reorganised or disposed of, it is important to consider whether the entity has allocated (remaining) goodwill in accordance with AASB 136. If the CGU grouping has been set at too high a level, this may cause anomalies when goodwill is allocated on a relative fair value basis. On a disposal, for example the entity may assert that much too much/much too little goodwill has been allocated to the group disposed of. This may indicate that goodwill was not actually monitored at the level of the CGU group to which it had been allocated. If you have reorganised or disposed of part of your operations we strongly encourage you to consult with your auditor prior to balance date – these situations can be complex. In conclusion ASIC will continue to focus on impairment. This complex area should be focused on not only by management but the Board of Directors. Our experience is that impairment should and must be addressed prior to year end. While all elements of impairment are important there should be strong focus on the identification of your CGUs and the disclosure of the results of your impairment testing in your Financial Statements. Many entities will often just refresh impairment calculations from prior years – while this can be a supportable approach we strongly encourage entities to review all assumptions, inputs and calculations in 2014 as the world economy starts to show growth and recovery. This may even impact on reversals of non-goodwill impairments which will be required where CGU values increase over previously impaired values. We strongly encourage, directors and auditors to exercise professional scepticism and challenge the appropriateness of asset values and assumptions underlying impairment calculations, particularly in the context of current economic conditions and where prior period financial forecasts have not been met. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. 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About EY’s Tax services Region Name Telephone/Email National 菊井隆正 Takamasa Kikui Partner Japan Business Services Asia-Pacific / Oceania Leader +61 2 9248 5986 [email protected] 鈴木大介 Daisuke Suzuki Transaction Advisory Services Sydney +61 2 9276 9083 [email protected] 篠崎純也 Junya Shinozaki Director Japan Business Services NSW Leader +61 2 9248 5739 [email protected] カーンズ裕子 Yuko Kearns Director, Tax +61 2 9248 5518 [email protected] Melbourne 加藤雅子 Masako Kato +61 3 9655 2766 [email protected] Brisbane 荒川尚子 Shoko Arakawa Senior Manager, Assurance +61 7 3011 3189 [email protected] 渡辺登二 Toni Watanabe Tax +61 7 3011 3526 [email protected] 井上恵章 Shigeaki Inoue Director, Tax +61 8 9217 1296 [email protected] 諸貫 健太郎 Kentaro Moronuki Manager, Assurance +61 8 9429 2222 [email protected] 川井真由美 Mayumi Kawai +61 8 8417 1974 [email protected] Perth Adelaide Your business will prosper as you build it on strong foundations and grow it in a sustainable way. At EY, we believe that managing your tax obligations responsibly and proactively can make a critical difference. Our global teams of talented people bring you technical knowledge, business experience and consistency, all built on our unwavering commitment to quality service — wherever you are and whatever tax services you need. We create highly networked teams who can advise on planning, compliance and reporting and help you maintain constructive tax authority relationships — wherever you operate. Our technical networks across the globe can work with you to reduce inefficiencies, mitigate risk and improve opportunity. Our 32,000 tax professionals, in more than 140 countries, are committed to giving you the quality, consistency and customization you need to support your tax function For more information, please visit www.ey.com/au. © 2014 Ernst & Young, Australia. All Rights Reserved. AU00002062 This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk.