Accounting management report writing analysis on: Foster Ltd. Annual report
Introduction
In this Report, Foster ltd annual report has been analyzed in order to answer the questions related to impairment. The external influences have been mentioned that drove Fosters to undertake an impairment test. The possible consequences have been mentioned, why other companies should go for impairment testing. In last, profit margins of both wine and beer segment have been calculated in order to know the performance of the Company in financial year 2010. At last, it can be say that the changing nature & volatility in the market of financial had resulted in the requirement of test of impairment.
Q.1.) why an impairment test is considered necessary?
It can be seen that the test of impairment is considered as necessary nowadays because economic environment is altering quickly & all companies are required to enhanced scrutiny by regulator & auditor & investors for timely & exact treatment of impaired assets. The changing nature & volatility in the market of financial had resulted in the requirement of test of impairment. Hence, Companies are required to examine intangible assets like goodwill, financial assets & investments for possible impairment on the interim basis. Goodwill plays a significant role in the total excellence of the Company (Levine, 1991). It can be seen that if the Company acquires some other Company then, goodwill will be a crucial factor for determination of acquisition value. It is very clear that, intangible assets impairment like goodwill is majorly significant for the accountant.
Question 2: Which assets are subject to impairment testing?
An asset is impaired if it is stated in the balance sheet at an amount that is more than the amount that will be recovered through the use of the asset in the business or its sale. It can be seen that in Fosters Ltd, the constant loss from the revenue in Australia, Europe and the US made the Company to take a quick takeover that requires the impairment test for the various number of Companies to value acquisition cost of the Foster (Bencivenga & Smith, 1991). It can be seen that the trade terms for the wine are usually among 30 to 135 days depending upon the kind of the business. In the Company, all types of receivables are routinely reviewed & a provision treatment for impairment trade receivable is started when there was objective proof that amounts would not be achievable as per the real terms of the transaction of the sales. The management of the Company writes off the bad debts when it is identified.
Q.3.) what were the external influences that drove Fosters to undertake an impairment test?
The external influences that drove Fosters to undertake impairment test like cost of financing, corporate cost, implementation cost and other costs. The company executives said in the interview that no any decision has been taken on the timing &structure of the demerger & the demerger was likely to be started before the calendar year 2011.The analysis will proceed as soon as possible and priority will be given to all the significant matters that are carefully examined and inconvenience to employees and customers will be minimized. During the period of evaluation the Company will constantly try to change the agenda and view the opportunities for the business improvement (Greenwood & Jovanovic, 1990). The Company announced a charge of non cash impairment for the wine that lies among $1.1 to $1.3. The business of the bear in Australia is the leader of the market & has robust leadership for continuing its records for earnings growth. It has been analysed that the wine business of the Foster’s was showing the signs for the improvement and constantly to be effected by the excess supply in Australia. Due to this, the charge of non cash impairment, the payment & timing of dividends for the next 12 months is predicted to change; in fact the entire amount got by the shareholders is estimated to be widely in line with the earlier years. The Company recognized a charge of non cash impairment in relation to wine assets lies between 1.1 & 1.3 billion before deduction of tax & 1.05 & 1.2 billion after deduction of tax. It has been analysed that charge of impairment will comprise the remaining goodwill write off in the business of the wine and changes in the forwarding values of current assets. It can be seen that the major reason for the charge of the impairment arrived because of higher rate of discount applied to the business of the wine & the implementation of higher assumptions of exchange rate. It can be seen that earlier the Company was using the common rate of discount and now implemented higher rate of discount for testing of wine impairment. The alteration in the assumptions of the currency was also considerably made the Company for impairment charge. The Company had done the forecast of the currency based upon the external variables. Due to this, the Company was required to accept the new rates for purposes of impairment testing. The Directors of the Company had announced that the charge of non cash impairment would not have adverse consequences under the banking facilities of Foster.
Q. 4.) What assumptions need to be made when undertaking an impairment test, and what effect would these have for evaluating the performance of Fosters and its competitors?
The various assumptions are there when undertaking an impairment test such as the Company must represent the carrying sum of intangible assets & goodwill with unmentioned useful lives distributed to the CGU, the Company must reveal information concerning basic assumptions created by the administration for determination of fair value and these basic assumptions can be increase in volume, rate of growth & operating margin and the explanation of the approach of the management for determination of the value attached to basic assumptions and to investigate whether value shows past experience or not (Cooley & Smith, 1998). It can be analysed that all basic assumptions such as carrying sum of intangible assets & goodwill given to the CGU and revealing of information on determination of market value of the asset would help the Foster Company in evaluating the performance of the competitor.
Q.5.)Specify which intangible assets of the cash generating unit (CGU) are subjected to the impairment test. What was the amount of the impairment loss for each intangible asset?
It has been observed that in fiscal year 2008, the Company Foster would introduce reporting of secondary segment along the lines of the product & as an outcome, the AAP BCS & the AAP wine cash generating unit are subjected to the impairment test. As per the AASB 114 Segment Treatment, the acquisition of the Southcorp goodwill was around 1.6 billion out of which 1 billion had given to the CGU AAP wine & 0.6 billion had given to the CGU AAP BCS. The distribution of goodwill of the Southcorp acquisition shows a proportion of integration synergies of the Southcorp predicted in the region of AAP from coordinating the BCS & route of the wine to back office, markets & warehousing activities (Rubin & Rubin, 2004)
Q.6.) Is the impairment loss material? How do you know?
It is very clear that the impairment loss is viewed in the recent period of income statement. The assessment of the impairment loss is done at every date of reporting as to find out is there any signal which earlier viewed that the impairment loss may not exist and decreased. It is very clear that the loss on the impairment can be reversed only if there is change in the prediction for determining the recoverable amount of the assets (Patton, 1987). It can be seen that the impairment loss viewed for goodwill are strictly restricted for reversed. It can be seen that the impairment loss is material. It has been observed that the charge of the impairment between 170 & 220 million was predicted to be known in the cash generating unit of AAP Wine showing the negative effects on the movements of the exchange rate and a decrease in predicted international sales of wine of Australia. It is analysed that the rate of exchange had moved considerably during the closing year of 2007 and beginning of fiscal year 2008. The Company was also expected to give 70 million non cash deficit to surplus bulk wine stocks of Australian. The surplus inventory of the wine shows a higher than estimated intake from vintage of Australian 2008, and the effect of the currency on the international demand for the wine of Australia.
Q.7.) Given the experience at Fosters, what are the possible consequences of other companies considering undertaking impairment testing?
It can be analysed that the undertaking of impairment testing would have a wider consequence on the financial reporting as compared to earlier. The objective of the impairment testing is to make sure that assets are recorded at no extra than their amount recoverable, either fair value minus cost to sale or their excellence in VIU (Maggio, Paul & Powell, 1983). It can be seen that if measures are greater than the amount of carrying, then assets are not impaired, whether the greater measure is market value minus cost to sale & Companies have no target of selling. It is viewed that CGU’s and assets require to be examined if there is indicator of impairment. Indicators include external and internal factors, external factors like adverse changes, reduction in the value of the market and internal factors like reduction in value of the cash flow and losses in which the Company operates. In the recent environment, significant indicator will be where the net assets carrying amount exceeds the market capitalization. This can also be a reason where Companies are required to search the indicator & therefore they are required to take full test of impairment. In general, various intangibles & goodwill are required to examine annually regardless of if there is the impairment indicator. It is very clear that goodwill in relation to current acquisitions is the probable asset for impairment in the recent market conditions. Cash Inflows & outflows are affected by the enhanced costs and should be updated sufficiently. In the Company like Foster all trade receivables are reviewed & a provision for the trade receivable impairment is started when there was evidence that sums would not be achievable as per the real terms of sales transaction. It has been analysed from the annual report of the Company that the wine business of the Foster was showing the signs for the betterment &improvement and due to this, the charge of non cash impairment, the payment & timing of the dividends for the coming next 12 months is estimated to change. This shows that, when the business of the Company needs improvement, then the Company would be liable to change the payment & timing of the dividend. It is analysed that the Company had made the estimation of the currency based upon the external factors and because of that the Foster was required to adopt the new rates for impairment testing. The possible consequences of other companies considering undertaking impairment testing are higher rate of discount applied to the business, implementation of higher exchange rate assumptions and higher estimation of the currency.
Q.8.) Calculate the profit margin (profit before tax/total revenue) for 2009 and 2010 separately for the:
Profit Margin = (profit before tax/total revenue)
2009 & 2010
Beer Segment & the Wine Segment
Wine Segment
Profit margin for the year 2009=PBT/Total Revenue
PBT for 2009 is = 304.1
Total revenue for 2009 is = 2144.8
Profit margin for wine segment for the year 2009 is = 304.1/2144.8
= 14.17%
Profit Margin for the wine segment for the year 2010 is = 221.3/1890.2
= 11.70%
It can be seen that Profit Margin for the Wine Segment had decreased in the financial year 2010 from 14.17% to 11.70% due to decrease in the PBT of the company in 2010 from 304.1 to 221.3.
Beer Segment
Profit margin for the year 2009=PBT/Total Revenue
PBT for 2009 is = 885.3
Total revenue for 2009 is = 2346.30
Profit margin for Beer segment for the year 2009 is= 885.3/2346.30
= 37.73
Profit Margin for the Beer segment for the year 2010 is= 922.1/2395.40
= 38.49
It can be seen that Profit Margin for the Beer segment had increased in the financial year 2010 from 37.23 to 38.49 due to increase in the PBT in 2010 from 885.3 to 922.1. The profit margin of the Beer segment in 2010 had improved as compared to Wine segment due to increase in PBT of the beer segment.
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