Question Tag: Recoverable Amount

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  • 5 Marks

CR – May 2016 – L3 – Q2a – IAS 36: Impairment of assets

Analyze the circumstances under which impairment losses arise and demonstrate the circumstances that may indicate that a company's assets may have become impaired as per the provisions of IAS 36 – Impairment of Assets.

Analyze the circumstances under which impairment losses arise and demonstrate the circumstances that may indicate that a company’s assets may have become impaired as per the provisions of IAS 36 – Impairment of Assets.

An impairment loss arises where the carrying value of an asset, or group of assets, is higher than their recoverable amounts. In effect the standard requires that assets should not appear in a statement of financial position at a value which is higher than they are worth. The recoverable amount of an asset is defined as the higher of its net realizable value (i.e. the amount at which it can be sold for net of direct selling expenses) or its value in use (i.e. its estimated future net cash flows discounted to a present value). IAS 36 Impairment of Assets recognizes that many assets do not produce independent cash flows and therefore the value in use may have to be calculated for a group of assets – a cash generating unit.

The standard recognizes that it would be too onerous for companies to have to test for impaired assets every year and therefore only requires impairment reviews when there is some indication that impairment has occurred. The exception to this general principle is where an intangible asset has an indefinite useful or is not yet available for use, in which case an impairment review is required at least annually. This also applies to goodwill acquired in a business combination. Impairments generally arise where there has been an event or change in circumstances. It may be that something has happened to the assets themselves (e.g. physical damage) or there has been a change in the economic environment relating to the assets.

Indicators of Impairment which may be available from internal or external sources:

o Poor operating results – this could be a current operating loss or a low profit. One year’s losses in itself does not necessarily mean there has been an impairment, but if this is coupled with previous losses or expected future losses then there is an indication of impairment.

o A significant decline in an asset’s market value (in excess of normal depreciation through use or the passage of time) or evidence of obsolescence (through market changes or technology) or physical damage.

o Evidence of a reduction in the useful economic life or the estimated residual value of assets.

o Adverse changes in the market or economy such as the entrance of a major competitor, new statutory or regulatory rules or any indicator of value that has been used to value an asset.

o A commitment to a significant reorganization or restructuring of the business.

o Loss of key employees or major customers.

o Increases in long-term interest rates which could materially impact on value in use calculations thus affecting the recoverable amounts of assets.

o Where the carrying amount of an entity’s net assets is more than its market capitalization.

  • 6 Marks

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

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)

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).

  • 5 Marks

CR – Mar 2023 – L3 – Q3a – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40) ,IAS 36: Impairment of Assets,

Discuss the impairment of a printing machine owned by Dajanso Plc, including necessary computations.

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.

  • 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)
  • 7 Marks

CR – Dec 2022 – L3 – Q2a – IAS 36: Impairment of assets

Calculate impairment loss and revised carrying amounts for Inaki Group in relation to goodwill and other assets.

Inaki Group (Inaki) has held a 90% interest in a subsidiary for over five years and prepares its consolidated financial statements to 31 March each year. The share consideration given for this investment was GH¢3,960 million and fair value increase in respect of non-depreciable land was GH¢200 million (this has not changed since acquisition). Due to the difficulties in determining reliable fair value of the investment in the subsidiary, Inaki measures the non-controlling interests at their proportion of the subsidiary’s net assets. The subsidiary’s net assets (excluding any fair value adjustment and goodwill) at acquisition and current reporting dates are provided below:

Reporting Acquisition
Properties GH¢2,300m GH¢1,800m
Plant & equipment GH¢1,500m GH¢1,400m
Net current assets GH¢680m GH¢600m
Total GH¢4,480m GH¢3,800m

Inaki has determined the recoverable amount of the subsidiary to be GH¢4,140 million at the reporting date. No impairment losses have previously been recognised for the goodwill. Net current assets above are stated below their recoverable amount.

Required:
From the above, determine how much impairment loss (if any) would be recognised by Inaki Group at the current reporting date and indicate the revised carrying amounts (if applicable) of the subsidiary in line with the applicable IFRS.
(Total: 7 marks)

Computation of goodwill:

GH¢ million
Purchase consideration 3,960
Add: NCI’s share of net assets at acquisition (10% x (3,800+200 =4,000)) 400
Total 4,360
Less: Net assets at acquisition (4,000)
Goodwill 360

Test for impairment at reporting date:

GH¢ million
Goodwill gross-up (360 x 100/90) 400
Properties (2,300 + 200) 2,500
Plant & equipment 1,500
Net current assets 680
Total carrying amount 5,080
Recoverable amount 4,140
Impairment (940)

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