Assessment Solutions of Australian Stock Exchange: ACCTING7023

Assessment Solutions of Australian Stock Exchange: ACCTING7023

Part a Answer


The company that is available for the purpose of the study is Leighton Holding Limited. The company is listed company in the Australian Stock Exchange and annual report for the financial year ending 31st of December 2016 has been considered. In accordance with the note number three of the annual report of the company for the year ending 31st of December 2016, the impairment has been charged only for the three items. The three items are property plant and equipment and the intangibles assets and the trade debtors. The intangibles asset includes the goodwill and other intangibles on which the impairment has been charged. The property plant and equipment includes land, buildings, leasehold land buildings and improvements and plant and equipment. The trade debtor includes the amount that will be received from the trading vendors to whom the goods have been sold or the services have been provided. The impairment has been grouped under the head of the expenses. The amount of the expenses has been mentioned in the consolidated statement of profit and loss account. Thus, the company has tested for impairment in respect of the above assets.    


The procedures that have been adopted by the company have been listed in annual report of the company.

At first, in note number fifteen of the annual report of the company, the impairment testing of the goodwill has been detailed. For the purpose of the impairment testing, the cash generating units have been identified and the goodwill is allocated to each of the cash generating unit. The similar has continued with the $120.20 million of allocation of the goodwill to the cash generating units which have been identified in the construction segment. And the remaining amount of goodwill has been allocated to the other segments amounting to $350.70 million. After allocating the same, the recoverable amount has been identified in accordance with the provisions of the accounting standard 136 on the impairment of assets. Recoverable amount is calculated as the higher of the value in use and the price that is received on selling the particular item or the asset including the intangibles assets of the company. The value in use is the discounted value of the estimated future cash flows at present and including the value of the residual at present. For the purpose of the value in use the cash flow projections have been made using the company’s business plan and the forecasted projections (AASB, 2016). After intangibles the second assets which have been tested for the impairment is the trade debtor. The trade debtors have been tested for impairment in accordance with the credit risk. It means as to how far the debtors will be able to repay their obligations and met their liabilities. The ageing schedule has been made accordingly and the impairment has been made.

The third class of assets that have been impaired is the property plant and equipment and for that the value in use and the net selling price has been identified. The value in use has been calculated on the cash flows based on the business plan. Thereafter, the recoverable amount has been identified and the same has been compared with the carrying amount of the company and then it has been identified that the recoverable amount is higher and accordingly the impairment has not been booked.


Yes, the company has recorded the expenditure on impairment in the consolidated statement of profit and loss under the head of the Expenses. The expenses have been detailed in the Note number 3 of the financial statement of the company. The impairment on intangibles has been charged equivalent to the amount of ten million dollar. The amount of 3.5 million dollar has been charged as an impairment of trade debtors. During the year under consideration the company has not charged any impairment on the property plant and equipment. The basic reason for not providing for the impairment is that the company has identified that the recoverable amount of the assets including in the property plant and equipment is more than the carrying amount as on that date and thus no impairment has been charged. Thus, in this manner, the company has charged the impairment expenditures in the financial statements.


As per note number fifteen of the financial statements of the company relating to the intangibles of the company, following are the key estimates and the assumptions that have been considered for the purpose of conducting the impairment testing at the balance sheet date:

  • Three cash generating units have been identified for the intangibles of the company. These are construction, mining and mineral processing and services. For all the three cash generating units five key assumptions have been made for determining the recoverable amount of the intangibles.
  • These five key assumptions are market or segment growth, commodity price stability, inflation rates and foreign currency rates, discount rate and growth rate.
  • The first key assumption relates to the forecasts of the economy and how far the group is associated with the conditions that is prevalent in the market. It means whether the group is active and to what extent.
  • The second key assumption relates to the detailed analysis of the forecasts of the price of the products and the adjustment if any made by the group on the basis of the actual experience.
  • The third key assumption relates to the inflation rates and the foreign currency rates. The forecasts that are estimated by the company in their business plan totally depend upon the inflation rates and currency rates. It is because in case there is major effect from foreign currency for instance then the company will have to consider the provision for hedging of the transactions for saving the lost money or the amount.
  • The fourth key assumption relates to the discount rate which the group has adopted for discounting the estimated cash flows for the future years in order to arrive at the present value. The assumption regarding discount rate also includes the risk factor that is present in the market as well as in the country in which the group is operating including the industry also.
  • The fifth key assumption relates to the growth rate. Growth rate is the rate at which the company’s net revenue and net worth will be growing on year on year basis. The growth rate is assumed by taking into consideration the market conditions that is prevalent in the organization and the business plan that has been laid down by the company in its annual report for the concerned year.       

Apart from these assumptions, the company has also included the assumption on the basis of the risk factors like liquidity risk and credit risk and accordingly the provision for the impairment of debtors have been made in case the debtors are not able to pay and correspondingly the credit risk is identified as high.

Thus, in this way, the aforementioned key assumptions and estimates have been considered for impairment testing.


Yes, I have identified some sort of subjectivity in the impairment testing process. It is because the company has not impaired any part of the property plant and equipment during the year under consideration and has mentioned that the recoverable amount is higher than the carrying amount and hence no impairment expenditure has been charged to statement of the profit and loss account.

This subjectivity has overvalued the assets of the company and thus have increased the net worth of the company which otherwise should have been decreased by the amount of the impairment charged if any.


The impairment testing that the company has adopted and followed is very interesting. It is because of the five key assumption and the estimates that the company has made in its annual report for the testing of the impairment and mainly the intangibles. Secondly the effect of each of the key assumption have been detailed which have given the more insight of the subject. Lastly, the company has mentioned the three cash generating units and has followed the provisions of the accounting standard only.


The new insights that have been gained through the analysis of the annual report are that the key assumptions and the estimates shall be made whenever the asset is being considered for the test of the impairment. Without the proper estimates the impairment testing could not be made in an effective and efficient manner.


Australian accounting standard 13 on the Fair Value Measurement prescribes how the fair value shall be measured (AASB, 2016). The fair values have been determined either with the use of the quoted market price or the net present value of the estimated future cash flows that have been made by the company. The company has mentioned the same in the note number 35 of the annual report of the company and accordingly have divided the financial instruments in accordance with the three levels and then the fair value have been measured.

Part b Answer

Economic reality refers to financial reality in relation to the statement mentioned by IASB meeting head. Every company should bound by the accounting standard issued by IASB and should follow the accounting treatment mentioned in the accounting standard so that their financial statements represent the true and fair view and they can be comparable as economic level and can be used for making decisions (Ely, 2015). The accounting standard for leases before changes suggest recording of operating lease liability as contingent liability instead of actual liability which result in showing of high net worth of the companies and high value of their share price. This fact hurt the economic reality feature of the financial statement as values of the net asset are manipulated by the company. Thus, the belief of the chairperson becomes true in relation to economic reality of the companies and their net worth (Day and Stuart, 2013).

The chairperson has mentioned in their speech that the debts shown outside the balance sheet are 66times of the total debts shown by the company in their balance sheet as liability. The major reason for this statement is that the leases are categorized in two major parts as financial lease and operating lease. The operating lease will not find any place in the balance sheet in the accounting treatment as mentioned in accounting standard before changes (Singh, 2011). The companies are majorly entering into operating lease contracts because of this accounting treatment as directed by accounting standard and showing their liabilities towards operating lease as contingent liability which is mentioned as notes to balance sheet. And with the increase in no of such contracts enhances the accumulated liabilities shown as contingent liability which will become around 66 times higher than actual liabilities of the company at a point of time (Ma, 2011).

The statement said by Chairperson regarding no playing fields available for Airline companies as they will not take advantage from the loop holes which were available in prior accounting standard for leases of recording the operating leases in financial statements as contingent liability (Singer, 2017). Some of the new airlines will not take advantage of this as taken by major airlines player in the old accounting standard on leases. Also, some of the financial statements of the airline companies have the old treatment and their financial statements cannot be used making comparison and analytical review for taking certain major decisions which can be helpful in making opinion about the airline company or which help in attracting the investors. Thus, airlines companies cannot play with their contracts treatments about lease contracts and manipulate the financial statements (Gross, 2014).

The statement mentioned by the chairman of IASB regarding the popularity of the new accounting standard on lease is seems to be true as the one of the foremost reason for the same is that after the changes the companies who are taking advantage from the missing facts in the old standard will not able to take advantage (Lim, 2014). The companies will not able to fooled their investors and management by showing the short term liabilities as contingent liabilities. Second fact is that the cost and man power in terms of professional skills are required for implementation will be high and the company owner will resist for the implementation of the same in the accounting treatment. Also, rental contracts will gain more popularity than the lease contracts. After implementation of new standard other options apart from lease contracts become more lucrative for companies as they can have more net worth in other options (Knubley, 2010; Moore and Nagy, 2013).

The head of IASB has said the statement of having better investment decisions and management decisions with the aim of having new developments in the field of the lease accounting and their presentation. The statement has been said because the new changes in accounting standard create more clarity in the presentation of leases in the financial statements of the company. Recognition of Operating lease in the balance sheet face help in clear picture about the actual net assets position of the company which is the major base for investors while taking decisions regarding in investment to be made in the company. Also in the same manner while making the decision of buy or lease by the management of the company, the management is mainly looking for earnings in relation to net assets employed in the company which is accurate and shows actual after the new changes of accounting standard. Thus, the new standard motivates and encourages better investment decisions and management decisions with more transparency (FASB, 2016).


AASB, (2016), “Impairment of Assets” available at  accessed on {23-01-2018}.

AASB, (2016), “Financial Instruments: Recognition and Measurement” available at accessed on {23-01-2018}.

Company Official Website, (2017), “Annual Report 2016”, available on  accessed on {23/01/2018}.

Day, R. and Stuart, R., (2013), “New lease accounting proposal: what it means and what companies can do to prepare.” Financial Executive, 29(6), pp.11-13.

FASB, (2016), “New Guidance on Lease Accounting” available at  accessed on {23/01/2018}.

Ely, K.M., (2015), “Operating lease accounting and the market’s assessment of equity risk”. Journal of Accounting Research, pp.397-415

Gross, A.D, (2014). “The path of lease resistance: How changes to lease accounting treatment may impact your business”. Business Horizons, 57(6), pp.759-765.

Knubley, R., (2010). “Proposed changes to lease accounting”. Journal of Property Investment & Finance, 28(5), pp.322-327

Lim, S.C., (2014), “Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings”.

Ma W, (2011), “Impact on Financial Statements of New Accounting model for leases” available at accessed on {23/01/2018}

Moore, S. and Nagy, A., (2013), “CONTRACT STRUCTURING UNDER THE NEW LEASE ACCOUNTING RULES: THE CASE OF CUSTOM DESIGN RETAIL, INC.” Global Perspectives on Accounting Education, 10, p.81

Singer, R, ( 2017), “Accountinq for Leases Under the New Standard, Part 1: Definition and Classification of Leases and Lessee Accounting”. CPA Journal, 87(8).

Singh, A.,( 2011). “A restaurant case study of lease accounting impacts of proposed changes in lease accounting rules”. International Journal of Contemporary Hospitality Management, 23(6), pp.820-839.

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