Airline Industry And Impact Of Deregulation -Myassignmenthelp.Com

Question: Discuss About The Airline Industry And Impact Of Deregulation? Answer: Introducation AWB Limited was the major organization in grain marketing that was based in Australia. Formerly the company was the Australian Wheat Board that was regulated by the government. Thereafter it transformed itself into the public listed and integrated agribusiness. It held the monopoly position as it was the only grains and wheat exporter through single desk system. For this report the annual report of AWB Limited for the year ended 30th September 2009 is taken into consideration (AWB Limited 2018). From the annual report of the company it is identified that goodwill has been tested for impairment during the year. The carrying value of the non-current assets are considered for impairment test while changes or events in the circumstances signifies that carrying value of the asset may not be recovered. However, the asset from which the large cash flows cannot be generated independently then the recoverable amount for the cash generating unit (CGU) to which the asset is included is determined (Amiraslani, Iatridis and Pope 2013). While any significance of impairment is there, the CGU or the assets value is adjusted to the recoverable amount. Further, the goodwill is tested for the purpose of impairment more frequently or annually if any changes or events under the circumstances signify that carrying value of the asset may get impaired. For conducting the impairment test, the goodwill that is acquired in the business combination from the date of acquisition is allocated to the groups CGU that are projected to be benefitted from combination synergies (Edeigba and Amenkhienan 2017). This will be irr espective of the fact that of whether the liabilities are allocated to the units or not. However, AWB Limited allocated the goodwill to Stocklease Pty Ltd Temora Grains Pty Ltd Landmark Financial Services Landmark Copeland Medway Pty Ltd Landmark Rural Services Further, the impairment loss is determined through assessment of recoverable amount of CGU under which the goodwill is related (Cotter 2012). While the CGUs recoverable amount is lower as compared to the carrying amount. The amount of looses from impairment that are recognized are not reversed subsequently. The company recorded $ 119,715,000 as impairment loss under the income statement on account of goodwill for the year ended 30th September 2009. The financial statement preparation in accordance with the Australian Accounting Standards needs of using some critical estimates for accounting. It further requires the management to apply the judgements while applying the accounting policies of the company (Ifrs.org 2018). Key estimates used by the company for impairment testing is that the asset from which the large cash flows cannot be generated independently then the recoverable amount for the cash generating unit (CGU) to which the asset is included is determined. While any significance of impairment is there, the CGU or the assets value is adjusted to the recoverable amount. The carrying value of the long term asset are considered for impairment test while any changes or events in the circumstances signify that the carrying value cannot be recovered. Further, for estimating the provision of impairment is recorded while objective evidence is there that the company will not be able to collect the entire amounts due with regard t o the actual receivable term (Kabir and Rahman 2016). However, the actual result may vary from the estimates. Therefore, the underlying assumptions and estimates are reviewed on the ongoing basis. Further, any revisions to the accounting estimates are recorded under the period which is related to the revision of the estimates and the future affected period, if any. AASB 136 on impairment of asset states that this standard allows the creative accounting treatment by the user. It further seeks the subjective interpretation of the user that can be complied and adaptable by the requirement of the company as well as the management (Ramanna and Watts 2012). The term subjectivity stands for the users perception. As it can be identified the annual report of AWB Limited that the impairment test is conducted on the basis of certain estimates and judgements, there always exist the involvement of users subjectivity. Further, the goodwill is tested for impairment more frequently than annually while any significance is there that the recoverable amount will not be recovered. Therefore, the management can carry out the test during recession or economic downturn for showing more amounts on account of impairments loss and recording lower profits in the income statement of the company (ztrk and Seremeli 2016). This can be further established with the fact that w hen the fair value or recoverable amount is not determinable from the active market the recoverable amount is computed and assigned to CGU on the basis of judgements and estimates. The interesting fact of impairment that found while going through the annual report of AWB Limited is that the AASB 8 which is a disclosure standard have no effect on the amounts recorded in the financial statement of the company. However, it may have indirect effect at the level at which the goodwill is considered for impairment. Further, the amendments may impact the segment disclosure of the company. Further, the difficult part is that if the goodwill is considered for impairment test at more frequently than annually then which indication is to be given maximum importance for the purpose of conducting the test. In addition to these, another difficult part is that more than one recoverable values are determined based on the active market then which one is to be taken into consideration for computing the impairment test. For instance, if the value of business goodwill to one purchaser is $ 600,000 and to another is $ 625,000 then which one is to be considered is a matter of question . Some new insights of impairment gained while going through the annual report of AWB Limited. The 1st one is that the impairment loss for goodwill can never be more than its carrying value that is recorded in the financial statement of the company as goodwill. Further, the amount of impairment loss = value of the assets carrying amount recoverable value of the asset. Another new insight gained is that the impairment test is an ongoing process and the management always have to check on any indication that may signify that the asset may get impaired. The estimated fair values of the fixed assets are based on discounted value of the projected future cash flows. For fixed assets the valuation is made on independent basis and for other assets various factors like sales value of the asset as per the sales agreement, value of the asset as per the active market valuation and other available information are taken into consideration. Further, for the fair value measurement, the company follows IFRS 13 (Rennekamp, Rupar and Seybert 2014). The chairman of the IASB believes that the new change in the leasing agreement of the company will be making the companies more competitive in the business (Danjou and Walton 2012). The new standard is expected to bring about a change in the disclosures which will be the aspects more of making it more realistic in nature. As per the analysis of the companies around the world have around 3 trillion worth of leases which are widely spread across airline business, retail business and shipping business. The business under current standard on leases considers and labels their leases as operating leases. As per the estimates around 85% of the leases are labelled as operating leases which do not show any disclosures in the books of finance (Agrawal et al. 2012). These operating leases will be definitely be creating real liabilities, hence the chairperson is of the opinion that if the current accounting standard is allowed to operate than the economic reality of the company will not be revea led (Altamuro et al. 2014). As per the situation most of the business used the advantages of the current standard on lease disclosures which allowed these companies to report a lot lesser amount of leases in the financial statements as most of these leases were labelled as operating leases by these companies which enabled them to show a favourable balance sheet. Most of the companies would then show a small part of the leases which is considered healthy for the business in the balance sheet and the rest of the leases would be off balance sheet. As per the chairperson of the IASB, some of the companies which have significant leasing commitments but are still able to show a lean balance sheet due to the current standard in force (Colla, Ippolito and Li 2013). This is the reason why the company may have more than 66% of lease liability as compared to the debt which are reflected in the balance sheet. The chairman of the IASB is under the impression that the airline companies under the former standard of leasing were not on the same ground in terms of competition wise. The uses of leases by companies like airline industry, retail industry and shipping industry as mentioned by the chairperson of the IASB (Choi, Peasnell and Toniato 2013). An airline which leases more of its aircrafts will naturally have a better balance sheet than a company which is in the habit of purchasing these aircrafts. The balance sheet and financial obligations of the company which has purchased may not be that good; however the situation in the case of a company which leases the aircrafts which the business uses may not be in a better position either (You 2017). The reason for this is because that such companies recognizes the leases as operating leases and the airlines business shows a favourable financial statements which in reality may not be that good in terms of debts of the company. As per the new standard which is going to be introduced is going to have massive changes in how leases are treated and also on the disclosure requirements of the company. The new standard on leasing will ensure that all types of leases are recognized and recorded in the financial statements. In other words the new standard will be replacing and resolving the problems which were associated with the leasing agreements (Jennings and Marques 2012). Moreover the accounting under the new lease will be showing more economic reliability. The reason due to which the standard will be unpopular among the most of the listed companies is because this will change the environment and the companies will be needed to survive this sort of change. Moreover the standard robs them of the advantage which was provided earlier by the former standard. In addition to this the companies will be facing an increase in costs which such companies have to adjust to due to the introduction of the new standard (Morre ll 2013). The chairperson is of the opinion that the new standard will definitely increase the costs of the company but such an increase in the cost is worth the accountability and efficiency which the new standard on leasing is going to bring in the disclosure of accounts with concern to leases. As per the chairperson of IASB the new standard will be bringing better informed decision making process due to the points given below: Firstly the new standard is going to make all leases qualified to be recorded in the financial statements which will give the shareholders a better idea of the total debt which is taken by the business (Williams 2017). Usually the leases which are taken by the companies are always attached to certain risks. Thus the investors will have an opportunity to analyse the risks of the business before investing in the business. Reference Agrawal, V.V., Ferguson, M., Toktay, L.B. and Thomas, V.M., 2012. Is leasing greener than selling?.Management Science,58(3), pp.523-533. Altamuro, J., Johnston, R., Pandit, S.S. and Zhang, H.H., 2014. Operating leases and credit assessments.Contemporary Accounting Research,31(2), pp.551-580. Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR). AWB Limited., 2018. [online] Available at: https://awblimited.com/ [Accessed 26 Jan. 2018]. Choi, Y.S., Peasnell, K. and Toniato, J., 2013. Has the IASB been successful in making accounting earnings more useful for prediction and valuation? UK evidence.Journal of Business Finance Accounting,40(7-8), pp.741-768. Colla, P., Ippolito, F. and Li, K., 2013. Debt specialization.The Journal of Finance,68(5), pp.2117-2141. Cotter, D., 2012.Advanced financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall. Danjou, P. and Walton, P., 2012. The Legitimacy of the IASB.Accounting in Europe,9(1), pp.1-15. Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate Transparency and Accountability: Evidence from New Zealand. Australasian Accounting, Business and Finance Journal, 11(3), pp.3-19. Ifrs.org., 2018. IFRS. [online] Available at: https://www.ifrs.org/ [Accessed 26 Jan. 2018]. Jennings, R. and Marques, A., 2012. Amortized cost for operating lease assets.Accounting Horizons,27(1), pp.51-74. Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting Economics, 12(3), pp.290-308. Morrell, P.S., 2013.Airline finance. Ashgate Publishing, Ltd.. ztrk, M. and Seremeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in Turkey. Business and Economics Research Journal, 7(4), p.143. Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in required goodwill impairment.Review of Accounting Studies,17(4), pp.749-780. Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment.The Accounting Review,90(2), pp.739-759. Williams, G., 2017.The airline industry and the impact of deregulation. Routledge. You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline Companies (Doctoral dissertation, Auckland University of Technology).