Transpacific Industries - A Case Study in Profit Quality Through the Examination of Impairment Disclosures

This paper examines the profit quality of a goodwill-intensive firm, Transpacific Industries Group Limited (ASX.TPI), by specifically focusing on critical judgments and disclosures relating to goodwill impairment. The term "profit quality" is synonymous with terms such as "creative accounting" and "earnings management" refers to the degree of agressiveness or conservatism in the underlying estimates of a firms accounting disclosure. By examining the impairment disclosures made in accordance with AASB 136 - Impairment of Assets, an assessment is made of the reasonableness of a variety or critical assumptions, such as CGU growth rates and discount rates. This assessment is useful in judging the robustness of the firm's impairment testing methodology and its ability to promptly recognise an impairment charge, should an impairment even occur. The paper catalogues ten issues relating to critical accounting judgements that ultimately undemine the profit quality of TP, and the paper concludes with the view that TPIs methodology and approach to impairment testing is disingenuous, suggesting that TPI is applying a degree of agressiveness to profit recognition.