Financial Accounting- JB HI-FI Limited - Assessment Answer

Financial Accounting Assignment

Assignment Task

Introduction

The assignment below analyses the latest financial report of JB-hifi limited, an ASX listed company in respect of revaluation and de-recognition of property, plant and equipment and revaluation of other non-current assets as well as the intangible assets and goodwill of the company.

Items of property, plant and equipment revalued by the Entity in the latest annual consolidated financial report 2015 and previous years are as referred to in the current report. In 2015, plant and equipment was revalued downwards to the tune of $ 1,119,000 on account of impairment loss.

The impairment exercise has been carried out each year by the company. It is difficult to obtain separate amount for depreciation and amortization on a perusal of only the current year report as details are provided for clubbed depreciation and impairment for previous years before 2015. In 2013, the total amount accumulated as depreciation and amortization was $ 93,096,000; in 2014 it was to the tune of $ 113,223,000. In 2015, the total accumulated amount was $ 126,000,000. No impairment was done in 2014 as per the current report.

This information has also been provided segment wise for the years 2014 and 2015. In 2014, the depreciation and impairment for Australia segment was $ 33,304,000, while for the New Zealand segment it was 2,226,000 summing up to a total of $ 35,530,000. In 2015; it was $ 37,895,000 for Australia and $ 2,348,000 for New Zealand summing up to total of $ 40,243,000.

The summary of significant accounting policies, part m provides details of the methodology adopted for the impairment of assets by the company. As per the note, Goodwill as well as tangible assets like property, plant and equipment are assumed to have an indeterminate useful life. These are not amortized and are subject to impairmentby the company. This exercise is also done where change in events and circumstances suggest the need for impairment calculation The test is also carried out where change of events or circumstances indicate that the amount that is being carried cannot be recovered.

Loss on impairment is identified when the asset’s book value exceeds the amount it can be recovered for. The recoverable amount is taken to be the higher of the item’s fair value less selling costs and the depreciated value on date as in use. For calculating the impairment charge, the items of assets are grouped to the level so as to be able to separately identify the associated independent cash inflows from the asset. Non-current assets including plant and equipment that suffered impairment in the previous years are monitored annually for possibility of reversal.

Thus the revaluation of assets has been attempted by the company in 2015 and other previous years so as to accurately present the true value of these assets at fair price devoid of the depreciation charge that represents the use and normal wear and tear of the asset (plant, property and equipment in this case). To be noted that revaluation implies an upward as well as downward revision in the book value of assets is identified in the income of the current year in which the impairment took place. Thus, JB is complying with AASB 136 dealing with impairment of assets in this regard.(Jbhifi.com.au, 2016)

The summarized accounting policies used for the financials in the annual report 2015 mentions in note s that an items of non-current assets ought to be de-recognised whether on sale or where it is certain that may be of no further use to the company. The profit or loss on such an event is basically the difference between the sale receipts and the amount at which the asset was being carried which is ultimately charged or recognized in the income statement of the concerned year.

A perusal of the financials of the company for the year reveals that disposals to the tune of $ 4,530,000 took place during 2015 and $ 991,000 in 2014. The proceeds from the disposal of plant and equipment are mentioned as $ 496,000 in 2015 and $ 674,000 in 2014 in the consolidated cash flow statement under the Investing cash flows of the company. Other important point to be noted is that as per the report no asset has been retired due to the establishment of the fact that the asset may be of no future benefit to the company.

The net loss on the sale of non-current assets (as mentioned in the reconciliation statement of operating cash inflow to the income for the year) is $ 997,000 for 2015 and $ 382,000 for 2014 andhas been charged to the income of the respective years in the year which the assets were disposed of.

Though the computations for the net loss on each category or asset group has not been included in the notes, the computation is well in compliance with the relevancy regulations particularly AASB 116 dealing with property, plant and equipment. As such the carrying amount of all items of property, plant and equipment that were derecognised as per the conditions specified for them to be derecognized are treated accordingly. (To be noted that there was no recognition as per criteria 2 dealing with DE recognition when expected future economic benefits were exhausted as per the annual report in the current year as well as relevant previous years. The gain or loss due to the DE recognition is recognised as profit or loss when expected future economic benefits were exhausted. To be noted that as per the standard, the gain is to be classified as income rather than revenue. However, in JB case, the disposals have resulted in a net loss to the company in both the years.

The company has disclosed in respect of each group of property, plant and equipment, the basis of measurement, methods of depreciation, schedule of depreciation rates with useful life of each asset group, the carrying amount grossed and the accumulated depreciation duly reconciled with the opening and closing balances of the mentioned periods.(Jbhifi.com.au, 2016)

details of the type and number of assets regarded by JB as intangible was $ 84,541,000 in 2015 and $ 85,218,000 in 2014 as per the balance sheet of the company. The other intangibles recognised by the company include brand names and trademarks, profit sharing rights and premium on location. The company considers the technical and commercial life of these for the determination of useful life and indefinite life. These assets are not subject to amortization and are annually reviewed for impairment (as discussed in 1 above) and assessment of the indefinite useful life assumption. The computations have been done asper the Australian cash generating unit formula as the management intends to utilise these for the foreseeable future. The recoverable amount is calculated on the basis of value in use. These assets have been shown in Note 14 for both the years at their opening and closing book amounts. Brand names $ 43,094,000, location premium $ 2,388,000 and profit shares $ 3,542,000 in 2014. The carrying amount for these intangibles has not changed for the current year 2015.

The accounting treatment adopted for acquisition of goodwill which is also an intangible asset is mentioned in the report. Goodwill is the excess of the cost at which a business was acquired over the company’s share in the net identifiable assets computed at fair value of the business on the acquisition date. Goodwill arising on acquisition of associates is disclosed as part of investment in associates. Goodwill is monitored for impairment annually or before if required due to change in circumstances. The profit or loss on the sale of a business include goodwill as well. It is assigned to the cash-generating units on the basis of the expected benefit of the synergy due to acquisition. The CGUs are also tested for impairment as described above.

Where the amount expected to be recovered from the CGU is less than the amount at which it is being carried, impairment loss on goodwill is assigned to the CGU first and subsequently to the other assets on a pro rata basis. It is recognised immediately to the income statement of the current year and will not be reversed in the next year. On disposal, the attributed goodwill is included for calculating the profit or loss on the sale of the CGU unit. The recoverable amount is calculated on the basis of value in use.

Goodwill as bifurcated in note 14 of the report for the CGU is as follows:

JB Australia $ 13,724,000 for both years

JB New Zealand $ 13,669,000 for 2015 and $ 14,346,000 for 2014

Impact records $ 1,727,000 for both years and

JB solutions $ 6,397,000 for both years

The recoverable amount was calculated with a discount rate of 11% for all the above except for New Zealand where it was 11.5%. The discount rate was calculated on the basis of the company’s weighted average cost of capital. Goodwill was $ 36,194,000 in 2014 and $ 35,517,000 in 2015.(Jbhifi.com.au, 2016)

Items of non-current assets revalued by the Entity in the latest annual consolidated financial report 2015 and previous years are as referred to in the current report.The instances where the group non-current assets were revalued downwards are basically the same as mentioned in 1 above. No case of upward revaluation was noted in the annual report for the company. In addition, leasehold rights have also been tested for impairment revaluation.

The impairment exercise has been carried out each year by the company. In 2015, plant and equipment was revalued downwards to the tune of $ 1,119,000 on account of impairment loss. No impairment was charged to leasehold assets during the year.

The summary of significant accounting policies, part m provides details of the methodology adopted for the impairment of assets by the company. As per the note, Goodwill as well as noncurrent assets like property, plant and equipment are assumed to have an indeterminate useful life. These are not amortized and are subject to impairmentby the company. This exercise is also done where change in events and circumstances suggest the need for impairment calculation. The test is also carried out where change of events or circumstances indicate that the amount that is being carried cannot be recovered.

Loss on impairment is identified when the asset’s book value exceeds the amount it can be recovered for. The recoverable amount is taken to be the higher of the item’s fair value less selling costs and the depreciated value on date as in use. For calculating the impairment charge, the items of assets are grouped to the level so as to be able to separately identify the associated independent cash inflows from the asset. Non-current assets including plant and equipment that suffered impairment in the previous years are monitored annually for possibility of reversal.

Thus, the revaluation of assets has been attempted by the company in 2015 and other previous years so as to accurately present the true value of these assets at fair price devoid of the depreciation charge that represents the use and normal wear and tear of the asset. To be noted that revaluation implies an upward as well as downward revision in the book value of assets is identified in the income of the current year in which the impairment took place. Thus, JB is complying with AASB 136 dealing with impairment of assets in this regard.

To be noted that depreciation charge is not included as revaluation as the charge is assumed to be due to timing and normal wear and tear. No other revaluation has been noted in any other non-current asset for the company as revealed from its latest annual report. The revaluation on account of impairment as discussed above is in compliance with the accounting standards applicable in this behalf in Australia as the company is listed on the ASX stock exchange.(Jbhifi.com.au, 2016)