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IAS 36 Impairment Review Explained

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LYDIA KONG WEI JIE
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48 views3 pages

IAS 36 Impairment Review Explained

Uploaded by

LYDIA KONG WEI JIE
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Chapter 1 Answer

(a) An impairment review as laid out in IAS 36 impairment of Assets is carried out to determine whether the value
of an asset may have fallen below its carrying amount in the statement of financial position. It is a requirement
for goodwill carried in the statement of financial position that it should be tested annually for impairment.
An asset is considered to be impaired if its carrying amount exceeds its recoverable amount, defined as the
higher of fair value less costs to sell and value in use. Value in use is the present value of the future cash
flows which will be generated by the asset. It is often not possible to attribute cash flows to an individual
asset, so in this case the impairment review is carried out at the level of the cash generating unit to which
the asset belongs. A cash generating unit is a group of assets which together generate cash flows. For
instance, a production unit in a factory could be treated as a cash generating unit and any impairment
identified will be apportioned between the assets of the CGU.
(b) (i) Carrying amount of the plant at 31.3.X2
$’000
1.4.X0 Cost 800,000
Depreciation ((800,000 — 50,000) / 5) (150,000)
31.3.X1 Balance 650,000
Depreciation (150,000)
31.3.X2 Balance 500,000
As there is currently no market in which to sell the plant, its recoverable amount will be its value
in

use, calculated as:


Year ended Cash flow Discount factor 10% Present value
$1000 $’000
31 March 20X3 220 0.91 200
31 March 20X4 180 0.83 149
31 March 20X5 170 + 50 0.75 165
514
$’000 $’000 $'000
Goodwill 1,800 Written off (1,800) —
Patent 1,200 W/D to realisable amount (200) 1,000
Factory building 4,000 Working (1,600) 2,400
Plant 3,500 Working (1,700) 1,800
Receivables and cash 1,500 No impairment — 1,500
12,000 (5,300) 6,700

As this is greater than the carrying amount, the plant is not impaired and will be left at its
carrying amount of $500,000.
(ii) The impairment loss will be allocated as follows.

Working

The total amount of the impairment loss to be allocated is $5.3m.


$’000
The initial write-offs are: Damaged plant 500
Goodwill 1,800
Patent 200
2,500
This leaves $2.8m impairment loss to be allocated between the factory building (4,000) and the
remaining plant (3,000). The allocation will be:
Factory (2,800 x 4,000 / 7,000) 1,600
Plant (2,800 x 3,000 / 7,000) 1,200
2,800
1 A cash-generating unit comprises the following assets:
$’000
Building 700
Plant and equipment 200
Goodwill 90
Current assets 20
1,010

One of the machines, carried at $40,000, is damaged and will have to be scrapped. The recoverable amount
of the cash-generating unit is estimated at $750,000.
What will be the carrying amount of the building when the impairment loss has been recognised?
(to the nearest $’000)

A $597,000
B $577,000
C $594,000
D $548,000

2 What is the recoverable amount of an asset?


A Its current market value less costs of disposal
B The lower of carrying amount and value in use
C The higher of fair value less costs of disposal and value in use
D The higher of carrying amount and market value
3 A machine has a carrying amount of $85,000 at the year end of 31 March 20X9. Its
market value is $78,000
and costs of disposal are [Link] $2,500. A new machine would cost $150,000.
The company which owns the machine expects it to produce net cash flows of
$30,000 per annum for the next three years. The
company has a cost of capital of 8%.

What is the impairment loss on the machine to be recognised in the financial statements at
31 March 20X9?

A $7,687
.B $1,667
C $2,200
D $9,500

Common questions

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When there is no active market for an asset, its recoverable amount is determined by its value in use, which is calculated as the present value of future cash flows generated by the asset .

The company would compare the machine's carrying amount with its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The company would also review any indications of impairment such as market value declines, technology changes, reduced cash flow expectations, or physical damage .

Scrapping one of the machines reduces the carrying amount of the assets in the cash-generating unit, which directly impacts the total impairment loss to be recognized. The unit's recoverable amount will reflect this adjustment, impacting the allocation of the impairment loss across other assets .

Failing to conduct a thorough impairment review may lead to overstated asset values and financial statements that do not present a true and fair view of the company's financial position. This can affect decision-making by investors, lenders, and regulators, potentially leading to legal and financial consequences for the company .

IAS 36 mandates that goodwill be tested annually for impairment, regardless of whether there is an indication of impairment, unlike other assets which are only tested when there is an indication they may be impaired. This ensures goodwill is accurately valued in the financial statements, reflecting its recoverable amount annually .

The impairment loss is calculated as the difference between the machine's carrying amount and its recoverable amount. The recoverable amount is determined as the higher of its fair value less costs of disposal or its value in use. In an example, if the carrying amount is $85,000 and the recoverable amount is less, the impairment loss would be recognized based on this difference .

The present value of expected future cash flows is calculated by discounting these cash flows using an appropriate discount rate which reflects the time value of money and the risks specific to the asset. Future cash flows are multiplied by discount factors corresponding to each year's cash flow, cumulative of the risk-adjustment for the cost of capital .

The recoverable amount of an asset is calculated as the higher of its fair value less costs to sell and its value in use .

An asset is considered impaired if its carrying amount exceeds its recoverable amount. The recoverable amount is defined as the higher of fair value less costs to sell and value in use, where value in use is the present value of the future cash flows generated by the asset .

The impairment loss is first allocated to reduce the carrying amount of any goodwill within the CGU, and then proportionately to other assets based on their carrying amounts. For example, a remaining impairment loss of $2.8m can be allocated between assets such as a factory building and plant based on their relative carrying amounts within the CGU .

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