Impairment Analysis of Non-current Assets under DCF Based-test in the Jordanian Industrial Shareholding Companies

Aims: To examine the significance differences between discounted operating cash flow associated with non-current assets and the impairment loss for 2005 compared to 2006, 2006 compared to 2007, 2007 compared to 2008.Moreover,estimating value in use through future cash flows attributable to the asset under DCF Based-test. To determine impairment trends by showing ratios of companies that have increasing trends, decreasing or fluctuated trends for the years 2005-2008. Study Design: Data were collected for the period 2005 to 2008 from Annual reports issued by Amman Stock Exchange (ASE) of the selected industrial public shareholding companies. For this study, 30 industrial companies impaired their non-current assets were selected out of 73 working Jordanian industrial companies during the study period; Descriptive statistic has been used in this study, in addition to Wilcoxon Signed Ranks Test. Results: Based on the financial data in the companies’ financial reports, about (58.9%), or 30 companies, apply asset impairment accounting. For companies implement IAS (36), impairment loss should be recognized, measured, and disclosed separated from depreciation. Impairment loss can be affected by discount rate, and future cash flows. Original Research Article Nawaiseh; BJEMT, 7(1): 10-22, 2015; Article no.BJEMT.2015.067 11


INTRODUCTION
The primary objective of financial accounting for the impairment of assets according to International Accounting Standard 36 (IAS 36) is to ensure that assets are not stated in the statement of financial position at more than they are worth to the business (recoverable amount), where asset carrying amounts are not recoverable through the returns generated from them the underlying assets are impaired and should have their carrying amounts reduced accordingly. IAS 36 supports users by seeking to ensure that non-current and other asset carrying amounts will be, at a minimum, recovered from future operations. This avoids the overstatement of profits and capital employed which would occur if assets were carried at above their recoverable amounts. Properly recognized impairment losses are likely to reduce the return on capital employed provides more realistic and decision useful information to stakeholders of financial statements. The implementation of International Accounting standards in Jordan commenced in the year 1999 [1], which insisted on the implementation of impairment of assets (IAS 36), and how the impairment loss should be recognized. IAS 36 [2]. Impairment applies to all tangible, intangible and financial assets except inventories IAS 2 [3], assets arising from construction assets (IAS 11) [4], deferred taxation assets (IAS 12) [5], assets arising from employee benefits (IAS 19) and financial assets within the scope of IFRS 9 (IAS 39) [6]. This is because those IAS's already have rules for recognizing and measuring impairment. IAS 36 does not apply to non-current assets held for sale that is covered by IFRS [7]. Adopting of (IAS 36) on large basis, and future directions of Jordan public share holding companies can deeply modify the way companies actually use to account for noncurrent assets, IAS 36 seems to adopt a Discounted Cash Flow (DCF) approach, since it states that value-in-use must be calculated, estimating the future cash inflows and outflows deriving from the asset, applying the appropriate discount rate to these future flows. The objective of this study is to prescribe procedures that the company has to follow, keeping in mind, all noncurrent assets should be carried at no more than their recoverable amount. When non-current assets are impaired (the fair value of the asset is less than book value), the resources of a company have changed in value. Thus, it is considered important to inform external users, such as creditors and investors, of the change in financial information, and to provide them with relevant information. Objective of this study is to investigate if the Jordanian companies largely use ISA 36or not, to make sure for the companies those apply impairment criteria, if they reflect impairment in their financial statements, and to understand the effect of present value of discounted cash flows on impairment loss.

Book value (carrying amount) of the asset
Represents the amount that is recognized for the non-current asset in the financial position statement after the exclusion of accumulated depreciation, and the loss of its value.

Fair value of the asset (fair value)
Represents the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date in an active market.

Recoverable amount of an asset
Is the higher of its fair value less costs of disposal and its value in use? If either of these amounts exceeds the asset's carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.

Decrease in asset value (impairment loss)
If, the recoverable amount of an asset is less than its book value (book value), the book value of the asset shall be reduced to its recoverable amount.

Value in use
The present value of discounted cash flows within the expected consequences of the use of such an asset.

Measuring asset's value in use
The following elements shall be reflected in the calculation of an asset's value in use according to

Recognizing and measuring an impairment loss
An impairment loss shall be recognized immediately in profit or loss. An impairment loss shall be recognized for a cash-generating unit (the smallest group of cash-generating units to which a corporate asset has been allocated) if, and only if, the recoverable amount of the unit (group of units) is less than the book value of the unit (group of units). The impairment loss shall be allocated to reduce the book value of the assets of the unit (group of units) in the following order according to IAS 36 [9]: The entity shall not reduce the book value of an asset below the highest of: (a) its fair value less costs to sell (if determinable); (b) its value in use (if determinable); and (c) zero. IAS (36) requires measuring the value of non-current assets, and reporting in financial statements value of not less than the recoverable amount for these assets, to identify how to access this value, this standard would be applied on the basis of cost of the acquisition, these non-current assets should be recorded in the books on the basis of the amounts re-evaluated in accordance with the requirements of IAS (16) [10] and (Companies at the date of the financial statements should examine all of its assets to find any circumstances which indicate the lack of inventory value that may exceed the recoverable amount, where, recoverable amount represents the highest net value of fair (market) of the asset or its value in use.

Discount rate
The discount rate is the rate, that can be paid by the company in a deal market is underway to borrow money to buy group of assets. If the discount rate is not available in the market, we must use the rate of replacement reflects the time value of money over the life of the original, taking into account the cost of capital weighted to the company, and the rate of borrowing additional to the company, and any other rates for borrowing (IAS 36.57) [11], and must recognize the loss of the lack of value of the asset when the book value is higher than its recoverable amount (IAS 36.59) [12].

Prior Literature Review
From the survey of literature review, it appears that: First, most studies concentrate on three pivotal aspects relating to impairment; the first, considers applying impairment as a tool to provide accurate information and increase transparency by increasing the representational faithfulness of reported information [13,14,15]. The second pivot considers the impairment concept as a tool for manipulation [16,17,18,19,20,21]. The third pivot examines the association between impairment loss and market reaction, or stock prices reaction, and performance [22,23]. Literature on impairment of assets in Jordan is so scanty, and insufficient that it is difficult to determine value relevance of accounting information, Most of researches worldwide concentrated on the usefulness of the new standards as compared to the previous practices. Olugbenga, et al. [24] in their study entitled Financial Reporting and Compliance of Impairment of Non-current Assets in the Nigerian, The purpose of their study was to analyze financial reporting and implementation of impairment of non-current assets in the financial reports of Nigerian banks. The specific objectives of the study were: (i) to determine the ratio of banks which disclose scope and method of impairment of assets in their annual reports for 2012. (ii) to determine the ratio of Nigerian banks which disclose impairment of classes of assets in their 2012 annual report, one of its results is Disclosing of information on significant impairment of Assets are set out under the IFRS, companies should disclose additional information for each significant impairment, in the results, 100% of banks disclosed the accounting policy for asset impairment. Also 100% of banks recognized impairment losses in the income statement, cash flow and financial position. While 91% of banks disclosed the measurement method.
Prior researchers got the evidence that impairments disclose private information to reduce uncertainty about firm value in the period prior to the global financial crisis (GFC). During the global financial crisis (GFC), a significant number of firms, confronted by unprecedented market volatility, substantial declines in profitability and sustained falls in stock prices, needed to recognize asset impairments, Amir Vanza and et al. [25]. In view of the economic value concept, independently of any legal aspect, companies should periodically assess their assets' impairment Reistem; Lander, [26]. Hitz and Kuhner [27] analyzed the usefulness of impairment charge in decision making through comparing the net income prior and after goodwill write offs to the economic income, they favored the goodwill impairment method over the amortization method. Chen et al. [19] proved that the new rules of goodwill accounting outperform the previous enactments. On the other hand, Wiese, [28] favored the amortization approach. Chambers [13] concluded that goodwill accounting under SFAS 142 does not improve financial reporting compared to amortizationbased accounting. Carlin et al. [29] discussed the adoption of IFRS 3, which seemed to be complex and of great risk according to their conclusion. Zhang and Zhang, [30] predicted that management is motivated to allocate more purchase price to goodwill. The exposure draft of SFAS 142 includes some indicators of goodwill overpayment. First, the existence of more than one bidder may cause the value allocated to goodwill to be overstated, Ruback [31]. Second, the means of payment is an important indicator when evaluating goodwill overpayment. Kuzmina, Irina, and Ieva Kozlovska [32] reveals the theoretical and practical relevance of the researched topic examines the existing approaches used by Latvian companies for measuring the value of long-lived assets and considers the peculiarities of information disclosure in their financial statements. Particular attention is paid to the importance of measuring assets impairment using the example of a Latvian fuel retail company. The authors' conclusions based on the study of Western publications and analysis of Latvian practices will be useful for the company management when forming the company's accounting policy for measuring and valuing long-lived assets, and may be taken into consideration by investors when developing investment strategies. Tsoy Alexander [33] Examines impairment accounting practice and impairment testing methods in Russia and Kazakhstan.
Peetathawatchai, Acaranupong [34] found out that there is connection between impairment losses and indicators. Management of many companies uses in practice the recognition of impairment losses in order to smooth earnings in its increasing periods. Ullah, Farooq and Niazi [35] Investigated the effect of asset impairments on analysts' choices of valuation models by the UK sample firms and find significant preference in discounted cash flow method after IAS 36 is applied. Sooriyakumaran L. and Velnampy T.
[36], according to their study, the disclosure of impairment was analyzed by using descriptive statistics and the impacts were evaluated by inferential statistics of regression and analyzed the relationship by correlation and coefficient between Impairment loss and selected accounting information of Return On Assets (ROA), Return On Capital Employed (ROCE), Net Profit Margin (NPM), Operating Profit Ratio (OPR), and Earning Per Share (EPS). According to the findings 6% of reports disclosed very detailed information about the impairment. Nearly 90% of companies fail to give any reason to the impairment loss, even though they met the significant amount loss. All the companies have disclosed the accounting policies of impairment of assets. The results of analyzing impact of impairment show that, reported impairment losses had a significant impact upon reported profits. Loss making companies were more adversely affected by impairment losses than profitable companies. The sample company's EPS dropped from 0.21 to -1.89 by recording Impairment loss. Hence the impairment loss was often a significant component of the reported overall loss. Future company financial reports on impairment could improve the disclosure to include a clear cause of impairment stated unambiguously in the annual reports with supporting value. On the Arabian side, Rishani study [37], which aims to identify the concepts of accountability lack of value of long-term assets in the accounting standards of U.S, and international one, with their application in Syria, this study included a sample of (60) persons whom the practitioners of the auditing profession, and practitioners of the profession of accounting firms, in both public and private sectors in Syria, this study found that there are differences between American standards and international accounting standards, moreover, found that the public and private sectors do not apply any of these criteria, the study therefore recommends the application of international accounting standards in Syria.

Data Presentation, Analysis and Hypotheses Testing
It is necessary to compare book value of noncurrent assets with value in use, if book value of such assets is lower than value in use, the impairment loss will not occur. The amount of impairment is equal to the difference between the book value and the recoverable value of an asset. For calculating value in use, the discounted operating cash flows of non-current assets can be computed as follows: (1) Table (2) showed an estimated impairment loss, these differences shown by comparing book value of non-current assets with value in use (Discounted cash flows). One can conclude, the recoverable amount of an asset as one group is less than its book value, the latter amount shall be reduced to its recoverable one, and this difference is an impairment loss. Table 2 provides descriptive statistics relating to the reported write-offs. This data is collected to provide additional insights into the properties of the write-offs used in the sample.
The above table reveals that: all industrial companies have had book values more than their values in use of non-current assets; it means, there is an impairment loss for these assets. One can conclude these companies suffer from the decline in market value of their non-current assets, this decline may due to some indicators I; e, changes in technological levels, in the law, increase in market rates of interest, obsolescence, or poor economic performance larger than expected. The general ratio is 11.72% comes from dividing total discounted operating cash flows to Book values for companies as a whole, it means; for every Jordanian Dinar (JD) 11.72 of Discounted cash flows, only JD 100 represent book value of non-current assets appears on the balance sheet, these assets are over-evaluated.

CONCLUSION AND RECOMMENDATIONS
Based on the investigation of financial statements of the selected industrial companies in ASE in the period 2005-2008, The financial ratio of discounted operating cash flows to book value of non -current assets has shown impairment loss from year to year. The same result has been assured by using statistical Wilcoxon test; there was no any positive improvement in operating cash flows compared with book value of noncurrent assets during 2005-2008, impairment loss of non-current assets shows increasing, decreasing and fluctuated trends. These trends should be recognized, measured, and reflected in the financial statements on the light of events or changes in economic circumstances. Impairment loss can be affected by the discount rate used, in addition to operating cash inflow and cash outflow. This increase in impairment loss is expected, when business conditions in Jordan are taken into consideration. we recommend that; it is necessary for all regulatory bodies in Jordan (Ministry of Industry and Trade, The Jordanian Association of Certified Public Accountants (JACPA), Amman Stock Exchange (ASE). etc. to identify the companies with the Importance of implementing the impairment test. Further, requirements relating to recognition, measurement and disclosure of IAS 36 should be considered. Another major task is to give more attention to the economic and financial indicators (Present value, cash flow to non-current assets carrying amount) that are coherent to impairment accounting, these indicators should be taken as a primary key for company' evaluation for decisionmaking.

SUGGESTED RESEARCHES
1-Tax and effect of impairment accounting on financial reporting. 2-The extent of disclosure of impairment loss.