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- 6 Marks
Question
Afoko Ltd acquired a car taxi business on 1 January 2015 for GH¢230,000. The value of the assets of the business at that date based on net selling price were as follows:
| Assets | GH¢’000 |
|---|---|
| Vehicles | 120 |
| Intangible assets | 30 |
| Trade receivables | 10 |
| Cash | 50 |
| Trade payables | (20) |
| Net assets | 190 |
On 1 February 2015, the taxi business had three (3) of its vehicles stolen. The net selling values of these vehicles was GH¢30,000, and because of non-disclosure of certain risks to the insurance company, the business was uninsured. As a result of this event, Afoko Ltd wishes to recognize an impairment loss of GH¢45,000, inclusive of the loss of the stolen vehicles due to the decline in value of the stolen income-generating unit, that is the taxi business. On 1 March 2015, a rival taxi company commenced business in the same area. It is anticipated that the business revenue of Afoko Ltd would be reduced by 25%, leading to a decline in the present value in use of the business, which is calculated at GH¢150,000. The net selling value of the taxi license has fallen to GH¢25,000 as a result of the rival taxi operator. The net selling values of the other assets have remained the same as at 1 January 2015.
Required:
Recommend how Afoko Ltd should account for the above transaction in its financial statements in accordance with IAS 36 Impairment of Assets.
(6 marks)
Answer
Under IAS 36 Impairment of Assets, Afoko Ltd must determine the recoverable amount of the taxi business, which is the higher of fair value less costs to sell and value in use. If the recoverable amount is lower than the carrying amount, an impairment loss should be recognized.
Steps to account for impairment:
Determine the carrying amount of the business as of 1 February 2015:
Determine the recoverable amount as of 1 March 2015:
In this case, since there is no goodwill, the impairment loss should be allocated to the remaining assets. The intangible asset (taxi license) would likely be impaired due to the competitive pressures from the rival company.
Conclusion:
Afoko Ltd should recognize an impairment loss of GH¢10,000 in its financial statements, reducing the carrying amount of the intangible asset (taxi license).
- Tags: Cash-Generating Unit, Goodwill, Impairment, Recoverable Amount
- Level: Level 3
- Topic: IAS 36: Impairment of assets
- Series: NOV 2016
- Uploader: Theophilus