Exercises
Exercise 15.14
★
STAR RATING
★ BASIC
★★ MODER ATE
★★★ DIFFICULT
DETERMINATION OF CGUS
The Rennes City Council contracts out the bus routes in Rennes to various subcontractors based on a
tender arrangement. Some routes, such as the Express to City routes, are profitable, while others, such as
those collecting schoolchildren from remote areas, are unprofitable. As a result, the city council requires
tenderers to take a package of routes, some profitable, some less so. The Le Bon Bus Company has won the
contract to operate its buses with a package of five separate routes, one of which operates at a significant
loss. Specific buses are allocated by the Le Bon Bus Company to each route, and cash flows can be isolated
to each route because drivers and takings are specific to each route.
Required
Discuss the determination of cash-generating units for Le Bon Bus Company.
Exercise 15.15
★
IMPAIRMENT LOSS, GOODWILL
On 1 January 2015, Narrabri Ltd acquired all the assets and liabilities of Oakey Ltd. Oakey Ltd has a
number of operating divisions, including one whose major industry is the manufacture of toy trains, particularly those of historical significance. The toy trains division is regarded as a cash-generating unit. In
paying $2 million for the net assets of Oakey Ltd, Narrabri Ltd calculated that it had acquired goodwill
of $240 000. The goodwill was allocated to each of the divisions, and the assets and liabilities acquired
measured at fair value at acquisition date.
At 31 December 2017, the carrying amounts of the assets of the toy train division were:
Factory
Inventory
Brand — ‘Froggy’
Goodwill
$250 000
150 000
50 000
50 000
There is a declining interest in toy trains because of the aggressive marketing of computer-based toys, so
the management of Narrabri Ltd measured the recoverable amount of the toy train division at 31 December
2017, determining it to be $423 000.
Required
Prepare the journal entries to account for the impairment loss at 31 December 2017.
Exercise 15.16
★
IMPAIRMENT LOSS, GOODWILL, PARTLY OWNED SUBSIDIARY
Winton Ltd acquired 60% of the issued shares of Wodonga Ltd on 1 January 2016 for $426 000. At this
date, the net fair value of the identifiable assets and liabilities of Wodonga Ltd was $660 000.
At 31 December 2016, the tangible assets and liabilities of Wodonga Ltd as included in the consolidated
financial statements of Winton Ltd were as follows:
Property, plant and equipment
Accumulated depreciation
Inventory
Cash
Liabilities
$ 863 000
(120 000)
743 000
55 000
22 000
820 000
(50 000)
$ 770 000
Goodwill had not been written down over the year.
In conducting an impairment test on Wodonga Ltd as a cash-generating unit, Winton Ltd assessed the
recoverable amount of Wodonga Ltd to be $800 000.
Required
1. Explain how the impairment loss in relation to Wodonga Ltd should be allocated. Prepare journal entry(ies) in relation to the assets of Wodonga Ltd at 31 December 2016 as a result of the impairment test.
2. Explain the accounting for the impairment (if any) if the recoverable amount was $860 000.
CHAPTER 15 Impairment of assets
1
Exercise 15.17
EFRAG RESPONSE TO PROPOSED AMENDMENTS
★★ Read the following comments made by the European Financial Reporting Advisory Group (EFRAG) in its
response, dated 4 April 2003 (pp. 4–5), to the IASB on the proposed amendments to IAS 36:
Impairment test
The proposed impairment test does not distinguish between acquired goodwill and pre-existing goodwill of the
acquirer nor between acquired goodwill and goodwill internally generated after the combination. This results in
‘cushions’, so avoiding recognition of real impairment losses of goodwill in certain situations when the impairment test is performed. We believe that this undermines the reliability of the information obtained.
The Board claims that there seems to be no alternative design for the impairment test to avoid this. This may
be true for the replacement of acquired goodwill by self-generated goodwill of the acquired business but we
believe a stronger effort should be made to eliminate the cushion provided by the pre-acquisition self-generated
goodwill of the acquirer. The current UK accounting standard FRS 11 Impairment of Fixed Assets and Goodwill
attempts to make such a distinction.
We urge the Board to delete the second step of the impairment test (paragraph 86). We believe that the second
step, which measures the amount of goodwill impairment by comparing its carrying amount with its implied
value, is costly and does not improve the quality of the information.
In our view it suffices to allocate the identified impairment firstly to goodwill and then to intangible assets
with indefinite useful lives that are part of the cash-generating unit and any remainder to other assets on a pro
rata basis.
Required
Evaluate the comments made by EFRAG.
Exercise 15.18
DELOITTE TOUCHE TOHMATSU RESPONSE
★★ Read the following comments made by Deloitte Touche Tohmatsu (4 April 2003, p. 7) on the proposed
amendments to IAS 36:
We agree with the conclusion that goodwill acquired in a business combination should be recognised as an asset.
With regard to the accounting for goodwill after initial recognition, we generally agree with the Board’s proposal.
However, we note that there may be circumstances where goodwill has a finite life. For example, this may be the
case when an entity has a specified life. In certain jurisdictions such as the People’s Republic of China (the PRC),
foreign investment is made by means of certain legal structures that expire after a specified number of years. At the
end of the agreed period, the assets will revert to the PRC partner. In such circumstances, any goodwill will have
an implied value of zero at the end of the entity’s life.
Consequently, we believe that, in accounting for goodwill after initial recognition, there should be a rebuttable
presumption that goodwill has an indefinite life and, therefore, accounted for at cost less any accumulated
impairment losses. However, in those cases where that presumption is rebutted and sufficient persuasive evidence exists indicating that goodwill has a finite life, we believe that a method of systematic amortisation is
preferable to ‘impairment only’ accounting. In such cases, we believe that goodwill, consistently with other
intangible assets that have a finite life, should be amortised and tested for impairment when an indicator exists.
The impairment test applied to goodwill with a definite life should be the same test as goodwill with an indefinite life.
Required
Evaluate the comments made by Deloitte Touche Tohmatsu.
Exercise 15.19
IDENTIFICATION OF CGUS
★★ Fad Furniture Ltd has three separate operating divisions. The first, the timber division, is in charge of producing milled timber. This division manages a number of timber plantations and timber mills from which
the finished timber is produced. The majority of the timber is sold, at an internal transfer price, to the second
area of operations in Fad Furniture, the parts division. Any excess timber is sold to external parties. The parts
division is responsible for turning the timber into parts for the making of timber furniture, both indoor and
outdoor. These parts are suitable only for the manufacture of the furniture produced by Fad Furniture. The
parts are then transferred at internal transfer prices to the third area of operations, the furniture division. This
division assembles the furniture and delivers it to the various outlets that retail Fad Furniture’s products.
Required
1. Identify the cash-generating unit(s) in this scenario, giving reasons for your conclusions.
2. Would the determination of the cash-generating units be affected if the parts division was also responsible for kit furniture, where the parts are made available to customers for self-assembly?
2
PART 2 Elements
Exercise 15.20
★★
IMPAIRMENT LOSS FOR A CASH-GENERATING UNIT, REVERSAL OF IMPAIRMENT LOSS
One of the cash-generating units of Broome Ltd is associated with the manufacture of wine barrels. At 30
June 2016, Broome Ltd believed, based on an analysis of economic indicators, that the assets of the unit
were impaired. The carrying amounts of the assets and liabilities of the unit at 30 June 2016 were:
Buildings
Accumulated depreciation — buildings*
Factory machinery
Accumulated depreciation — machinery**
Goodwill
Inventory
Receivables
Allowance for doubtful debts
Cash
Accounts payable
Loans
$ 420 000
(180 000)
220 000
(40 000)
15 000
80 000
$40 000
(5 000)
20 000
30 000
20 000
* Depreciated at $60 000 p.a.
** Depreciated at $45 000 p.a.
Broome Ltd determined the value in use of the unit to be $535 000. The receivables were considered to
be collectable, except those considered doubtful. The company allocated the impairment loss in accordance with IAS 36.
During the 2016–17 period, Broome Ltd increased the depreciation charge on buildings to $65 000 p.a.,
and to $50 000 p.a. for factory machinery. The inventory on hand at 1 July 2016 was sold by the end of
the year. At 30 June 2017, Broome Ltd, because of a return in the market to the use of traditional barrels
for wines and an increase in wine production, assessed the recoverable amount of the cash-generating unit
to be $30 000 greater than the carrying amount of the unit. As a result, Broome Ltd recognised a reversal
of the impairment loss.
Required
1. Prepare the journal entries for Broome Ltd at 30 June 2016 and 2017.
2. What differences would arise in relation to the answer in requirement 1 if the recoverable amount at 30
June 2017 was $20 000 greater than the carrying amount of the unit?
3. If the recoverable amount of the buildings at 30 June 2017 was $175 000, how would this change the
answer to requirement 2?
Exercise 15.21
ALLOCATION OF CORPORATE ASSETS
★★ Hay Ltd has three cash-generating units, Hebel Division, Hawker Division and Hillston Division. The head
office is in the city, and the infrastructure for the divisions is located outside the city centre. Because of
the potential for the company to have problems of an environmental nature or in relation to social justice, particularly with its mix of employees, Hay Ltd has recently established a social responsibility centre
(SRC), which interacts with the divisions, generating information and statistics for the production of a
triple-bottom-line social responsibility report.
At 30 June 2017, the net assets relating to each of the divisions as well as the headquarters section and
the SRC were as follows:
Land
Plant and equipment
Accumulated depreciation
Inventories
Accounts receivable
Liabilities
Net assets
Hebel
Division
Hawker
Division
Hillston
Division
Head
office
SRC
$ 120 000
420 000
(120 000)
150 000
90 000
660 000
60 000
$ 600 000
$ 140 000
310 000
(100 000)
110 000
80 000
540 000
50 000
$ 490 000
$ 80 000
270 000
(80 000)
100 000
50 000
420 000
50 000
$ 370 000
$ 10 000
40 000
(5 000)
0
0
45 000
0
$ 45 000
$ 5 000
15 000
(4 000)
0
0
16 000
0
$ 16 000
CHAPTER 15 Impairment of assets
3
Hay Ltd believes that the corporation’s headquarters supplies approximately equal service to the three
divisions, and an immaterial amount to the SRC. Because the SRC has been established only recently, it
is not possible at this stage to allocate the assets of the SRC to the three divisions. Economic indicators
suggest that the company’s assets may have been impaired, so management has determined the value in
use of each of the divisions — the head office and the SRC do not generate cash inflows. The recoverable
amount of the three divisions were calculated to be:
Hebel Division
Hawker Division
Hillston Division
$720 000
500 000
400 000
Required
Determine how Hay Ltd should account for any impairment loss to the entity.
Exercise 15.22
★★
IMPAIRMENT, TWO CASH-GENERATING UNITS
Miles Ltd has two divisions, Jericho and Jackson. Each of these is regarded as a separate cash-generating
unit.
At 31 December 2016, the carrying amounts of the assets of the two divisions were:
Plant
Accumulated depreciation
Patent
Inventory
Receivables
Goodwill
Jericho
Jackson
$ 1 500
(650)
240
54
75
25
$1 200
(375)
75
82
20
The receivables were regarded as collectable, and the inventory’s fair value less costs of disposal was
equal to its carrying amount. The patent had a fair value less costs of disposal of $220. The plant at Jericho
was depreciated at $300 p.a., and that at Jackson was depreciated at $250 p.a.
Miles Ltd undertook impairment testing at 31 December 2016, and determined the recoverable amounts
of the two divisions to be:
Jericho
Jackson
$1 044
990
As a result, management increased the depreciation of the Jericho plant from $300 to $350 p.a. for the
year 2016.
By 31 December 2017, the performance in both divisions had improved, and the carrying amounts of
the assets of both divisions and their recoverable amounts were as follows:
Carrying amount
Recoverable amount
Jericho
Jackson
$ 1 322
1 502
$1 433
1 520
Required
Determine how Miles Ltd should account for the results of the impairment tests at both 31 December 2016
and 31 December 2017.
Exercise 15.23
★★
4
CORPORATE ASSETS
Albury Ltd recently conducted an impairment test on the company. It determined that it had two cashgenerating units, Division One and Division Two. Both divisions were considered to be impaired, with
Division One having an impairment loss of $25 000 and Division Two having an impairment loss of
$30 000. These losses were allocated to the assets of the divisions in accordance with IAS 36 Impairment of
Assets, with the assets and liabilities of the divisions after the allocation being recorded as follows:
PART 2 Elements
Division One
Cash
Inventory
Receivables
Plant
Accumulated depreciation
Land
Buildings
Accumulated depreciation
Furniture & fittings
Accumulated depreciation
Total assets
Provisions
Borrowings
Total liabilities
Net assets
Division Two
$
5 000
30 000
20 000
320 000
(120 000)
80 000
110 000
(40 000)
40 000
(15 000)
430 000
20 000
30 000
50 000
$ 380 000
$
8 000
40 000
8 000
300 000
(120 000)
50 000
100 000
(60 000)
30 000
(10 000)
346 000
40 000
66 000
106 000
$ 240 000
Albury Ltd also recorded goodwill of $14 000 (net of accumulated impairment losses of $12 000)
and had corporate assets consisting of a head office building carried at $150 000 (net of depreciation of
$50 000) and furniture and fittings of $80 000 (net of depreciation of $20 000).
Albury Ltd determined that the recoverable amount of the entity’s assets was $950 000.
The management of Albury Ltd then completed the accounting for impairment losses. The receivables in
both divisions were considered to be collectable.
Required
Prepare a table of the assets and liabilities of Albury Ltd, using the headings ‘Division One’, ‘Division Two’
and ‘Corporate’, after the completion of accounting for impairment losses.
Exercise 15.24
★★
CORPORATE ASSET
Fiery Ltd is a company that is operated through two divisions, namely Green Ltd and Dragon Ltd. These
divisions were regarded as separate cash-generating units. The assets of the two divisions at 30 June 2016
were as follows:
Land
Plant
Accumulated depreciation
Equipment
Accumulated depreciation
Inventory
Goodwill
Green Ltd
Dragon Ltd
$100 000
280 000
(60 000)
160 000
(40 000)
60 000
20 000
$520 000
$ 64 000
145 000
(30 000)
220 000
(20 000)
36 000
15 000
$430 000
Fiery Ltd had a corporate headquarters carried at an amount of $100 000. This asset could not be allocated on a reasonable basis to the cash-generating units.
At 30 June 2016 there were indications that the assets of the company may be impaired. The company
calculated the recoverable amounts to be as follows:
Fiery Ltd
Green Ltd
Dragon Ltd
$973 000
$478 000
$420 000
The inventory had fair values less costs of disposal greater than the current carrying amounts. The land
held by Green Ltd had fair value less costs of disposal of $97 000.
Required
Prepare the journal entries at 30 June 2016 to record the accounting for the impairment losses.
CHAPTER 15 Impairment of assets
5
Exercise 15.25
REVERSAL OF IMPAIRMENT LOSSES
★★ At 30 June 2016, Reacher Ltd reported the following assets:
Land
Plant
Accumulated depreciation
Goodwill
Inventory
Cash
$ 50 000
250 000
(50 000)
8 000
40 000
2 000
All assets are measured using the cost model.
At 30 June 2016, the recoverable amount of the entity, considered to be a single cash-generating unit,
was $272 000.
For the period ending 30 June 2017, the depreciation charge on plant was $18 400. If the plant had not
been impaired the charge would have been $25 000.
At 30 June 2017, the recoverable amount of the entity was calculated to be $13 000 greaterâ¯than the
carrying amount of the assets of the entity. As a result, Reacher Ltd recognised a reversal of the previous
year’s impairment loss.
Required
Prepare the journal entries relating to impairment at 30 June 2016 and 2017.
6
PART 2 Elements