03 IAS 36 Impairment of assets PDF

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© kashifadeelPage | 1IAS 36Impairment ofAssets03INTRODUCTIONSCOPEExcluded Inventories [IAS 2]  Assets arising from contracts with customers [IFRS 15]  Investment property at fair value [IAS 40]IAS 36 also does not apply to deferred tax assets [IAS 12], assets arising from employee benefits [IAS 1...

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CAF 5 – IAS 36

IAS 36

Impairment of Assets

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INTRODUCTION SCOPE    Excluded

Revalued assets DEFINITIONS Impairment loss Recoverable amount Fair value Cost of disposal Value in use

Inventories [IAS 2] Assets arising from contracts with customers [IFRS 15] Investment property at fair value [IAS 40]

IAS 36 also does not apply to deferred tax assets [IAS 12], assets arising from employee benefits [IAS 19], financial assets [IFRS 9], biological assets measured at fair value less costs to sell [IAS 41], non-current assets held for sale [IFRS 5], which are out of syllabus at this level.  If costs of disposal are negligible, there is no need to apply IAS 36.  If costs of disposal are NOT negligible, IAS 36 shall be applied as there may or may not be an impairment loss.

Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cost of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense. Value in use is the present value of the future cash flows expected to be derived from an asset, including its eventual disposal.

TIMING OF IMPAIRMENT REVIEW IAS 36 requires that at each reporting date, an entity must assess whether there are indications of impairment. Indications may be derived from within the entity (internal sources) or the external market (external sources).  Obsolescence or physical damage or no longer of use to the entity  Significant changes with an adverse effect in the manner in which an Internal asset is used or is expected to be used.  Economic performance of an asset is worse than expected. sources  Actual cash flows are worse than the budgeted e.g. reduction is expected remaining useful life.

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CAF 5 – IAS 36 Asset’s market value has declined significantly more than expected. Significant changes with an adverse effect in the technological, market, economic or legal environment in which the entity operates.  Market interest rates have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use  The entity’s net assets are measured more than its market capitalisation (suggesting that assets are over-valued). If an indication of impairment exists then an impairment review must be performed. Where there is no indication of impairment, then no further action needs to be taken. The following assets must be reviewed annually for impairment (in addition to when an indication exists):  Goodwill acquired in a business combination  An intangible asset with an indefinite useful life  An intangible asset not yet available for use  

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Indication exists

Annual review

MEASURING RECOVERABLE AMOUNT Entities have to bear in mind the following steps and considerations when evaluating an asset’s recoverable amount: Value in use is calculated by estimating future cash inflows and outflows from the use of the asset and its ultimate disposal, and applying a suitable discount rate to these cash flows. Estimates of future cash flows should be based on reasonable and supportable assumptions that represent management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset. Estimates of future cash flows must not include:  cash inflows or outflows from financing activities; or  income tax receipts or payments.

Value in use

Also note that future cash flows are estimated for the asset in its current condition. Therefore, any estimate of future cash flows should not include estimated future cash flows that are expected to arise from:  a future restructuring to which an entity is not yet committed; or  improving or enhancing the asset’s performance. The discount rate must be a pre-tax rate that reflects current market assessments of:  the time value of money; and  the risks specific to the asset for which the future cash flow estimates have not been adjusted. However, both the expected future cash flows and the discount rate might be adjusted to allow for uncertainty about the future – such as the business risk associated with the asset and expectations of possible variations in the amount or timing of expected future cash benefits from using the asset.

Latest update: M arch 2020

CAF 5 – IAS 36 Fair value is normally market value. If no active market exists, it may be possible to estimate the amount that the entity could obtain from the disposal. Fair value less cost of disposal

Cost of disposal might include legal costs, stamp duty, costs relating to removal of sitting tenant but must exclude finance costs and income tax expense. Redundancy and restructuring costs (to be incurred after the sale of business) are not cost of disposal.

No need to calculate both amounts

It is not always necessary to determine both an asset’s net selling price and its value in use. For example, if either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount

RECOGNITION OF IMPAIRMENT LOSS An impairment loss should be recognized as an expense in the income statement immediately, unless the asset is carried at revalued amount. Dr. Impairment loss Recognising Cr. Asset expense Alternatively, Dr. Impairment loss Cr. Accumulated impairment losses An impairment loss on a revalued asset is recognized directly against any On revalued revaluation surplus for the asset to the extent that the impairment loss does asset not exceed the amount held in the revaluation surplus for that same asset. The reversal of impairment loss is dealt in the same way as reversal of Reversal revaluation loss is dealt in IAS 16. Depreciation The depreciation (or amortisation) of an impaired asset shall be charged on its revised amount. etc.

SYLLABUS Reference

Content/Learning outcome

C5

IAS 36 Impairment of Assets (other than cash-generating units CGU) Identify and assess the circumstances when the assets may be impaired (other LO3.5.1 than cash-generating units CGU). LO3.5.2 Discuss the measurement of recoverable amount LO3.5.3 Account for the related impairment expenses Proficiency level: 2 Testing level: 1 Past Paper Analysis A14 S15 A15 CAF 5 Objective Type CAF 7 -

S16

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A16

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S17

12

A17

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S18

-

A18

07

S19

-

A19

S20

03

03

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CAF 5 – IAS 36

PRACTICE Q&A

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Sr.# 1C 2C 3C 4C 5H 6C 7C 8C 9H 10H 11C

Description Basic Calculations Recognition: Entity Q (Cost Model) Recognition: Entity Q (Revaluation Model) Journal entries – Alternatives ABA Limited – FS extracts Hussain Associates Limited Sunshine Limited: Various machines with renewal usage Sky-Line Limited: Probability based cash flows Premier Limited: Typical calculations Naveed Limited: Typical calculations Apricot Pakistan Limited

Latest update: M arch 2020

Marks 08 06 10 06 15 08 06 06 04 05 07

Reference ST ST ST KA QB QB ST New ST New ST New ST New PE A18

CAF 5 – IAS 36

QUESTION

01

A company has a machine in its statement of financial position at a carrying amount of Rs.300,000. The machine is used to manufacture the company’s best-selling product range, but the entry of a new competitor to the market has severely affected sales. As a result, the company believes that the future sales of the product over the next three years will be only Rs.150,000, Rs.100,000 and Rs.50,000. The asset will then be sold for Rs.25,000. An offer has been received to buy the machine immediately for Rs.240,000, but the company would have to pay shipping costs of Rs.5,000.The risk-free market rate of interest is 10%. Market changes indicate that the asset may be impaired and so the recoverable amount for the asset must be calculated. Required: Relevant calculation for impairment loss and journal entry.

(08)

QUESTION

02

On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful life of 20 years and an estimated zero residual value. Depreciation is on a straight-line basis. On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be Rs.100,000 and its remaining useful life to be 10 years. Required: Calculate: (a) The carrying amount of the machine on 31 December Year 3 (immediately before the impairment). (b) The impairment loss recognised in the year to 31 December Year 4. (c) The depreciation charge in the year to 31 December Year 4. (06)

QUESTION

03

On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful life of 20 years and an estimated zero residual value. Depreciation is on a straight-line basis. The asset had been re-valued on 1 January Year 3 to Rs.250,000, but with no change in useful life at that date. On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be Rs.100,000 and its remaining useful life to be 10 years. Required: Calculate: (a) The carrying amount of the machine on 31 December Year 2 and hence the revaluation surplus arising on 1 January Year 3. (b) The carrying amount of the machine on 31 December Year 3 (immediately before the impairment). (c) The impairment loss recognised in the year to 31 December Year 4. (d) The depreciation charge in the year to 31 December Year 4. (10)

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CAF 5 – IAS 36

QUESTION

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04

An entity owns a property which was originally purchased for Rs. 300,000. The property has been revalued to Rs. 500,000 with the revaluation of Rs. 200,000 being recognised as other comprehensive income and recorded in the revaluation reserve. The accumulated depreciation related to property after revaluation is Rs. 40,000 and therefore its carrying amount is Rs. 460,000 but the recoverable amount of the property has just been estimated at only Rs. 200,000. The entity does not transfer incremental depreciation. What is the amount of impairment and how should this be treated in the financial statements? (06)

QUESTION

05

Aba Limited conducts its activities from two properties, a head office in the city centre and a property in the countryside where staff training is conducted. Both properties were acquired on 1 April 2013 and had estimated lives of 25 years with no residual value. The company has a policy of carrying its land and buildings at current values. However, until recently property prices had not changed for some years. On 1 October 2015 the properties were revalued by a firm of surveyors. Details of this and the original costs are:

Head office Training premises

– cost 1 April 2013 – revalued 1 October 2015 – cost 1 April 2013 – revalued 1 October 2015

Land Rs. 500,000 700,000 300,000 350,000

Buildings Rs. 1,200,000 1,350,000 900,000 600,000

The fall in the value of the training premises is due mainly to damage done by the use of heavy equipment during training. The surveyors have also reported that the expected life of the training property in its current use will only be a further 10 years from the date of valuation. The estimated life of the head office remained unaltered. Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on the straight-line method from the date of purchase or subsequent revaluation. Required Prepare extracts of the financial statements of Aba Limited in respect of the above properties for the year to 31 March 2016. (15)

Latest update: M arch 2020

CAF 5 – IAS 36

QUESTION

06

The assistant financial controller of the Hussain Associates Ltd group has identified the matters below which she believes may indicate impairment of one or more assets. Hussain Associates Ltd owns and operates an item of plant that cost Rs.640,000 and had accumulated depreciation of Rs.400,000 at 1 October 2015. It is being depreciated at 12½% on cost. On 1 April 2016 (exactly half way through the year) the plant was damaged when a factory vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity. It is also expected that as a result of the damage the remaining life of the plant from the date of the damage will be only two years. Based on its reduced capacity, the estimated present value of the plant in use is Rs.150,000. The plant has a current disposal value of Rs.20,000 (which will be nil in two years’ time), but Hussain Associates Ltd has been offered a trade-in value of Rs.180,000 against a replacement machine which has a cost of Rs.1 million (there would be no disposal costs for the replaced plant). Hussain Associates Ltd is reluctant to replace the plant as it is worried about the long-term demand for the product produced by the plant. The trade-in value is only available if the plant is replaced. Required Prepare extracts from the statement of financial position and statement of profit or loss of Hussain Associates Ltd in respect of the plant for the year ended 30 September 2016. Your answer should explain how you arrived at your figures. (08)

QUESTION

07

On 1 July 2016, Sunshine Limited (SL) acquired four machines namely A, B, C and D. The following information is available in respect of these machines: A B C D Cost (Rs. in millions) 200 230 90 60 Expected useful life 10 years 10 years 6 years 12 years Active market value at 30 June No active 170 300 65 market 2017 (Rs. in millions) Renewal cost (Rs. in millions) 65 85 2 1 (i) (ii) (iii)

The renewal would allow SL to use the machines for another five years and it is incurred at the end of year. SL uses the revaluation model for subsequent measurement of its assets. An independent value has estimated the value of machine ‘D’ at Rs. 130 million.

Required: Compare the carrying value of machines with fair values (active market value) to determine the revaluation surplus or impairment loss and prepare extracts of financial statements. (06)

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CAF 5 – IAS 36

QUESTION

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08

Sky-Line Limited (SL) operates a 4 Star Hotel facility in Muree. The hotel was constructed at a cost of Rs.300 million, 5 years back and it is depreciated on a straight-line basis (total useful life of 15 years and residual value of 20%). There are indications that the property is not performing as expected due to: (a) opening of a competing hotel nearby, (b) a significant drop in number of tourists to the area because of terrorism. There is a 40% probability that the hotel will generate net cash flows of Rs.40 million per annum and 60% probability that the cash flows would only be Rs.20 million per annum. The property’s net operating income is Rs.30 million which is at the rate of 15%. 5% of the proceeds from sale would be expended in closing the deal. Required: If the appropriate discount rate is 10% then compare the carrying value with the recoverable amount to arrive at the impairment loss. (06)

QUESTION

09

Premier Limited (PL) owns a plant which has a carrying amount of Rs.248 million as at 1 April 2019. It is being depreciated at 12½% per annum on a reducing balance basis. The plant is used to manufacture a specific product which has been suffering a decline in sales due to obsolescence. PL has estimated that the plant will be retired from use on 31 March 2023. The estimated net cash flows from the use of the plant and their present values are: Net cash Present flows value s Rs. in milli on Year to 31 March 2020 120 109.2 Year to 31 March 2021 80 66.4 Year to 31 March 2022 52 39 TOTAL 252 214.6 On 30 March 2020, PL had an alternative offer from the competitor to purchase the plant for Rs.200 million. Required: Measure the plant in the statement of financial position at recoverable amount after impairment at 31 March 2020. (04)

QUESTION

10

Naveed Limited has an item of plant which has a carrying value of Rs.1,800,000 as at the end of the year December 2020. It has undergone an impairment review and the following estimates were produced: Fair value of plant = Rs.1,400,000 Costs to sell 2% of selling price Revenue and associated costs per annum for remaining useful life: (assume all cash flows occur at the end of the year). Revenue Costs 2021 Rs.960,000 Rs.240,000 2022 Rs.880,000 Rs.220,000 2023 Rs.700,000 Rs.290,000 The plant has an estimated residual value of Rs.50,000. A discount rate of 10% is applicable to investments equivalent in risk to this plant.

Latest update: M arch 2020

CAF 5 – IAS 36

Required: Compare the carrying value with the recoverable amount to arrive at the impairment loss. (05)

QUESTION

11

Property, plant and equipment as disclosed in the draft financial statements of Apricot Pakistan Limited (APL) for the year ended 30 June 2018 include a plant having a carrying value of Rs. 610 million. The performance of the plant has been deteriorating since last year which is affecting APL’s sales. Following information/estimates relate to the plant for the year ending 30 June 2019: Rs. in million Inflows from sale of product under existing condition of the plant 250 Operational cost other than depreciation 25 Depreciation 170 Expenses to be paid in respect of 30 June 2018 accruals 8 Cost of increasing the plant’s capacity 60 Additional inflows (net) expected from the upgrade 40 Interest on finance lease 30 Maintenance cost 15 Tax payment on profits 18 Cash flows from the plant are expected to decrease by 15% each year from 2020 and onward. The plant’s residual value after its remaining useful life of 3 years is estimated at Rs. 100 million. An offer has been received to buy the plant immediately for Rs. 570 million but APL has to incur the following costs. Rs. in million Cost of delivery to the customer 45 Legal cost 10 Costs to re-organize the production process after disposal of plant 50 Applicable discount rate is 9%. Required: Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018. (07)

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CAF 5 – IAS 36

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Latest update: M arch 2020

CAF 5 – IAS 36

ANSWER

01 .

Fair value less costs of disposal

Rs. 240,000 (5,000) 235,000

Fair value Less: costs of disposal .

.

Value in use

Year

Cash flows (Rs. 000)

1 2 3

150,000 100,000 50,000 + 25,000

Discount factor (1.10) - 1 (1.10) - 2 (1.10) - 3

Present value (Rs. 000) 136,364 82,645 56,349 275,358

.

Recoverable amount Impairment loss Journal entry

Higher of the above: Rs. 275,358 Carrying amount > Recoverable amount Rs. 300,000 – Rs. 275,358 = Rs. 24,642 Debit Impairment loss 24,642 Credit Accumulated impairment 24,642

ANSWER

02
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