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- 5 Marks
Question
Dajanso Plc owns a number of printing shops across the country. On 1 January 2021, the carrying amount of Dajanso’s largest printing machine was GH¢65 million. The machine had a remaining useful life of five years and a residual value of GH¢7 million using the cost model. Due to a fall in demand for printed books, management conducted an impairment review of the printing machine on 30 June 2021.
At this date, the estimated selling price was GH¢55 million, including GH¢4 million, which would be received after reconditioning the asset. Agent fees would be 5% of the appropriate fair price. If the machine is kept in use, it is estimated to generate real cash flows of GH¢20 million a year over its remaining life (now estimated to be three years), with a revised residual value of GH¢6 million. The following discount rates are applicable:
| Rate Type | Pre-tax Nominal | Pre-tax Real | Post-tax Nominal | Post-tax Real |
|---|---|---|---|---|
| Discount Rate (p.a.) | 11.9% | 8.3% | 10.5% | 6.6% |
Required:
In line with IAS 16 Property, Plant, and Equipment and IAS 36 Impairment of Assets, recommend how Dajanso would account for the plant in its financial statements for the year ended 31 December 2021. Show appropriate computations where necessary.
Answer
- Carrying Amount at 30 June 2021:
The carrying amount of the machine was GH¢59.2 million (GH¢65 million less depreciation of GH¢5.8 million). Depreciation is calculated as:
(65−7)×15×612=GH¢5.8million(65 – 7) \times \frac{1}{5} \times \frac{6}{12} = GH¢5.8 million - Fair Value Less Cost of Disposal (FVLCOD):
Fair value: GH¢55 million
Reconditioning cost: GH¢4 million is included in the fair value, so it does not need to be deducted.
Less: Agent fees = 5% of GH¢55 million = GH¢2.75 million
FVLCOD = GH¢52.25 million - Value in Use (VIU):
Discount the estimated real cash flows of GH¢20 million per year over three years, using the pre-tax real discount rate of 8.3%.
GH¢20million×3−yearannuityfactor(2.563)=GH¢51.26millionGH¢20 million \times 3-year annuity factor (2.563) = GH¢51.26 million
Residual value = GH¢6 million GH¢6million×3−yeardiscountfactor(0.787)=GH¢4.72millionGH¢6 million \times 3-year discount factor (0.787) = GH¢4.72 million
Total VIU = GH¢55.98 million - Impairment Loss:
The recoverable amount is the higher of FVLCOD and VIU. Here, VIU is higher at GH¢55.98 million.
The impairment loss is the difference between the carrying amount and the recoverable amount:
Impairmentloss=GH¢59.2million−GH¢55.98million=GH¢3.22millionImpairment loss = GH¢59.2 million – GH¢55.98 million = GH¢3.22 million
This impairment would be recognised in the profit or loss statement. - Depreciation:
After recognising the impairment loss, the machine’s new carrying amount is GH¢55.98 million.
Depreciation for the remaining six months of the year would be:
(55.98−6)×13×612=GH¢8.33million(55.98 – 6) \times \frac{1}{3} \times \frac{6}{12} = GH¢8.33 million
The total depreciation for the year would be GH¢14.13 million (GH¢5.8 million before impairment and GH¢8.33 million after).
Marks Allocation:
- Carrying amount and depreciation: 0.5 marks
- Fair value calculation: 1 mark
- Value in use calculation: 1.5 marks
- Impairment loss calculation: 0.5 marks
- Depreciation calculation: 1 mark
(Total: 5 marks)
- Tags: Equipment, Impairment, Plant, Property, Recoverable Amount, Value in Use
- Level: Level 3
- Topic: IAS 20 and IAS 40), IAS 36: Impairment of assets
- Series: MAR 2023
- Uploader: Dotse