Executive summary

The company under analysis is Arrium Limited which is listed in the Australian Stock Exchange with a symbol of ARI (King, 2015, p1). It is an international company with operations both in Australia and other parts of the world. It deals in mining and materials. Arrium was previously known as Onesteel but has since changed its name to the current one it uses. Contained in this report are various segments as summarized below:

Example of acquisition

There is no report of any acquisition having taken place in the financial period reported in the 2015 Annual Report. There was, however, some acquisition back in 2010 when Onesteel acquired the Moly-Cop Group. Information relating to this acquisition is appropriately reported as shown in the discussion.

Composition of intangible assets

The intangible assets were composed as below:

Arrium Ltd’s reporting of goodwill seems to be substantially compliant with the requisite accounting standards.

Research and development undertaken

It was not possible to single out any R&D undertaken by the company although it should be noted that that information may have been aggregated with other information. The most important thing, however, is that Arrium only capitalizes the development costs which the costs of research being expensed as incurred. This is also consistent with requisite accounting standards.

Evaluation of measurement, amortization and impairment

It also comes out from evaluating these three matters that Arrium follows the requirements of the governing accounting standards save that some of the assumptions used in coming up with the figures are not explicitly stated.

Impact of acquisition

Onesteel which is the predecessor of Arrium Ltd acquired The Moly-Cop Group in December 2010. That acquisition has had the impact of increasing the profitability then, now, and it is expected to have the same effect in the future.

Example of acquisition

The 2015 annual report for Arrium does not report any acquisition during that particular financial year. What is, however, reported is an acquisition that took place in December 2010(Arrium, 2015, p.23).This was the acquisition of the Moly-Cop Group. It is understandable that the recognition criteria for this acquisition may not be available in the Annual Report 2015 given the lapse of time between 2010 and 2015.

Note 16 of the notes to the financial statements identify the information generating relating to goodwill and other intangible assets (Arrium, 2015, p.98). That note defines goodwill as the excess of the amount paid for and acquired business on the one hand and the fair value of the assets of the acquired business that Arrium is entitled to. It follows from this that the company recognizes goodwill at the time of acquisition in the manner demonstrated.

A look at various paragraphs of AASB 138 shows that the approach taken by Arrium does not fundamentally depart from what the standard stipulates. For instance, paragraphs 18-71 is to the effect that intangible either arising from contractual or legal rights on the one hand or when they are separable from the business combination should be recognized separately(Chartered Accountants,2016,p.1). The compliance with this requirement is evident in Note 16 in the 2015 Annual Report. For one, the note makes it explicit by discussing goodwill and other intangible assets in two different topic headings. The clear separation of the topic headings enables anybody reviewing the statement to see this difference. The second evidence that Arrium complies with the requirements of AASB 138 is the extensive discussion of useful lives of an intangible asset.

Composition of intangible assets

With the respective figures provided in the 2015 Annual report, the composition of intangible assets as can be gleaned from Note 16 are as shown in the below table(Arrium,2015,p.97).

AASB 138.18-71 governs the manner in which reporting entities are supposed to recognize intangible assets .Two important conditions must be met before an entity can recognize an intangible asset. For one, it should be probable that the expected future economic attributable to the asset will flow to the entity (AASB 138.21(a). Secondly, it is only when the cost of the asset can be measured reliably (AASB 138.21(b). It is against this recognition criteria stated in AASB 138 that any comment on the recognition criteria of intangible assets must be made.

The definition of goodwill as indicated in Note 16 of the Notes to Financial statements seems to comply with the requirement of AASB 138.21(Arrium, 2015, p.98). As indicated in the article detailing the acquisition practices at Google, companies make acquisitions because they expect that future economic benefits will flow to them. It follows from that reasoning that it is right for Arrium Ltd to assume that the goodwill it recognized in respect of its acquisitions were so recognized after being satisfied that the first condition under AASB 138 was met. A problem with Arrium’s statement of accounting treatment of this issue is not very clear for failing to explicitly spell out the recognition criteria.

With respect to system development costs, the recognition criteria at Arrium Ltd conform to the one set out under AASB 138. This is evident on Note 16 in the 2015 annual report. The same statement can be said about the recognition criteria of research and development costs.

Research and development undertaken

Even after a careful reading of the Annual Report 2015, it is not easy to confidently identify any research and development undertaken by the company. This statement is alive to the fact that not all the information relating to research and development are reported in the annual report. Perhaps that information has been aggregated with others in the presentation of the annual report. Lack of details in the annual report to allow the identification of a research and development undertaken, it is still necessary to explain and discuss the way to account for research and development.

AASB 138 provides for the accounting for R&D in two steps (AASB 138.57). The first of these is the research phase where the standard stipulates that the amount spent in carrying out research should be expensed when incurred. The rationale for this treatment is that a business would not be able to know whether the outcome of the research will lead to any future revenues or benefits to the entity. The research may succeed but it can also fail. The second phase is the development phase. AASB 138 is to the effect that such costs should be capitalized as intangible assets if it is probable that the firm will receive such future benefit from the development.

Arrium Ltd seems to follow the same approach as ASSB 138 to accounting for R&D. This can be seen from Note 16 of the 2015 Annual Report. In material paragraphs, the Note states that research costs are to be expensed when incurred and only the development costs should be capitalized. The present report is totally in agreement to the approach taken by Arrium Ltd towards accounting for R&D.

Evaluation of measurement, amortization or impairment

To begin with, it should be noted that amortization relates to assets with finite useful lives with impairment referring to assets whose lives are indefinite. For example, an intangible asset like a patent would be amortized as opposed to being impaired.

Measurement

Measurement, when used in accounting often means the method through which a business establishes the values that it records in the financial statements.  The company seems to follow different approaches depending on whether the measurement relates to the original figure to be reported on recognition or the figures reported subsequent to recognition. An evaluation of each of these measures is necessary to make any comment on the overall measurement.

The practice at Arrium Ltd is to recognize all the categories of its intangible assets at cost (Arrium, 2015, p.98). This approach is consistent with AASB 138 which is to the effect that intangible assets must initially be recognized at cost (AASB 138.24). This cost is the value that the company gives in order to acquire the asset.

Reporting entities have a choice between the cost and revaluation models respectively (AASB 138.72). The cost model is where the carrying amount of an intangible asset is determined as the cost less accumulated amortization and impairment (AASB 138.74). It is clear from this that Arrium uses the cost model as seen from Note 16 showing that Arrium tests the intangible assets with indefinite useful lives for impairment (Arrium, 2015, p.98). The ones with finite useful lives are subjected to amortization.

It is also necessary to evaluate fair value measurements as used in the intangible assets at Limuru. Much as the company uses the cost model, some of the costs referred to in Note 16 are defined in terms of fair values. For instance, the portion of that note referring specifically to ‘other intangible assets’ spells out that the cost of an intangible asset acquired in a business combination is the fair value of that asset as at the date of acquisition(Arrium,2015,p.98). Apart from merely mentioning the term fair value, the accounting policies as reported in Note 16 of the annual report makes no detailed exploration of the fair value measurement. This omission is not an important issue though it would have been better for the policy to indicate some further details as indicated in AASB 13.

Amortization or impairment

As already noted, amortization and impairment are respectively used when an asset has a finite useful life and an indefinite useful life respectively. This point is well captured in note 16 of the annual report. Patented technology, some brand names, customer and supplier contracts, system development and other capitalized development costs, and mining tenement rights are all subjected to amortization depending on their respective finite useful lives. This is indeed the manner in which such amortizations are supposed to be carried out.

On their part, intangible assets with indefinite useful lives are subjected to impairment tests in order to determine their carrying values. The governing accounting standard in this respect is AASB 136 Impairment. The approach to amortization disclosed in Note 16 of the annual report substantially complies with the standard.

Factors affecting measurement, amortization and impairment

What is clear from the foregoing discussion is that the accounting standards governing financial reporting for listed and public companies generally, the management choices given the options in the standards as well as the useful lives of the intangible assets all affect measurement, amortization and impairment at Arrium Ltd. For one, Arrium must report based on the financial reporting standards. This only means that whatever picture the management may be inclined to portray when carrying out any of the three to wit measurement, amortization and impairment, that picture must be portrayed within the confines of the governing standards.

Much as the company must measure, ammortise or impair as provided in the relevant accounting standards, the management can still rely on the flexibilities available in those standards to influence the outcome. For instance, the standards allow the company to choose between the cost models on the one hand and the revalaluation model on the other hand. It seems Arrium Ltd made the choice of using the cost model as can be seen in note 16 the annual report.

Impact of acquisition

An appropriate point to begin this discuss is to indicate that the 2015 annual report does not give adequate information to engage in this discussion. The most that one can say on this question from the said report is that the acquisition was completed in December 2010(Arrium, 2015, p.23). Not all is, however, lost as one can make reference to the 2011 annual report to glean some information. From this earlier report, one can infer that the acquisition of Moly-Cop increased the profitability of Arrium (the One Steel). It is evident that the sales revenues almost doubled some few months after the acquisition was integrated into Arrium (Onesteel, 2011, p.22).  It is also expected that the acquisition would still help the company increase its profitability even in the future. This conclusion is borne from the fact that the acquisition was meant to allow Arrium enter other markets which were outside its traditional geographical markets.

References

King, M.,2015. Who on earth is buying Arrium shares at this price? The Motley Fool, [online] 10 December. Available at :< http://www.fool.com.au/2015/12/10/who-on-earth-is-buying-          arrium-shares-at-this-price/ > [Accessed 1 October 2016].

Onesteel, 2011. Annual Report 2011.Arrium,[online] 20 September 2011. Available at: <             http://www.arrium.com/investor-centre/reports-         presentations?page=2&tab=reports1#reports1> [Accessed 1 October 2016].

Arrium, 2015.Annual Report 2015.Arrium,[online]1 October 2015. Available at :<               http://www.arrium.com/investor-centre/reports-presentations> [Accessed 1 October           2016].

Chartered Accountants, 2016. (April 14, 2016).Australian Reporting Essentials for June 2016.      Chartered Accountants, [online] 14 April 2016. Available at :< http://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-  accounting-standards/Analysis-of-AASB-standards/AASB-138-Intangible-            assets?standard=>

 
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