Report Writing on ‘Financial Reporting Disclosures in the Australian CorporateSe
ID: 2361927 • Letter: R
Question
Report Writing on ‘Financial Reporting Disclosures in the Australian CorporateSector’
One member of the Board of Directors of Coca Cola Amatil (CCA) Ltd came across a general press release of the Australian Securities and Investments Commission (ASIC). (Please see the ASIC and CCA (2010) reports attached). In the most recent Board meeting, she expressed her concerns regarding ISSUE NUMBER 4 of the focus points of ASIC (ASSET IMPAIRMENT) because she remembered a heated discussion around asset impairment and CGUs in one of the last board meetings where decisions were made to ‘support’ the company’s accounting profit. Now she is anxious about the company’s reputation if ASIC reviews the CCA (2010) financial reports and makes any non-compliance with the accounting standards public (e.g. by referral to the Financial Reporting Panel of ASIC). The Board shares her concern and decided to commission a business report with the Chief Financial Officer (CFO). In the report, the CFO is expected to investigate each of the points mentioned by ASIC in regards to asset impairment and related disclosures by comparing in details the current reporting practice (based on the 2010 annual financial report of CCA Ltd) with the
specific requirements of the respective accounting standards.
In particular,
*write-downs of indefinite life intangible assets (including goodwill),
*impairment testing, including the identification of cash generating units, the allocation of goodwill to cash generating units and the use of unrealistic assumptions to calculate recoverable amounts (including discount rates and expected growth rates),
*disclosures concerning impairment testing, including key assumptions, goodwill allocated to each cash generating unit, and sensitivity analysis for changes in key assumptions.
Required;
You are the CFO and you are required to write a business research report for the Board of
Directors of CCA Ltd on the following:
(a) the requirements according to the respective accounting standards related to each of the above listed items,
(b) the current accounting practice of CCA Ltd. regarding each of the above listed items,
(c) any potential gap between the CCA’s current practice and the accounting standards requirements,
(d) recommended actions to satisfy the potential ASIC reviewers.
Asset impairment (Issue No.4)
For the financial reports reviewed, ASIC found that write-downs were less than one per cent of the totalvalue of indefinite life intangible assets (including goodwill) for the 12 months to 31 December 2010. For the12 months to 30 June 2010, the write-downs were 6%.
We continue to identify issues with impairment testing, including the identification of cash generating units,the allocation of goodwill to cash generating units and the use of unrealistic assumptions to calculaterecoverable amounts (including discount rates and expected growth rates).
Cash generating units should be determined in accordance with AASB 136 'Impairment of Assets' andshould normally be consistent from year to year. Goodwill must be allocated to the units expected to benefitfrom the goodwill at the time of acquisition.
A number of entities omitted material disclosures concerning their impairment testing, including keyassumptions, goodwill allocated to each cash generating unit, and sensitivity analysis for changes in keyassumptions.
CCA Annual Report 2010 http://ccamatil.com/InvestorRelations/AnnualReports/2010/2010%20Annual%20Report.pdf
AASB 136
http://www.aasb.com.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
Explanation / Answer
There have been an unprecedented number of natural disasters across our major markets over the last six months. The floods in Queensland, Victoria and NSW, Cyclone Yasi and the Christchurch Earthquakes have devastated communities with over 4,000 of our customers affected by these events. CCA has deployed teams to provide assistance to those affected and provided customers with extended terms and special offers for restocking CCA product. In addition, CCA has donated beverage and food products to communities and emergency services in need and we are matching all employee donations to the flood relief program. Our sympathies go out to all of those affected by these disasters and we will continue to provide assistance into the future.