IAS 36 - IMPAIRMENT OF ASSETS
EXAMPLE
An entity has a property that was originally acquired for Le 500,000. The property was revalued
to Le 800,000, and the Le 300,000 was recognized in other comprehensive income as a
revaluation surplus in accordance with IAS 16. The current carrying amount for the property is
Le 750,000. Due to finding that the land on which the property stands is contaminated, the entity
has undertaken an impairment review. The fair value of the property is now estimated to be only
Le 300, 000 and the value in use of the property is calculated as being Le 400,000.
Calculate the impairment loss and show its treatment in the financial statement
SOLUTION
The recoverable amount of the property is therefore Le 400,000.
An impairment of GHS350, 000 has occurred, being the difference between the current carrying
amount of Le 750,000 and the recoverable amount of Le 400,000.
As the property was previously valued upwards, this part of the impairment loss should be
recognized in other comprehensive income, reducing the surplus on the revaluation reserve.
Consequently, Le 300,000 is recognized in other comprehensive income, i.e. it reduces the
revaluation reserve balance to zero. The remaining loss of Le 50,000 is recognized in profit or
loss.
Following the recognition of an impairment loss, any depreciation charged in respect of the asset
in future periods will be based on the revised carrying amount, less any residual value expected,
over the remaining useful life of the asset as per IAS 16.
EXAMPLE
A piece of machinery was originally acquired for Le 100,000. It was expected to have a useful
life of ten years and no residual value. At the start of year six, there was a downturn in demand
due to a competitor product entering the market, and this has led to an impairment of the asset.
The impairment has been calculated as being Le 20,000, although it is expected that the asset
will continue to have a remaining five-year life.
Calculate the depreciation to be charged.
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SOLUTION
At the end of year five, the asset had a carrying amount of Le 50,000 (100, 000 x 5/10years).
The impairment reduces the carrying amount of the asset to Le 30, 000 (Le 50, 000 less Le
20,000) which should be depreciated over the remaining life of five years.
Question
At December 31st, year 1, Dixon Company has specialized equipment with the following
characteristics:
Carrying Amount
50,000
Selling Price
40,000
Cost of disposal
1,000
Estimated future cash flow
55,000
Present value of estimated future cash flow
46,000
Required
Calculate the recoverable amount and the impairment loss
QUESTION
A machine was acquired on 1 January 20X5 at a cost of Le 50,000 and has a useful economic life
of ten years.
At 31 December 20X9 an impairment review was performed. The fair value of the machine is Le
26,000 and the selling costs are Le 2,000.
The expected future cash flows are Le 5,000 per annum for the next five years. The current cost
of capital is 10%. An annuity factor for this rate over this period is 3.791
Prepare extract from the financial statement for the year-ended 31 December 20X9.
QUESTION
Lichen Ltd owns a machine that has a carrying amount of Le 85,000 at the year end of 31 March
20X9. Its market value is Le 78,000 and costs of disposal are estimated at Le 2,500. A new
machine would cost Le 150,000. Lichen Ltd expects it to produce net cash flows of Le 30,000
per annum for the next three years. The cost of capital of Lichen Ltd is 8%.
Calculate the impairment loss on the machine to be recognized in the financial statements at 31
March 20X9.
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Impairment loss identified at a cash generating unit
i.
No impairment loss should be charged to monitory assets (current assets e.g Trade
receivables, Cash in hand, inventory)
ii.
Allocate Maximum impairment loss to goodwill
iii.
Charge impairment loss on specific assets
iv.
Allocate impairment loss on a pro-rata basis to other assets
Note: If the impairment loss is greater than the carrying amount of the relevant goodwill, the
excess should be allocated to the other non-current assets of the group of cash-generating units
on a pro-rata basis of the carrying amount of each asset in the group of cash-generating units.
QUESTION
A cash-generating unit comprises the following assets:
Le'000
Building
700
Plant and equipment
200
Goodwill
90
Current assets
20
One of the machines, carried at Le 40,000, is damaged and will have to be scrapped. The
recoverable amount of the cash-generating unit is estimated at Le 750,000.
Calculate the carrying amount of the building after the impairment loss has been recognized (to
the nearest Le 000)
QUESTION
A business which comprises a single cash-generating unit has the following assets:
Le m
Goodwill
3
Patent
5
Property
10
Plant and equipment
15
Net current assets
2
35
Following an impairment review it is estimated that the value of the patent is Le 2 million and
the recoverable amount of the business is Le 24 million.
At what amount should the property be measured following the impairment review?
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QUESTION
Kabia owned 100% of the equity share capital of Jarai , a wholly-owned subsidiary.
The assets at the reporting date of Sharon were as follows:
Goodwill
Buildings
Plant and equipment
Other intangibles
Receivables and cash
Le’000
2,400
6,000
5,200
2,000
1,400
17,000
On the reporting date a fire within one of Jarai’s buildings led to an impairment review being
carried out.
The recoverable amount of the business was determined to be Le 9.8 million. The fire destroyed
some plant and equipment with a carrying value of Le 1.2 million and there was no option but to
scrap it.
The other intangibles consist of a license to operate Jarai’s plant and equipment. Following the
scrapping of some of the plant and equipment a competitor offered to purchase the patent for Le
1.5 million.
The receivable and cash are both stated at their realizable value and do not require impairment.
Required: Show how the impairment loss in Sharon is allocated amongst the assets.
Question
Finsbury Co has a cash generating unit (CGU) that suffers a large drop in income due to reduced
demand for its products. An impairment review was carried out and the recoverable amount of
the cash generating unit was determined at $100m. The assets of the CGU had the following
carrying amounts immediately prior to the impairment:
$m
Goodwill
25
Intangibles
60
Property, plant and equipment
30
Inventory
15
Trade receivables
10
140
The inventory and receivables are considered to be included at their recoverable amounts
What is the carrying amount of the intangibles once the impairment loss has been allocated?
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ASSIGNMENT
QUESTION1.
Isaac Ltd produces and exports lumber and planks. It owns a plant which has book value of Le
1,800,000 as at 1 January 2011. The Government of Sierra Leone passed a legislation that
restricts the exportation of lumber. Consequently, Isaac Ltd has to reduce production
significantly. Cash flow forecast for the next four years included in the budget submitted for
management approval in January 2011 shows the following:
Year
Cash Flows (Leones)
2011
550,000
2012
500,000
2013
300,000
2014
700,000
The cash flow forecast for 2014 includes expected proceeds from disposal of the plant. The cash
flow projections also ignore the effects of general upwards movement in prices.
It is estimated that if the plant is sold in January 2011, it would realize net proceeds of Le
1,320,000.
The cost of capital for Isaac Ltd is 15% (ignore inflationary effect).
Required
Calculate the recoverable amount of the plant and impairment loss (if any)
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QUESTION 2
On 1 January 20x0, Multiplex acquired Steamdays, a company that operates a science railway
along the coast of a popular tourist area the summarized statement of financial position at fair
values of steamdays on 1 January 20x0, reflecting the terms of acquisition was:
Le
Goodwill
Operating License
200
1,200
Property - Train station stand
300
Rail track & coaches
300
Two Steams engines
1,000
Purchase Consideration
3,000
The operating license is for ten years. It was renewed on 1 January 20x0 by the transport
authority and is stated at the cost of its renewal. The carrying values of the property and rail track
and coaches are based on their value in use. The engines are valued at their net selling price.
On 1 February 20x0 the boiler of one of the engines exploded, completely destroyed the whole
engine. Fortunately, no one was injured, but the engine was beyond repair.
Due to age, a replacement could not be obtained. Because of the reduced passenger capacity, the
estimated value in use of the whole of the business after the accident was assessed at Le 2M.
Passenger numbers after the accident were below expectations even allowing for reduced
capacity.
A market research report concluded that tourist were not using the railway because of their fear
of a similar accident occurring to the remaining engine
In the light of this, the value in use of the business was re-assessed on 31 March, 20x0 at Le
1.8M
On this date, Multiplex received an offer of Le 900,000 in respect of the operating license (it is
transferable). The realizable value of the net assets has not changed
The realizable value of the net assets has not changed significantly.
Required:
Calculate the carrying value of the assets of steamdays (in Multiplex Consolidated statement of
financial position) at February 20x0 and 31 March 20x0 after recognizing the impairment losses
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