Chapter 10: Depreciation, Impairment, and Derecognition of Property, Plant, and Equipment

The year 2014 was tough for Qantas Airways Ltd. On August 28, the iconic Australian airline announced that it would be reporting a net loss of AUD $2,843 million for the year ended June 30, 2014. The most significant components included in this loss were two asset-impairment charges: AUD $387 million for impairment of specific assets and AUD $2.6 billion for impairment of the Qantas International cash-generating unit. The CEO, in his annual report to shareholders, indicated that these write-downs were “required by accounting standards.” The chairman of the board of directors indicated in his report that the year was “challenging” and “unsatisfactory” but made no mention of the asset write-downs. These non-cash, asset-impairment charges, which were charged primarily to the aircraft and engines category, clearly had a significant impact on the company’s financial results. The impairment of the cash-generating unit, in particular, was almost solely responsible for the company’s net loss.

This asset-impairment charge arose as part of a restructuring plan within the business. The company assessed the value in use of a particular group of assets, Qantas International, and determined that the current carrying value of these assets was overstated. The value in use was determined by projecting future cash flows for this asset group and then discounting these cash flows at a 10.5 percent interest rate. In projecting the cash flows, assumptions were made about the growth rate of future revenues, fuel charges, currency exchange rates, and many other factors.

The annual report explained that the impairment loss resulted from a situation where wide-body aircraft were purchased at a time when the Australian dollar was weaker than the US dollar. Although this may explain why the initial recorded value of these assets was higher, it obscures reasons behind the current decline in the value in use.

Clearly, the economic benefits to be derived from these assets were no longer justified by the initial purchase price. Companies purchase property, plant, and equipment assets with the expectation of realizing economic benefits at least equal to the price paid. Accounting standards need to be able to allocate these capital costs in a rational way so that they are reflected in the accounting periods where the economic benefits are created. When these estimates of benefit consumption are incorrect, write-downs such as those experienced by Qantas are necessary. The CEO was correct in stating that accounting standards require this treatment.

(Qantas, 2014).