Practice Questions: IAS 36 (Impairment of Assets)

Example # 1

A company owns a car that was involved in an accident at the year end. It is barelyuseable, so the value in use is estimated at $1,000. However, the car is a classic and thereis a demand for the parts. This results in a fair value less costs to sell of $3,000. The opening carrying value was $8,000 and the car was estimated to have a life of eight years from the start of the year.

Required: Identify the recoverable amount of the car and any impairment required.

                                                         

Example # 2

An entity owns a property which was originally purchased for $300,000. The property has been revalued to $500,000 with the revaluation of $200,000 being recognized as other comprehensive income and recorded as revaluation reserve. The property has a current carrying value of $460,000 but the recoverable amount of the property has just been estimated at only $200,000.

Required: What is the amount of impairment and how should this be treated in the financial statements?

Example # 3

Oscar PLC acquired its head office on 1 January 2001 at a cost of £10 million (excluding land). The company’s depreciation policy is to depreciate property over 50 years on a straight-line basis. Estimated residual value is zero. On 31 December 2005, Oscar PLC revalued the non-land element of its head office to £16 million. In accordance with IAS 16 Property plant and equipment the company has elected not to transfer annual amounts out of revaluation reserves as assets are used. In January 2011 storm damage occurred and the recoverable amount of the head office property (excluding land) fell to £5.8 million. Required: According to IAS 36, what impairment charge should be recognized in the statement of comprehensive income arising from the impairment review in January 2011?

Example # 4

X Ltd has a single manufacturing plant which has a carrying amount of £900,000. A new government has passed legislation which significantly restricts exports of the product produced by the plant. As a consequence, and for the foreseeable future, X Ltd’s production will be cut by 40%. Cash flow forecasts have been prepared derived from the most recent budgets/forecasts for the next five years approved by management. 

Year                            1          2          3          4          5 

£000    £000    £000    £000   £000

Future cash flows          280      253      188      125     280

 (including disposal  proceeds)

If the plant was sold now if would realize £660,000, net of selling costs. X Ltd estimates the pre-tax discount rate specific to the plant to be 15%, excluding the effects of general inflation.

Required: Calculate the recoverable amount of the plant and any impairment loss.

Example # 5

Carrying Value of an asset on 31-Dec-20x4 was $760000

Fair Value of that asset on that point of time is $820000, whereas the company will have to undergo the process for selling this asset and that efforts will cost company $90000.

Company estimated the outcome from the asset as follows:
$80000 per year for 5 years, and at the time of disposal the asset will generate the disposal proceed of $180000. D.F @ 12%

Required: Show workings for impairment

Example # 6

A company runs a unit that suffers a massive drop in income due to the failure of its technology on 1 January 2008. The following carrying values were recorded in the books immediately prior to the impairment:

$M

Goodwill                      20

Technology                  5

Brands                         10

Land50Buildings          30

Other Net Assets          40

The recoverable value of the unit is estimated at $85 million. The technology is worthless, following its complete failure. The other net assets include inventory, receivables and payables. It is considered that the book value of other net assets is a reasonable representation of its net realizable value.Required:Show the impact of the impairment on 1 January.

Example # 7

A CGU holds the following assets:

           £000

Goodwill                                              40

Patent                                                   80

Property, plant and equipment                120

Total                                                    240

An annual impairment review is required as the CGU contains goodwill. The most recent review assesses its recoverable amount to be £180,000. An impairment loss of £60,000 has been incurred and is recognised in the statement of comprehensive income. First, the entity reduces the carrying amount of goodwill. As the impairment loss exceeds the value of goodwill within the CGU, all the goodwill is written off. The entity then reduces the amount of other assets on a pro rata basis. Hence the remaining loss of £20,000 should be allocated pro rata between the property, plant and equipment and the patent.

Required: Show workings for impairment allocation

Example # 8

Blizzard Ltd has a division that represents a separate cash generating unit. At 30 June 2017, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:

Assets:	$
Cash	32,000
Motor vehicles	300,000
Less: accumulated depreciation	(120,000)
Plant and equipment	200,000
Less: accumulated depreciation	(50,000)
Land	600,000
Inventory	5,000
Accounts receivable	13,000
Patent	60,000
Goodwill	15,000
Carrying amount of cash generating unit	1,055,000

The receivables were regarded as collectable, and the inventory is measured at the lower of cost and net realizable value which is now at $4700. The patent has a fair value less costs to sell of $50,000, and the land has a fair value less costs to sell of $520,000.

The directors of Blizzard estimate that, at 30 June 2017, the fair value less costs to sell of the division amounts to $820,000, while the value in use of the division is $900,000.

Required:

Determine how Blizzard Ltd should account for the results of the impairment test at 30 June 2017, and prepare any necessary journal entries.

Example # 9

The company acquired a machine at a cost of $400 in the year 2001.

The company policy is to charge deprecation straight line basis @10%.

The useful life of machine is 10 years.

At the end of 2002 year the recoverable amount of the machine was estimated Was estimated as $300 causing an impairment loss.

Again after 4 years of acquisition of machine due to technological changes the recoverable amount was estimated as $272 causing a reversal of impairment loss.

Required: Account for the impairment loss and then the subsequent reversal

Example # 10

At 30 June 2009, Reacher Ltd reported the following assets:

$

Land                                        50,000

Plant                                        250,000

Accumulated depreciation         (50,000)

Goodwill                                  8,000

Inventory                                 40,000

Cash                                         2,000

All assets are measured using the cost model.

At 30 June 2009, the recoverable amount of the entity, considered to be a single cash-generating unit, was $272,000.

For the period ending 30 June 2010, 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 2010, the recoverable amount of the entity was calculated to be $13,000 greater than the carrying amount of the assets of the entity. As a result, Reacher Ltd recognized a reversal of the previous year’s impairment loss.

Required: Account for the impairment loss and then the subsequent reversal

Example # 11

At the end of 2000, Par Ltd. acquired Sub Ltd. for $3,000m. Sub Ltd. had manufacturing plants in country A. Owing to poor business situation, impairment loss had been made in 2004 as shown in schedule 1.

In relation to country A’s assets, Par Ltd. used straight-line depreciation and amortization over a 15-year life and no residual value was anticipated.

In 2006, management estimates that production will increase by 30%. This favorable change requires Par Ltd to re-estimate the recoverable amount of the assets of its Country A operations. Suppose calculations show that the recoverable amount of Country A cash generating unit is now $1,710m.

Schedule 1

End of 2004                                                   Goodwill          Other Assets                    Total

Historical cost                                                  1,000                2,000                            3,000

Accumulated depreciation                                 (267)               (533)                            (800)

Carrying amount                                               733                  1,467                           2,200

Impairment loss                                                (733)                (107)                            (840)

Carrying amount after impairment                     0                     1,360                           1,360

Required: Calculate the excess of re-estimated recoverable amount over carrying amount of assets at the end of 2006, the amount of reversal of impairment loss, and the carrying amount of the country A cash generating unit after reversal of the impairment loss?