Changes to the growth and discount rates and asset impairment

Purpose With timeliness and measurement of asset impairments as well as management opportunistic behaviour being topical, since the issuance of Australian Accounting Standards Board (AASB) 136, this study aims to examine whether assumptions about growth and discount rates made about asset recoverable amounts determine asset impairments. Design/methodology/approach This study uses a sample of 450 firm-year observations representing 133 Australian listed firms from 2015 to 2018. An estimation model is used where asset impairments is the dependent variable, growth and discount rates are the variables of interest and several impairment indicators are included as controls. Findings The results show that the decrease in growth rate but not the increase in discount rate affects the recognition of large asset impairments, where firms decrease the growth rate in the year of recognition. A change in discount rate affects asset impairments only when it is higher than the industry average. Hence, the growth rate is the management’s tool of choice in the recognition of asset impairments. Originality/value This study provides additional insight into how AASB 136 is used in practice. This includes investigating the tools used by firms in the calculation of asset recoverable amount and whether firms provide important information, as a part of disclosure. The results are of interest to investors and policymakers because they highlight the need for more restrictions around growth rate assumptions and less variation in disclosure.

First Time Reporting of Key Audit Matters (KAM) by Malaysian Auditors

This paper reports on the early first cohort of Audit Reports issued by external auditors in response to the requirement of ISA 701, Communication of Key Audit Matters (KAM) in the Auditor’s Report, which became effective for audits of financial statements on or after 15 December 2016. Based on 15 Audit Reports of financial statements for year ending 31 December 2016 available in early 2017, this paper reports that only one out of 15 had a disclaimer and no KAM reported for the audit as ISA 701 specifies that no KAM should be reported following a disclaimer. The other fourteen audit reports were all clean reports with the number of KAMs reported ranging from one to five. The highest most significant audit matter reported was revenue recognition and inventory valuation followed by asset impairments of both tangible and intangible assets. Justifications by auditors of matters considered most significant ranged from no additional information (it is most significant because it is material) to articulate explicit link with business model and industry specific factors thus compliance with disclosure of KAM may be compliance de jour rather than compliance de facto. Despite the additional requirement to disclose KAM, this study finds no evidence of audit delays. All KAMs disclosed are elaborations of and related to a client’s significant accounting policies choice. From KAM disclosures, readers of audit reports now are informed of the audit risk areas where estimates were made and judgments prevailed challenging auditors to exercise greater skepticism. This preliminary finding provides pointers for greater research into the cost benefits and communicative value of KAM disclosure in the Audit Reports of Listed companies in Malaysia.

Auditor Industry Specialization and Accounting Estimates: Evidence from Asset Impairments

SUMMARY This study examines whether auditor competencies developed through industry specialization play a role in monitoring client firms' accounting estimates. Specifically, I focus on asset impairment decisions as a key accounting estimate given managers incentives to hide these losses and the PCAOB's criticisms of auditors' testing in this area. Impairments examined in this study relate to goodwill and intangibles, other long-lived assets, and investment securities. Using the portfolio share approach to measure office level specialization, I find that client firms engaging industry specialist auditors exhibit a greater propensity to record, and record larger, impairments relative to client firms engaging auditors with less specialization. The results also demonstrate that impairments recognized by clients of specialist auditors are more positively associated with concurrent bad news signals, suggesting that these losses are recognized on a more timely basis. This evidence enhances our understanding of the factors affecting auditors' ability to evaluate complex accounting estimates. Data Availability: Data are available from the public sources cited in the text.

Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre- and post-IFRS adoption

PurposeThis paper aims to evaluate the relation between acquisition premiums and amounts recognised as identifiable intangible assets (IIAs) in business combination, in periods before and after transition to International Financial Reporting Standards (IFRS).Design/methodology/approachThis is an empirical archival research using data from business acquisitions.FindingsIn the pre-IFRS period, there is evidence of firms recognising IIAs in business combinations having higher acquisition premiums. This association of acquisition premiums and IIAs ceased with transition to IFRS, notwithstanding the relative latitude provided in accounting standards for the recognition of IIAs.Research limitations/implicationsThis paper complements the study by Su and Wells (2015) which founds little association between IIAs and performance subsequent to business acquisitions prior to transition to IFRS. The results here suggest that it is attributable to overpayment. Problematically, the incentives for opportunism remain and an issue requiring address is whether alternative sources of accounting flexibility in relation to business combinations exist, such as goodwill which is no longer subject to mandatory amortisation.Practical implicationsThe results are consistent with accounting opportunism and suggest “overpayment” and accounting flexibility having an economic consequence. This would be expected to result in asset impairments in subsequent periods; however, there is little evidence of this occurring.Social implicationsThese results have relevance for regulators concerned with the operation of regulation relating to business acquisitions (AASB 3) and intangible assets (AASB 138).Originality/valueThis paper complements a number of papers concerned with the recognition of IIAs in business combinations and confirms what many researchers in the area typically assume (triangulation).