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Azman Hashim International Business

School
AZMAN HASHIM INTERNATIONAL BUSINESS SCHOOL

SHAC/SBSC 2143
FINANCIAL ACCOUNTING REPORTING 3

MFRS 136 – IMPAIRMENT OF ASSET

Lecturer Name : Dr. Aniza Othman

Session : Semester 1, 2021/2022
Student Details :

NO NAME MATRIX NO.

1 Muhammad Taufiq B Jumari SX200925BSCHS01
2 Siti Nur Amira Fatin Bt Md Afandi SX200915BSCHS01
3 Amira Shahira Bt Ashaari SX200921BSCHS01
4 Nur Raihanah Shahirah Bt Azhar SX200945BSCHS01
5 Nur Syarfina Raudah SX200933BSCHS01
 TABLE OF CONTENT

A. Introduction
Introduction

MFRS 136 defines asset impairment as a decrease in the value of an asset. FRS 136 applies to all
tangible, intangible, and financial assets. FRS 136 addresses identifying an impairment loss,
determining the asset's recoverable amount, recognising or reversing any resulting impairment
loss, and providing information on impairment losses or reversals of impairment losses.
Identifying a potentially impaired asset and calculating the recoverable amount for intangible
assets.
The goal of MFRS 136 Impairment of Assets is to ensure that an entity's assets are not carried at a
value greater than their recoverable value. Entities are required to conduct asset impairment tests
when there is an indication of asset impairment, and the test may be performed for a cash-
generating unit if an asset does not generate cash inflows that are largely independent of those
from other assets, with the exception of goodwill and certain intangible assets, which must be
performed annually.
MFRS 136 was reissued in March 2004 and applies prospectively to goodwill and intangible
assets acquired in business combinations with an agreement date on or after March 31, 2004, as
well as any other assets acquired in business combinations with an agreement date on or after
March 31, 2004.
Review/Discussion Findings
1. Impairment of Assets and Market Reaction during COVID-19 Pandemic on the
Example of WSE
The main purpose of this article was to look at how the capital markets reacted to information
provided by issuers in the form of a current report on IoA (using the WSE as an example). The
research contribution to the state of knowledge in the field of the implemented paper is an attempt
to verify how the market will react to such information in a situation where the threat of a
significant economic crisis looms, as a result of the COVID-19 pandemic in 2020. 55 occurrences
of IoA announcements were finally qualified to the research sample based on the above-
mentioned references by WSE issuers. A seven-day symmetrical event window was created for
each of them, spanning the day the information about the IoA was published, as well as three days
before and after. Except for two cases: WIG20 day t0 and mWIG40 day t+3, the obtained research
results, as confirmed by non-parametric testing, revealed no statistical significance of the AAR
for any of the investigated days of the event window.
Unfortunately, in many circumstances, a statistically significant market reaction was due to a tiny
research sample size. The main hypothesis made at the start of this investigation should be
rejected due to the lack of statistical significance of the great majority of collected results. The
lack of statistically significant AR on the days after the announcement of information on asset
impairment, on the other hand, suggests a different market reaction in the context of the economic
crisis triggered by COVID-19 than in previous years. The market's lack of reaction to recent
reports on IoA is fairly surprising. During the COVID-19 pandemic, investors may discount a
variety of unfavorable environmental information while ignoring completely negative information
about the reduction of recoverable assets of issuers. The situation is unexpected because WSE
investors had already expressed dissatisfaction with IoA. (Lisicki 2021). This was evidenced by
the incidence of statistically significant negative AAR on the day the current report on IoA was
published and the next day. As a result, it's reasonable to believe that the COVID-19 pandemic
made investors substantially less attentive to other (non-COVID-19) market information. The
research presented in this article allows world researchers to evaluate the possibility of a distinct
market reaction (or its entire absence) in response to incoming capital markets information during
the COVID-19 pandemic.
The observed results are in some ways contradictory to earlier studies' findings. As a result, they
should be seen as an invitation to future scientific investigation. However, some study limitations
should be mentioned at this time, including a significant reduction in the study sample size (from
76 to 55 cases) due to the occurrence of simultaneous events in the event window. However, an
author who employs the event analysis methodology must constantly consider such a scenario.
The acquired results may serve as the foundation for further research into the verification of
investor attitude toward specific data (not just on the WSE), which may have altered due to the
challenging economic conditions in which we operate. Stock market analysts, investment
advisers, stockbrokers, managers, members of supervisory boards, institutional and individual
investors, and scholars in the field of capital markets research in accounting may be interested in
the findings of the article.
Attempting to validate the market reaction to the presentation of financial results during a
COVID-19 pandemic year could potentially be a fascinating problem. The findings of that study
could suggest that investors' expected reaction (increase in market valuation/decrease in market
valuation of shares) to companies' outcomes that differ from the market consensus is different
from what is seen in regular world economies. In the event of a pandemic, the market does not
have to react in direct proportion, which is a fascinating question to investigate.
 2. Research on impairment of assets in listed firms with negative earnings in China
[https://fbr.springeropen.com/track/pdf/10.1007/s11782-007-0020-1.pdf]
Economic factors such as industry downturns and business performance are linked to these
companies' reported asset impairment. Companies with negative earnings on the stock exchange were
more likely in subsequent years to write off significant assets, but not in the first year of loss.
However, once the individual effect of the firms is considered, the relationship between asset
impairment and economic factors becomes insignificant, whereas earnings management factors
continue to have a significant effect on asset impairment, but the difference between loss and
profitable years becomes insignificant. The stated impairment of assets of publicly traded enterprises
with negative earnings reflects the poor performance of the industry and the firm. Earnings
management factors have a significant impact on reported asset impairment after accounting for
economic considerations. Companies with negative earnings have a very strong big bath incentive.
Furthermore, companies with negative earnings are more likely to write down significant assets in
subsequent years rather than the first year of loss.
Economic and earnings management factors have a significant relationship with reported asset
impairment in both loss and non-loss years, but the earnings management incentive in loss years is
greater than in non-loss years, and the difference is significant. In terms of economic factors, a
decrease in revenue from main operations has a greater impact on the reported impairment of assets of
businesses with negative profitability in loss years. However, in non-loss years, the reported asset
impairment is influenced by an unfavourable change in the industry. The industry, firm performance,
and earnings management characteristics all have a significant impact on the reported asset
impairment after controlling for the listed years and changing auditors. After controlling for the
individual firm effect, the relationship between asset impairment and economic factors is small,
whereas earnings management factors continue to have a large impact on asset impairment, but the
difference between loss and non-loss years is small. As a result, we discover that in Chinese listed
companies with negative earnings, earnings management is the most important factor influencing
reported asset impairment.
Based on the research in the article, we can conclude that since the implementation of the China
Accounting System for Business Enterprises, many professional judgments have given managers
more opportunities to manipulate earnings. As a result, we suggest that management publish more
information about accounting policy and other elements so that investors and other information
consumers can accurately assess the use of professional judgments
There are some limitations to this paper as well. First, the big bath proxy variables are significant in
loss years, with a significant difference between loss and non-loss years. However, in non-loss years,
these variables are significant. As a result, this study found no consistent evidence that enterprises
with negative earnings manipulate earnings by reporting asset impairment in all years. Second, in this
study, BATH1it, BATH2it, and FIRSTLOSSit are used to model large bath behavior. However, the
definition of BATH1it is based on dependent variable information, which causes estimation bias.
Because there is a scarcity of relevant literature on the definition of the big bath, future research will
need to gather more data on the big bath's behavior.
 3. The Impact of an Enforceable Standard in Malaysia: Assessing the Compliance of
Disclosure for Large First-Time Adopters Under MFRS 136
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1283648]
MFRS 136's requirement was a significant departure from the past, when there was no mandatory
standard framework for goodwill accounting and reporting. As a result, at least one aspect of
Malaysia's transition to IFRS must be regarded as a significant shock, raising concerns about the
extent to which reporting entities, auditors, and regulators will be able to effectively respond. Because
of the standard's inherent complexity and the extent to which judgement and discretion are required
components of the standard's functioning mechanism, this strain was amplified in the case of
Malaysia's new goodwill standard. The purpose of this paper was to see if enterprises required to
report under the new framework demonstrated the ability to do so in a way that resulted in systematic
compliance and the production of more transparent, higher quality financial disclosures.
The quality of the reaction has been uneven, as evidenced by the facts presented above. While some
firms produced financial reports and appeared to have used value analysis processes that were mostly
in line with the new standard's technical and goal-driven requirements, many others fell short. This
could be due to a variety of factors. The findings we present could be attributed in part to a
misunderstanding of the materiality standards and their impact on what must and must not be
revealed. However, given the facts, the assumption that this explains all observed deviations from
required practise appears difficult to support.
It's also possible that some of the variation in results we saw was due to the need for judgement (for
example, in determining future growth rates or appropriate risk adjusted pre-tax discount rates) as part
of carrying out the standard's activities and then configuring the resulting financial statement
disclosures. The presence of obvious outlier data (unusually low discount rates or unusually high
anticipated growth rates) demonstrates that this, too, cannot be regarded as a complete explanation for
the state of reporting standards observed across the research sample.
Some of the findings could be attributed to the teething problems that frequently accompany the
implementation of new processes, especially when they are as intricate and complex as those found in
FRS 136. This is an empirical question that may be answered in the future through a study of
reporting methods; however, even if a correct explanation for the empirical occurrences observed is
discovered, it raises troubling policy concerns. In the early years following implementation, there are
no provisions in the IFRS regulations that penalize incorrect or inadequate compliance.
Of course, if our findings point to a more serious problem than first-year teething issues, even more
difficult questions arise. Given that compliance with accounting standards is required by law,
evidence of noncompliance combined with a lack of obvious enforcement action would cast serious
doubt on Malaysia's financial regulatory framework, including the role and impact of financial
statement audits, and, by extension, raise the spectre of similar problems in other jurisdictions. Even
when viewing the situation through this lens, the investigation's focus logically returns to motivational
issues. Aside from concerns about the nature and efficacy of regulatory remedies, the question of why
systematic noncompliance manifests itself in the first place must be a source of concern.
Could this be a sign of insufficient competence or a persistent refusal to submit to the principles of the
mandatory reporting framework, comforted by the knowledge that a serious reprimand is unlikely?
Could this be an indication that policymakers have enacted rules that are so complex, unwieldy, and
intellectually challenging that they will never be followed in a systematic manner? These are the kinds
of questions that need to be looked into further. The widespread adoption of IFRS-based reporting in
Malaysia and many other jurisdictions appears to open the door to extensive future research in this
area.
 4. Asset Impairment Testing: An Analysis of IAS 36
[https://www.ajol.info/index.php/afrrev/article/view/129843#:~:text=An%20asset
%20that%20loses%20its,be%20used%20when%20assessing
%20impairment.&text=Key%20words%3A%20Asset%20impairment%2C%20testing
%2C%20IAS%2036.]
There is little doubt that properly implementing IAS 36 can assist a company's assets in reflecting
their economic value. The standard, however, has been chastised for being based on unrealistic
requirements involving subjective judgments and predictions that are unlikely to be verified.
Unverifiable estimates can lead to inflated net assets, aggressively managed earnings, and impairment
decisions used primarily to manage earnings. Transparency would be expected to be low under such
conditions. In line with this point of view, the European Securities and Markets Authority (ESMA)
recently published a study expressing concern about the quality of disclosures on assumptions and
judgments underlying non-financial asset impairments (ESMA, 2011). Among the issues identified in
the report are a lack of adequate justification for business plans and discount rates, a lack of
meaningful disclosures on impairment triggering events, an excessive use of boilerplate language, and
a lack of information on assumptions used in determining recoverable amounts.
Evidence from IFRS reporting countries has confirmed implementation concerns. Petersen and
Ptenborg (2010), for example, report inconsistencies in the implementation of IAS 36, particularly in
how corporations define a CGU and generate estimates for recoverable amounts. Discretion in
determining a discount rate can be used to opportunistically avoid or manage the timing of
impairment losses, at the expense of transparency, comparability, and decision usefulness. Costs rise
when businesses are expected to exercise discretion and then make disclosures to back up their
discretionary decisions. For example, if a standard specifies a specific discount rate to be used in
valuing future cash flows (e.g., 10%), a company can avoid having to determine an acceptable rate
and justify it with a disclosure remark. When conducting research to support a decision, as well as
providing an explanation and responding to user inquiries and difficulties, costs can be incurred.
If management discretion is required in reporting decisions, such costs may be incurred. Amireshui et
al. describe disclosure requirements as "high effort" (2011). They forecast and test whether
compliance is lower for disclosures requiring a significant amount of work. They categorize
disclosure requirements as those that require a significant amount of work and judgement (high-effort
disclosures) and those that can be met with minimal judgement or effort (low-effort disclosures) (low-
effort disclosures). This category includes issues where corporations can easily use boilerplate
language instead of providing detailed information that will help customers better understand the
estimations and judgments that underpin accounting measurements. Because asset impairment can
reduce the value of accounting information used for decision making, managers' judgement and
estimates should be checked through auditing.
 5. Beware of the existence of a big bath with asset impairment after pandemic Covid-19!
[https://journal.perbanas.ac.id/index.php/tiar/article/view/2243]
The impact of large bath accounting on asset impairment loss in Indonesian mining businesses is
investigated in this study. Profitability, as assessed by return on equity, and business size, as measured
by total assets, are the research control variables. Companies who have a habit of doing large bath
accounting have been proven to have a loss of asset value. Managers enhance personal gains by using
a large bath accounting to control earnings. Managers think that investors would respond whether the
company suffers significant or little losses, so they utilize a big bath accounting method. When
unpleasant unavoidable situations in the current period occur, the manager recognizes the costs of
future periods as well as current period losses.
As a result, it will make a profit in the coming year that is more than predicted. The company's
performance will improve in the coming time, allowing management to maximize utility in the form
of remuneration for the goals that have been met. Even if a company's profitability is low or high, it
will nonetheless suffer an impairment loss. Investors are unaffected by a company's profitability,
whether it is low or high. Even if the company is profitable, managers continue to depreciate asset
prices. Impairment losses on assets continue to be recognized by companies of all sizes. Consumers
and the media will pay close attention to companies with high profit margins, which will attract the
attention of government and regulators, resulting in political costs such as government involvement,
increased taxes, and numerous other demands that might increase political costs.