Case Study On Financial Accounting: Assessment Answer

Challenging and understanding the assumption of the management relating to tariffs and volume used to determine the costs accrual by: sample basis including calculation of volumes in to sales, purchases and other systems as well as testing the control system within the departments (Moles, 2011).

Prices are compared applied by the distributors with the current tariff tables

Critically evaluating the methodologies of management and their key assumptions are utilized in the valuation model that are described in the Note 19

The identification of the cash generating unit includes allocation of property, plant and equipment and associated allocation and identification of the cash flow for the purpose to assess the recoverable amount of cash generating units (Paramasivan and Subramanian, 2009).

The assumption for the long term growth rate in forecasting the flow of cash by comparing them to the historical results, industry and economic forecasts

The applied discount rate

The appropriateness of the unbilled cost accrual s based on the calculation of the expected accrual to utilize the supplied information. The finance department evaluates the models of cash flows and forecasting the flow of cash as well as assessing the historical accuracy (Spiceland, Sepe and Nelson, 2011). The sensitive analysis helps to determine and evaluate the key drivers of the growth rates uses in discount rate and cash flow forecast. The sensitive analysis includes key assumptions that either collectively or individually required for the assets to be impaired and likelihood of movement in the arising key assumptions (Stittle and Wearing, 2008). The annual report of the company shows the intangible assets in the balance sheet at the end of the financial reporting period.  The financial reports is prepared as per the AASB standard.  

The intangible assets of Medibank  is also shown in the balance sheet of the company. The disclosure of intangible assets includes:

Goodwill

Goodwill is estimated as described in the Note 3(f)(x) of the annual report. The intangible asset includes goodwill on the acquisition of the subsidiaries. It is not amortized but it is evaluated for impairment and it is carried at the cost less the impairment losses (Wolf, 2008). Losses and gains on the disposal of an organization includes carrying amount of the goodwill related to the company sold. The goodwill is allocated to the CGUs for the objective of the of the impairment testing.

Software

The costs incurred in obtaining licenses and software will contribute to the financial benefits in future period through cost reduction and revenue generation are capitalized to the software intangibles. The capitalized costs include direct costs of service and material and payroll related costs and direct payroll of the employees (Berk and DeMarzo, 2007). The software intangibles are commonly carried at the cost less impairment losses and accumulated amortization.

Customer relationships and contracts

Customer relationship and contracts acquired as the part of the business are separately recognized from goodwill. The customer contracts and relationship are carried at the fair value acquisition dateless impairment losses and accumulated amortization (Hillier, 2010). The amortization of the customer relationships and contracts is estimated on the basis of the straight line method over expected useful life that for the assets owned currently by the group is around 10 to 12 years and is determined in amortization and depreciation expense in income statement.   

Impairment of assets

Intangible assets and goodwill have useful life and are not subjected to the amortization and annually tested for the impairment. Other assets of the company are tested for the impairment whenever changes in situations or events show that carrying amount cannot be recoverable.  The impairment losses are determined for the amount at which the carrying amount of the assets exceeds the recoverable amounts (Holton, 2012). Therefore, the recoverable amounts are higher of the fair value of the asset less disposal cost and value in use. The estimated flow of cash are discounted to the present value of the assets using the discount rate which reflects the assessment of current market’s time value of money and specific risk to the asset. The main purpose of assessing the impairment is that the assets are appropriately grouped at low level for which there are inflow of cash that are independently largely of the inflow of cash from other group of assets.

Provisions

Provisions are determined and recognized when a company has a constructive and legal obligations as a result of the past event and it is important that the outflow of the resources would be required to reconcile the obligations and amounts has been estimated reliably. The provisions are not determined for the future operating losses. Thus, there are number of obligations for the company and the outflow of resources would be required to be settled by considering the obligation class a whole (Paramasivan and Subramanian, 2009). The provisions are estimated at the net present value of the estimates of the management of expenditure that is required to settle the obligations at the end of the financial reporting period. The expected payments in future are discounted using the market yield at the end of the financial reporting period using the corporate bonds with the maturity terms that matches the estimated future outflows of cash (Stittle and Wearing, 2008). The increase in provision due to the time passage is recognized as the interest expense. The annual report of the company shows the intangible assets in the balance sheet at the end of the financial reporting period.

References

Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.

Hillier, D. (2010). Corporate finance. London: McGraw-Hill Higher Education.

Holton, R. (2012). Global finance. Abingdon, Oxon: Routledge.

Moles, P. (2011). Corporate finance. Hoboken, N.J.: Wiley.

Paramasivan, C. and Subramanian, T. (2009). Financial management. New Delhi: New Age International (P) Ltd., Publishers.

Spiceland, J., Sepe, J. and Nelson, M. (2011). Intermediate accounting. New York: McGraw-Hill Irwin.

Stittle, J. and Wearing, B. (2008). Financial accounting. Los Angeles: SAGE Publications.

Wolf, M. (2008). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.