The strategy of portfolio diversification in finance - Free Essay Example

Sample details Pages: 9 Words: 2626 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Portfolio diversification is a widely recognized investment strategy that helps protect investors from the unpredictability of markets, as the old caution Do not put all eggs in one basket applies. As a risk management technique, diversification helps to surrender higher returns and set lower risks by mixing a variety of investments within a portfolio. Consider an investor has an exposure to one asset class, such as to UK Equities. Don’t waste time! Our writers will create an original "The strategy of portfolio diversification in finance" essay for you Create order The earnings of the investor will fluctuate completely with that for UK Equities. But if the investor diversifies to also hold UK Gilts, some of the risks embedded in this portfolio can be removed without impacting on returns, since one performs strongly while the other may not. Take the equity market crash in the October 1987 as an example, UK Equities declined 27% for the month while UK Gilts increased by approximately 6%. In this situation, the security specific risks can be eliminated to a certain extent by gaining an exposure to other asset classes. (Frontier Capital Management, January 2009) The key benefits of diversification are reducing portfolio loss and volatility, which are documented in both academics and practice. The Modern Portfolio Theory suggests that to obtain diversification benefits, the feasible correlation range should be between [-1, 1). By holding assets not perfectly correlated (ÃÆ' Ãƒâ€šÃ‚ ÃƒÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã‚ °Ãƒâ€šÃ‚  1), that is, do not move in perfectly same direction, the risks in a portfolio can be lowered and higher risk-adjusted returns can be achieved. In other words, the lower the correlation between assets, the greater the risk reduction can be obtained. Market Portfolio, a properly diversified portfolio reduces the all diversifiable risk to the level of non-diversifiable risk, through combination of all assets classes that generate the highest risk adjusted returns. This portfolio suggests diversifying as much as possible amongst uncorrelated assets, not to be restricted to one country but including all asset classes globally. Related Literature Review U.S. and other investors have already started investing in foreign securities markets. Global markets have become more incorporated; these may lead the broad tendency toward liberalization, deregulation in the money and the capital markets of developing countries. These modifications have resulted in greater correlation between national stock markets (decreased profits from international diversification). This may lead to future gains for the emerging markets such as Asia and Latin America. Nowadays the investors are looking to invest in emerging markets with promising international diversifications such as those of Central Europe. According to the modern portfolio theory, the benefits of international portfolio diversification are connected with the correlations of security returns. The advantages of international diversification come up from the low correlations among developed and emerging equity markets have been confirmed in a number of studies such as Eun and Resnick (1984 ), Errunza and Padmanabhan(1988), Wheatly (1988), Meric and Meric (1989), Bailey and Stulz (1990), Divecha et al. (1992) and Michaud et al. (1996). Early studies by Grubel (1968), Levy and Sarnat (1970) believed there are low correlations between index returns in different countries and argued the benefits of international diversification outweigh the huge costs, including transaction costs, regulatory and cultural differences, exchange rate risks. Since the foreign investments incline to be less closely correlated with domestic investments, diversification benefits could be obtained. For example, an economic downturn in the U.S. may not affect Japans economy in the same way, which allows a U.S investor to have a small cushion of protection from Japanese investments against losses from the U.S. economic downturn. Recent evidence has shown that international diversification benefits are small for U.S. investors once transaction costs and short-sales constraints are incorporated (D eRoon, Nijman, and Werkerhenceforth, 2001). However, for investors in small, developing countries, global diversification may be much more important than for U.S. investors. Washington University Theory suggests and results show that firm performance is at the beginning positive but eventually diminishes and becomes negative as international diversification enhances. The product diversification mitigates the connection between international diversification and performance. International diversification is negatively related to performance in non-diversified firms, positively related in highly product-diversified firms, and non-linearly related in sparingly product-diversified firms. International diversification is also positively related to intensity, but the interaction effects with product diversification are negative. The results of this study provide evidence of the importance of international diversification for competitive advantage but also suggest the complexities of imp lementing it to achieve these advantages. A common feature of the above studies is that correlations between equity markets were estimated using relatively short-term horizons (weekly, monthly or quarterly). Kasa in 1992 mentioned that the benefits from international diversification affected by low correlations may be a misleading result for investors with long-term investment horizons if equity markets are trending together. Therefore, many current studies have used a combination of techniques to investigate whether there is any link and long-term actions between both developed and emerging equity markets. These examinations have created varied results and conclusions to the expenditure from diversification for US investors. Investigating long-term connections between the US and European equity markets, Kasa (1992) and Arshanapalli and Doukas (1993) generated confirmations of connections between the US with those markets; although, the results in Byers and Peel (1993) a nd Kanas (1998) recommend that there is no such connection. Diversity in time periods looked at **************** and research methods applied may explain the difference of outcomes between these studies. Studies of developed markets in the Pacific area have also created diverse findings. Campbell and Hamao (1992) argue that the US and Japanese markets are extremely incorporated, while results by Harvey (1991) and Chan et al. (1992) pointed out a lack of unification between the US and Asian markets. Sewell et al. (1996) confirms varying integration between Pacific Rim equity markets and the US. DeFusco et al. (1996) report that the US market is not united with thirteen emerging capital markets in three geographical regions the Pacific Basin, Latin America and the Mediterranean. Felix et al. (1998) found no progress between the US and a number of developing markets. The noticeable autonomy of the US and emerging markets recommend the existence of long-term benefits from diversif ication across these countries. However, several recent studies, such as those of Roll (1988), Hamao et al. (1990), Lau and McInish (1993), Rahman and Yung(1994), and Meric and Meric (1997), confirmed a significant rise in correlations and volatility transmission between equity markets during and after, the 1987 international equity market crash. P.T.O Empirical Analysis of Diversification By conducting the empirical analysis, well study the effects of diversification into emerging market on the expected return and risk of investors portfolios using efficient frontier and CAPM. Efficient Frontier Analysis We choose the Bond Index and Developed Market Index as the representatives of domestic markets risk and return level of U.S. investors, while using the Emerging Market Index as the representative of the emerging market. Our analysis is based on data from Oct.30, 1991 to Sept.30, 2010, totaling 230 samples (from DataStream). We have obtained the current U.S. 3-month Treasury bill rate as the risk-free rate (from Financial Time, annualized figure is 0.13%). To calculate the Efficient Frontier, we assume that investors can borrow and lend at the risk free rate of interest and that they are able to take short positions. By comparing the differences between the market portfolios and their efficient frontiers before and after diversification, we can conclude the influence of diversification into emerging markets on investors efficient set. Integrated analysis First we conduct the empirical analysis on the whole time period: 1991-2010. By calculating the market portfolio comprised by Bond and Developed market index and the new market portfolio made by diversification into emerging market, we can compare their efficient frontiers and have an initial impression on the effects of diversification. The result is shown in graph 2-1. Graph 2.1: 1991-2010 From the graph we can see that diversification into emerging market do bring us more expected return given the same risk than undiversified portfolio. But we also observe a slight improvement of 2.65% i.e. from 0.296 to 0.304 in the slope of efficient frontier. The risk-return improvement brought by diversification is quite insignificant. Period analysis Considering the large volatility of the correlation among assets and the riskless rate along with the time period, which may largely influence the effectiveness of our estimate on Market Portfolio and Efficient Frontier, we divide the 19-year data into 4 parts: 1991-1995, 1996-2000, 2001-2005 and 2006-2010. The following is the Efficient Frontier analysis of different periods: 1991-1995 1996-2000 2001-2005 2006-2010 1991-2010 Number of Assets 2 3 2 3 2 3 2 3 2 3 Theta 0.29 0.48 0.14 0.35 0.11 -0.41 0.20 0.31 0.296 0.304 Improvement 66.58% 150.57% 282.26% 57.64% 2.65% Graph 2.2: Period Analysis (Note: Although the theta of three portfolios efficient frontier in period 2001-2005 is -0.41, but the slope of the efficient frontier is positive. The improvement of the diversification into emerging market in this period is calculated by using this positive slope 0.41.) As compared to the integrated analysis, the period analysis reveals a much more significant risk-reduction ability of diversification: the slopes of efficient frontier in the four periods are all largely improved, which is much bigger than that of the integrated analysis.  developed bond emerging developed 1 bond 0.776821 1 emerging -0.04983 -0.13109 1 Graph 2.3: Correlation between Emerging and other two assets The reason why the risk-reduction ability of diversification in smaller period is larger than that in the whole time range is that the effects of different return maximizing policies are offset by each other during a long period. We can see from the above chart that the efficient set can be achieved only by short selling the market portfolio and buying the riskless asset in the third period, while in the other three periods, the policies are opposite i.e. buying the market portfolio and riskless asset at the same time or taking short position on riskless asset in order to buy the market portfolio. These two opposite policies both have significant effects on maximizing returns and minimizing risk in their separate periods. When conducting the integrated analysis, we are unable to separate these differe nt effects making the influences of the third period offset by that of the others and showing relatively smaller and weaker risk-reduction ability than separate periods. But this insignificant figure can not deny the efficiency of diversification in reducing the risk and enhancing the returns. When we take a closer look at the correlation matrix (Graph 2.3), we find that the correlation between the Emerging and the other two assets (developed and bond) are very small which appear to be -0.04983 and -0.13109. According to the definition of Diversification we clarified above, the small negative correlations between these assets explain the significant risk-control effects by diversifying into the emerging market in the different periods. Therefore, the considerable influence of diversification on efficient frontier reflected in period analysis is really worth our attention. CAPM Analysis Beta is a measure of the sensitivity of the assets returns to market returns. We have obtained the betas for MSCI all country index , MSCI developed market index, MSCI emerging market index and Barclays US long government bond index which are 1, 0.98, 1.27 and -0.036. As for the calculation of expected return of the three indexes by CAPM, we need to estimate three elements, namely risk free rate, beta of the index and market return. From the previous parts, we have obtained the betas of the three stocks and the market return which is the mean of MSCI all country index. For MSCI all country index, the CAPM expected return is the original mean 0.00569, since it has a beta of 1. For MSCI developed market index, the beta is 0.98, which is very close to one, hence the CAPM generated expected return is 0.559, very close to the market return. For MSCI emerging market index with a beta of 1.27, higher than 1, which means there is a higher risk than the market thus, it has a CAPM expe cted return of 0.69. The Barclays US long government bond index has a negative beta of -0.036, which means it moves in the opposite direction of the market, hence, it has the lowest CAPM expected return of 0.1. Recommendation and Limitation Recommendations Including the percentage by which expected return improves on average by efficient frontier. Talking about benefits in terms of risk mentioning beta and correlation from capm. Having looked at the advantages of diversification we would also talk about some of the disadvantages it possesses. Trend is that markets are getting incorporated so influence of U.S all over the world. Disadvantage- still worth investing; Politics Difficulties which range from unfamiliarity with infrastructure legal issues, accounting differences, and currency risk can have a dampening effect on international diversification. This article examines a group of chemical, electronic, pharmaceutical, textile, food, scientific, industrial, farm equipment and motor vehicle industries. Relate it last part of lack of information.* Difficult to get detailed information about the asset, performance, market. Therefore difficult to decide based on assumptions and limited knowledge. This adds to the ris k of your investment. However having a thorough analysis of international diversification and looking both the merits and the demerits in detail it is evident that there are a number of benefits of diversification but some potential disadvantages as well. It can give you a lot of benefits if diversified properly that implies you have enough knowledge about the asset you are going to invest and the underlying trends of that assets together with its market potential which is hardly achieved by an ordinary person. Therefore it would be in the best interest of the investors to invest internationally if they have access to proper sources or professional advisors that have the appropriate information about the U.S market and the emerging market and the relationship between these two markets. Limitations In the end we would talk about some of the limitations that were inevitable in our analysis. 1. Riskless rate- we use current Risk free rate though we have a data of 19 years; changes a lot in a long time period 2. Short sale- assume that we can short sale all the time but not possible in the real world. 3. Transaction costs- we ignore these costs however they do exist and whether we will be able to gain any benefits if they exist. 4. We only do our study on the basis of market instead of individual assets. First, market index may not really tell us the performance of the securities in this market. Second, since the investment of an investor can only include limited securities, the market based research can never best describe the effect of diversification in practice. The CAPM is an important area of financial management. It is the linear relationship between the return required of an investment and its risk. The CAPM is often criticized as being unrealistic beca use of the assumption, on which it is based. If the parameters of the model cant be estimated accurately then the definition of the market index is different or the company may have changed during the estimation period. Also if the model is right, there should be a linear relationship between returns and betas and the only variable which should explain returns, is betas. Unfortunately, the relationship between betas and returns is weak and other variables such as size, price, and value seem to have differences in returns. Capm has a number of unrealistic assumptions such as: 1-perfect capital market exists,i.e the market is efficient market (in equilibrium). 2-lending and borrowing can take place at risk free rates. 3-all investors have the same expectations about return and risk 4-capm works only when we r well diversified, only a diversied portfolio investor can use capm(unsystematic risk is not accounted for into capm) 5-risk is measured on the basis of histo ric returns patterns and assumption is that returns pattern will repeat in the future . 6-beta worked out from std. Dev. Of returns which are in turn measured on the basis of historic return pattern and also it is assumed that the pattern will repeat in future. Limitations: Use current Risk free rate; changes a lot in a long time period Financial crisis; not easy to diversify

Marketing Research Exam 1 - 1473 Words

In order to develop the â€Å"right strategy† to succeed in business, managers must make the right decisions; and in order to make the right decisions, they must have objective, accurate, and timely : E. information about market trends and changes. Andrea Livingston arrives at her desk at western utility corporation, a provider of electrical power. she accesses her lexis-nexis comp program, which provides her with articles containing information related to utilities industry. she discovers.....Andrea is accessing which component of the MIS of western utility corporation? A. marketing intelligence. Because marketing has been defined as a function instead of processes for creating, communicating, and delivering value to customers and for†¦show more content†¦What type of experiment involves manipulating the independent variable and measuring the dependent variable in a natural setting? B. field experiments. When a variable exerts influence on the dependent variable and isn’t an independent variable we refer to it as a(n): B. extraneous variable. Which of following is true about research design? B. research design should be selected after thoroughly considering the problem and research objectives. Bob is a salesperson with the Acme Corporation. Bob has just made a large sale, and he accesses acme’s marketing information system in order to determine if the company has enough existing inventory to fill the large order. bob is accessing which component of Acme’s MIS? B. internal reports. The marketing concepts is important for marketing managers because it dictates: D. day-to-day decisions that managers will make. The MR industry launched the first ever certification program for MRers and this certification program is sponsored by: D. Marketing Research Association (MRA). 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BR Richardson Timber Corporation Free Essays

People want different things from work, usually when we get what we want we are motivated and our morale helps us to improve the quality of our work and lives. For most people money is the motivation but often it is necessary to tie in monetary rewards with non-monetary rewards so that employees remain motivated. A combination of these will almost always lead to commitment to an organization, innovative ideas and generally high quality of work. We will write a custom essay sample on BR Richardson Timber Corporation or any similar topic only for you Order Now Human resource policies should be such that they empower the most important of all the resources that a company has which is its people. This will translate to large profits for the company and great satisfaction among the employees. Safety and health issues are a major issue in the BR Timber Company. Most employees in the company are dissatisfied with their jobs, working hours and working conditions. Morale is down and as a result productivity is decreased with increased job turnover as high as 70 percent in some departments of the company. Ron, the team leader in gluing reports that new members rarely last a year at the gluing department. This is due to the work they are introduced to upon starting work. The grueling tasks involved usually result in back injuries. Often there is no orientation to the job and the new workers learn on the job about the rights technique of hanging beams. Ron reports that most men have bad backs, broken fingers and toes, and hernias. An interview with Marty reveals that a death had occurred at the gluing department. Even with this the death the men were expected to act as if nothing had happened and continue working. The mean also showed great concern for a man who had sustained a concussion after hitting a center nail in the overcrowded gluing area. During a tour of the plant it was noted that safety was very much compromised placing the worker’s health at risk. For instance, some workers did not have helmets, others did not have safety glasses, and band-saw safety devices were absent. Dirk a scheduler with a masters in forestry also reported that the employees did not under go any physicals. Though the men had medical insurance this was not enough to pick up their morale in relation to the safety of their working conditions. The stacks of beams are stacked too high such that they fall frequently. This in fact is how a death occurred at the plant. Some of the machines given to the workers are also not in good working order for example Rolf cited a machine that has four wheels and five feet of clearance. The machine has neither brakes nor shut-off making it inefficient and ineffective to work with. The building and ventilation standards of the plant as reported by Ro are below average leading to serious weight loss among the men during the summer. Physical well being and a healthy mind are necessary if a workforce is to be healthy. A healthy workforce is a motivated one and usually when one is in good physical health the mind is at ease and the worker can concentrate on his work. This is only possible if the worker knows that his working environment is safe and poses no danger to his health. This is absent at BR Timber Company. To begin with, BR Timber Company needs to set up an employee service that ensures that the employees undergo a physical and that they are up to the hard work expected of them. This will help in identification of any employees who may be risking their health by doing the grueling tasks at the plant. It is necessary to work with the quality control manager to develop guidelines that are task-specific for the different jobs and working environments in the place. Most men get accidents because they do not get the concept of a task clearly. The frequent movement of men from one job to another makes it difficult for them to be trained. To deal with the mistakes made the men need to be at one work station long enough to learn what exactly is needed in the beams and thus increase safety with less mistakes being made. OSHA (Occupational Safety and Health Administration) recommended that ergonomic policies be made voluntary rather than mandatory. This aims at reducing work-related injuries and is better when it is voluntary rather than mandatory because then the company is free to follow these guidelines without feeling coerced. The benefits especially for BR Timber Company ion having employees’ health maintained is that employees will need less time off because injuries (Ju, 2007). For BR Timber a safe environment would be provided by first ensuring that employees have the necessary safety gear. This includes ensuring that helmets and safety glasses are available to all employees in all shifts. In addition the company should improve the condition in its glue area which has many damps causing the place to be crowded and creating difficulty in walking around. The absence of safety devices for band saws should also be looked into so that the band saws are fitted with guarding. Ensuring that warning signs are placed at strategic points in the plant to improve safety by providing employees and visitors of potential danger should also be done. The storage area for the beams is a dangerous area with one death already having occurred due to the stacks of beams being too high and thus falling. A solution to this problem would be to make the stacks lower and look for adequate space like suggested by Dirk that a bigger yard could be created by knocking out the field and organizing the stacks so that their disarray could cease posing a danger to the employees. Maintenance of equipment and machines is also another issue that contributes to poor working and safety conditions. By regularly repairing the work-out machines or repairing them altogether the company stands to gain more in the long run since efficiency will be increased and productivity together with safety will also be enhanced. No employee is comfortable using a machine that has no brakes, so a simple intervention like ensuring all the machines have breaks would make the employees feel safer. The job of ensuring safety does not only lie with management but also with the employees. If and when quality safety gear is provided the management should make sure that the employees use them appropriately. By allowing ongoing inspection teams to ensure that the company and its employees are taking the necessary safety precautions a higher level of accountability is encouraged and the company is more likely to adhere to a safe workplace and with the employees adhering to the safety guidelines. The solutions to the safety problems at BR Timber Company would best be addressed by incorporating the assistance of a safety consultancy agency. OSHA has many resources that would be useful for the company. In addition they offer computer software and technical information assistance that is easy to follow and that has specifications of OSHA standards meaning that the company cannot go wrong on safety if they seek services of such an agency. Another strategy that BR Timber Company needs to employ for the sake of the health of its workers is to put up a counseling unit for the workers. Many of the employees seem to be very concerned and disturbed about injuries sustained by a worker (Bob) who was hit by a centre rail and also by the death of a colleague at the beam stacking area. Though most of the men wanted to go home that day, they were not allowed showing some degree of insensitivity to the men’s state of mind following the loss of a colleague. The employees would have benefited a lot from having supportive services then. Education concerning injury prevention should be regularly provided for the employees. These would be especially helpful in preventing back injuries and knowing how to manage hernias which are both common problems in the BR Timber Company. Compensation and benefits is another pressing issue in the company. It is mainly related to overtime. The amount of work the employees put in is significantly disproportionate to their pay. The workers felt that they were paid 60 cents per hour lower than the union and added that when the union got a 65 cents-per-hour raise, the employees at BR Timber Company got a 45 cent-per-hour raise. This being among the lowest paid employees in the timber business means that they are not motivated much. The only other benefit that seems available to these employees is the medical insurance cover. Most of the employees seem unhappy with their salaries even with overtime included. When a softball team was setup by one of the employees financing for it was inadequate since it required about $700 and the staff were only given $250. Due to the compulsory nature of overtime most employees do not even have the time to play the game. For most, they go home eat sleep and wake up again to go to work with very little time spent with their families. One of the things the company is doing right is providing medical cover for the employees. Other solutions to poor motivation due to poor salaries in benefits include pay increments. This would be better handled by a compensation analyst to ensure that the employees’ salaries are matched with those of other union employees. This does not have to happen to immediately it could be a plan over time in which the employees get gradual increases in payment following a survey of their salary scales. (Mathis and Jackson, 2006) An employee benefits manager may be necessary to provide better management of the employees benefits especially the health insurance and pension plans. In the case of the BR Timber Company the nature of the industry the company is in calls for the company to have an accident and dismemberment insurance plan. The manager when appointed will be able to keep abreast of all legal issues affecting the employee benefits. This will streamline the process of claiming benefits and increase the trust the employees have in the company leading to greater motivation (Mathis and Jackson, 2006) In assessing how much it needs to pay the employees to keep them motivated and still earn a profit the company ought to go through a budge process. This will provide a means for determining how much has been spent on the payroll. The positions of various employees ought to be such that their positions fit into the overall percentage of the payroll. When jobs are clearly defined determining their going rate becomes easier. Using job descriptions for entry other job will provide a means of comparison with the market place. The jobs can also be marched to others by comparison of the core functions (Krotz, 2007). To ensure that the turnover rate for employees is not high due to employee dissatisfaction with the pay it is necessary to track the competition. BR Timber pays lower than other union companies making those companies a viable alternative for the employees. Supervisors and others with positions of authority need to have a salary range especially for those whom it will be employing new. Other perks of the job can also be considered benefits and are important because work is not only about money. Overtime being such demoralizing aspect of work at BR Timber Company, the management ought to consider flextime. Most of the employees complain that they do not have enough time to spend with their families. How to cite BR Richardson Timber Corporation, Papers

Case Study on Financial Accounting AASB 138 Intangible Assets

Question: Discuss about the Financial Accounting for AASB 138 Intangible Assets. Answer: Intangible asset is the asset that is not physical in nature. The AASB 138 intangible assets explain how the intangible asset are recognized, estimated and disclosed within the financial statements. It outlines the treatment of both non identifiable and identifiable intangible assets (Berk and DeMarzo, 2007). Companies frequently incur liabilities or expend resources on the enhancement, maintenance, development, acquisition, of intangible resources such as scientific or technical knowledge, design and implementation of processes or new systems, intellectual property, trademark, market knowledge and licenses (Hillier, 2010). The disclosures of intangible assets are very much important for a company as it shows the asset value during a period of time. The intangible assets of AGL energy has been disclosed in the balance sheet of the financial statement of the organization. The balance sheet shows the assets and liabilities of a company during a period of time. The balance sheet shows property, plant and equipment of amount $6,482 million disclosed in the Note 18 and the intangible assets is around $3232 million that includes goodwill of amount $2791 disclosed in the Note 19 representing significant recorded balances in the consolidated financial position statement (Holton, 2012). The evaluation and analysis of the recoverable amount of the assets requires judgment to determine the assumptions to support the expected flow of cash and utilization of relevant assets. The valuation of the assets is also very much important for the company and the finance department plays a significant role in evaluating the value of the assets. The key areas that the AGL energy focuses are as follows: Acquiring the understanding of key control management that has placed in order to measure the unbilled cost accrual Challenging and understanding the assumption of the management relating to tariffs and volume used to determine the costs accrual by: sample basis including calculation of volumes in to sales, purchases and other systems as well as testing the control system within the departments (Moles, 2011). Prices are compared applied by the distributors with the current tariff tables Critically evaluating the methodologies of management and their key assumptions are utilized in the valuation model that are described in the Note 19 The identification of the cash generating unit includes allocation of property, plant and equipment and associated allocation and identification of the cash flow for the purpose to assess the recoverable amount of cash generating units (Paramasivan and Subramanian, 2009). The assumption for the long term growth rate in forecasting the flow of cash by comparing them to the historical results, industry and economic forecasts The applied discount rate The appropriateness of the unbilled cost accrual s based on the calculation of the expected accrual to utilize the supplied information. The finance department evaluates the models of cash flows and forecasting the flow of cash as well as assessing the historical accuracy (Spiceland, Sepe and Nelson, 2011). The sensitive analysis helps to determine and evaluate the key drivers of the growth rates uses in discount rate and cash flow forecast. The sensitive analysis includes key assumptions that either collectively or individually required for the assets to be impaired and likelihood of movement in the arising key assumptions (Stittle and Wearing, 2008). The annual report of the company shows the intangible assets in the balance sheet at the end of the financial reporting period. The financial reports is prepared as per the AASB standard. The intangible assets of Medibank is also shown in the balance sheet of the company. The disclosure of intangible assets includes: Goodwill Goodwill is estimated as described in the Note 3(f)(x) of the annual report. The intangible asset includes goodwill on the acquisition of the subsidiaries. It is not amortized but it is evaluated for impairment and it is carried at the cost less the impairment losses (Wolf, 2008). Losses and gains on the disposal of an organization includes carrying amount of the goodwill related to the company sold. The goodwill is allocated to the CGUs for the objective of the of the impairment testing. Software The costs incurred in obtaining licenses and software will contribute to the financial benefits in future period through cost reduction and revenue generation are capitalized to the software intangibles. The capitalized costs include direct costs of service and material and payroll related costs and direct payroll of the employees (Berk and DeMarzo, 2007). The software intangibles are commonly carried at the cost less impairment losses and accumulated amortization. Customer relationships and contracts Customer relationship and contracts acquired as the part of the business are separately recognized from goodwill. The customer contracts and relationship are carried at the fair value acquisition dateless impairment losses and accumulated amortization (Hillier, 2010). The amortization of the customer relationships and contracts is estimated on the basis of the straight line method over expected useful life that for the assets owned currently by the group is around 10 to 12 years and is determined in amortization and depreciation expense in income statement. Impairment of assets Intangible assets and goodwill have useful life and are not subjected to the amortization and annually tested for the impairment. Other assets of the company are tested for the impairment whenever changes in situations or events show that carrying amount cannot be recoverable. The impairment losses are determined for the amount at which the carrying amount of the assets exceeds the recoverable amounts (Holton, 2012). Therefore, the recoverable amounts are higher of the fair value of the asset less disposal cost and value in use. The estimated flow of cash are discounted to the present value of the assets using the discount rate which reflects the assessment of current markets time value of money and specific risk to the asset. The main purpose of assessing the impairment is that the assets are appropriately grouped at low level for which there are inflow of cash that are independently largely of the inflow of cash from other group of assets. Provisions Provisions are determined and recognized when a company has a constructive and legal obligations as a result of the past event and it is important that the outflow of the resources would be required to reconcile the obligations and amounts has been estimated reliably. The provisions are not determined for the future operating losses. Thus, there are number of obligations for the company and the outflow of resources would be required to be settled by considering the obligation class a whole (Paramasivan and Subramanian, 2009). The provisions are estimated at the net present value of the estimates of the management of expenditure that is required to settle the obligations at the end of the financial reporting period. The expected payments in future are discounted using the market yield at the end of the financial reporting period using the corporate bonds with the maturity terms that matches the estimated future outflows of cash (Stittle and Wearing, 2008). The increase in provision du e to the time passage is recognized as the interest expense. The annual report of the company shows the intangible assets in the balance sheet at the end of the financial reporting period. References Berk, J. and DeMarzo, P. (2007).Corporate finance. Boston: Pearson Addison Wesley. Hillier, D. (2010).Corporate finance. London: McGraw-Hill Higher Education. Holton, R. (2012).Global finance. Abingdon, Oxon: Routledge. Moles, P. (2011).Corporate finance. Hoboken, N.J.: Wiley. Paramasivan, C. and Subramanian, T. (2009).Financial management. New Delhi: New Age International (P) Ltd., Publishers. Spiceland, J., Sepe, J. and Nelson, M. (2011).Intermediate accounting. New York: McGraw-Hill Irwin. Stittle, J. and Wearing, B. (2008).Financial accounting. Los Angeles: SAGE Publications. Wolf, M. (2008).Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.