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Contents
Contents................................................................................................................ 2 Introduction .......................................................................................................... 3 Treatment of intangible assets .............................................................................4 Impairment testing, cash generating units and goodwill.......................................5

Comparative analysis between CCAS accounting practices and the Australian Accounting Standards Board

Introduction
Investors in most companies are unable to participate in the day to day running of the business and therefore mostly rely on financial statements issued periodically by the companys accountants. In that regard, it is always fair to ensure that these statements accurately reflect the in all material respects the companys state of financial affairs. Both national and international standards bodies exist for purposes of providing guidance that will ensure that there is some level of standardization when it comes to preparation and presentation of financial statements. This standards especially apply to those items that need some level of subjectivity, which makes them susceptible to abuse or misrepresentation by accountants. Such items include non cash items such depreciation, impairment and amortization. One such a body is the Australian Accounting Standards Board (AASB) which is the body regulating accounting practices in Australia. In collaboration with the other international interest groups such as International Accounting Standards Board (IASB), the body is responsible for providing guidance to the countrys accountants with regards to preparation and presentation of financial statements. However, compliance with these standards may not always be the case, which means that a good number of companies deviate from the standards. In any case, some of the standards only provide guidance meaning that the body has no legal mandate to enforce them. In fact, the emphasis in most of the cases is not disclosure as opposed to compliance. This paper is a case analysis on Coca Cola Amatils accounting practices and how they compare with the standards set out by the AASB.

Treatment of intangible assets

ACCA (2011) defines an intangible asset as an asset that lacks physical substance. In other words this is an item that is owned and controlled by the entity and for which future economic benefits are expected to flow to the entity but cannot be ascertained physically. Examples of such assets include goodwill, computer software and qualifiying contracts. An intangible asset may have limits with regards to how long the economic benefits will be expected to flow to the entity. In this case the the asset is classified as having a definite useful life and is consequently amortized. There is, however, there is the asset class for which the economic benefits are expected to accrue indefinitely in which case no amortization is applied but an annual test for impairment is required. CCA has a number of intangible assets both with definite and indefinite useful life. These include computer software, goodwill, customer lists and investment in bottlers agreements. In particular, the group views goodwill and investment in bottlers agreements as intangible assets with indefinite useful lives and are therefore not ammortized but tested annually for impairment. impairment testing for the group involves testing a cash generating unit in which the asset is allocated. That means that the impairment testing is done on the cash unit as whole which is in line with the provisions of the AASB standards. According to AASB (2009), an asset that is included in a cash generating units carrying amount can only be tested for impairment as part of that cash generating unit. In other words, it is not possible to separate the particular asset from the CGU which means that the impairment test relates to the entire unit. The AASB standards advises that impairment tests for CGUs should involve a comparison between the carrying amount and the recoverble amount. In its notes to the financial statements, the company shows how it arrives at its recoverable amount and its subsequent comparison with the carrying value, the difference of which is the impairment value. Further compliance by the group is through its treatment of reversal of impairment.

The AASB standards do not allow for reversal of impairment related to goodwill but allows for other intangible assets.

Impairment testing, cash generating units and goodwill

Determination of impairment involves a firm considering a number of factors. According to AASB (2009), both external and internal factors contribute to the determination of whether or not an asset is impaired. These include factors such market dynamics, disount rates and technology. In determining the recoverble value, the entity may either use the value in use method or the fair value less costs to sell. However, Catty (2010), suggests that the nature of intangible assets is so unique that the fair value less costs to sell may not be very applicable. Also, the fair value less costs to sell is usually used where there is an active market for the asset or in cases where the company has decided to dispose the asset. In CCAs case, the company has elected to apply the value in use methodology for arriving at the assets fair recoverable amount. According to AASB (2009), recoverable amount is determined by using projected future cashflows discounted at an appropriate rate to reflect the prevailing market conditions both present and expected. The companys approach for determining the recoverable amount involves using various assumptions with regards to the key elements that make up the forecast. Some of the factors used to determine the value include earnings before interest and tax, sales volumes and discount rates. In particular, the management uses three year estimates generated from business plans presented to and reviewed by management but applies other approaches when it comes to determining figures beyond this period. For example, in coming up with sales volumes beyond the three years, the management assesses factors such as population growth rates, rise in per capita consumption and market share growth possibilities. AASB (2009) suggests that cash flow forecasts should be limited to a period of five years

unless the companys management is confident of its predictions. CCA, on the other hand routinely uses projections that are longer than five years. Although it goes against the advice of AASB, it is not entirely wrong, only that the company may be hard pressed to justify such projections. However, Bragg (2010), justifies extrapolation of cash flows by noting that the useful life of an asset is likely to extend beyond the five years and hence making it necessary for the company to prepare forecasts that go beyond the period. CCA also notes in its financial statements that their decision to do forecasts for periods as long as 15 years is based on the need to avoid the company relying on residual asset values. One other important element in determination of cash flow projections is the determination of discount rates. AASB (2009) advises that discount rates should be determined based on a range of possible outcomes as oppposed to using one most likely figure. That means that the discount rate to be used should be based on an average figure as opposed to using one figure that the management determines is the most probably. CCA appears to be in compliance with this suggestion because it uses a risk adjusted weighted average cost of capital. The most important factor here is that the company adjusts its cost of capital for risk so that the figure used has taken in consideration almost all the factors affecting the entitys or the products business prospects.