Tutorial MFRS136 with SS - 26 may 2021 PDF

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FAR510 – MFRS136 IMPAIRMENT OF ASSETSTUTORIAL QUESTIONSQ1 – TEST FAR510 FEB 2021Comb Bhd acquired a machine costing RM500,000 on 1 January 2017. The estimated useful life of the machine was 10 years with no scrap value. The company adopted cost model in valuation of its machine. On 1 January 2020, t...

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FAR510 – MFRS136 IMPAIRMENT OF ASSETS TUTORIAL QUESTIONS Q1 – TEST FAR510 FEB 2021 Comb Bhd acquired a machine costing RM500,000 on 1 January 2017. The estimated useful life of the machine was 10 years with no scrap value. The company adopted cost model in valuation of its machine. On 1 January 2020, the economic performance of the machine was below expectation. The fair value less cost to sell was RM300,000 and the value in use (present value) was RM250,000. Required: a)

Discuss the accounting treatment for the year ended 31 December 2020 based on MFRS 136 Impairment of Assets.  On 1 January 2020 there is an indicator of impairment of the machine where the economic performance of the machine was expected to be below expectation  The machine must be test for impairment by comparing the carrying amount with the recoverable amount. The machine is impaired if the RA is less than its carrying amount  The carrying amount of the machine is RM350,000 and the recoverable amount is the higher value of FVLCTS and VIU of RM300,000. Thus the impairment loss is RM50,000 since the CA exceeds the RA  New CA as at 1 Jan 2020 is RM300,000.  Annual depreciation of 2020 = 41,857  New cA on 31 Dec 2020 = RM257,143 1/1/2020

31/12/202 0

cost AD (500,000 / 10 years) X 3 years CA Recoverable amount FVLCTS : 300,000 VIU : 250,000

500,000 (150,000) 350,000

RA 300,000 50,000 300,000 (42,857)

RA < CA impairment loss New CA Depreciation 300,000 / 7 years CA

257,143 (6 marks)

b)

Prepare the journal entries to record the above transactions for the year ended 31 December 2020 1. Dr SOPL Impairment Loss Cr Acc Impairment Loss

50,000

2. Dr SOPL : Depreciation Cr ACC Dep

42,857

50,000 42,857 (4 marks)

1

Q2 – TBFAR2 HMD Company decided to review one of their properties that maybe subject to impairment. The cost incurred to build the property during 2015 was RM1.2 million. The carrying amount in the financial statements for the year ended 31 Dec 2017 was RM1.8 million. Fair value less cost to sell as at 31 December 2019 was RM1 million while the value in use as at 31 December 2019 was RM800,000. Required: a)

Show the relevant journal entries of the above scenario for 31 December 2015, 31 December 2017 and 31 December 2019. Debit (RM) 31 Dec 2015 Dr IP Cr Bank / Payable

b)

Credit (RM)

1,200,000 1,200,000

31 Dec 2017 Dr IP Cr ARR

600,000

31 Dec 2019 Dr SOPL – Impairment loss Cr Accum Impairment loss

800,000

600,000

800,000

Show the extract statement of profit or loss for the year ended 31 December 2019.

Statement of profit or loss for the year ended 31 December 2019 (extract) RM Expenses Impairment loss 800,000 Workings: 31 Dec 2015 31 Dec 2017 31 Dec 2019

Cost FV Surplus on revaluation of property New CV FVLCTS 1,000,000 VIU 800,000 RA < CV – impairment loss

2

1,200,000 1,800,000 600,000 1,800,000 RA 1,000.000 800,000

Q3 – FAR460 DEC 2019 - MODIFIED FastLine Bhd is a company that involves in manufacturing microchips for computers. On 3 July 2015, the company purchased a specialised microchip processor to increase its production capacity with a useful life of 5 years. The costs incurred were as follows: RM 3,580,000 10% 36,000 12,000 18,500

Invoice price Trade discounts Delivery cost Annual maintenance Installation cost

On 10 January 2018, FastLine Bhd spent RM12,000 for annual maintenance for the processor. During the maintenance works, it was discovered that the major component of the processor should be replaced. The company incurred and paid RM255,000 for the new component on 25 June 2018. The replacement would increase the remaining useful life to 4 years. The cost for the old component replaced was RM150,000. On 30 June 2019, an impairment test was carried out on the processor. The fair value less cost to sell was RM998,000 and the present value future cash flows was calculated to be at RM1,100,000. The company closes its accounts on 30 June every year. Required: Determine the carrying amount of the processor to be disclosed as at 30 June 2019 and provide the relevant journal entries for the current financial year. (10 marks) RM Invoice price 3,580,000 Trade discounts 10% Net PP Delivery cost Installation cost Initial cost 30 June 2018

30 June 2019

3,222,000 36,000 18,500 3,276,500

Cost AD (3,276,500/5) x 3 years CA Add New component Less CA of Old component Cost 150,000 AD = (150,000/5) x 3 = (90,000) New CA AD (1,505,600/4) CA FVLCTS = 998,000 VIU = 1,100,000 RA is the higher amount RA < CA impairment loss 3

RM 3,276,500 (1,965,900) 1,310,600 255,000

(60,000) 1,505,600 (376,400) 1,129,200

1,100,000 29,200

New CA

1,100,000 Debit (RM)

30 June 2019 Dr SOPL - Depreciation Cr Accum Depreciation

Credit (RM)

376,400 376,400

Dr SOPL – Impairment loss Cr Accum Impairment loss

29,200 29,200

Q4 – TEST FAR510 MAC 2020 (reversal of impairment loss) Space Car Bhd is a company operating a rental car services in Klang Valley. Due to recent Covid-9 pandemic in the end of March 2020, the demand for the rental car had decreased tremendously. Some vehicles are not operating due to the fact that public users are required to stay and work from home. Space Car Bhd realised that the cash flows from a lower operating capacity of the vehicles had been adversely affected due to the pandemic and the company decided to perform impairment test on its assets. The motor vehicles were purchased on 1 January 2019 at the cost of RM1,000,000 and have the estimated useful life of 5 years. The motor vehicles were depreciated using the straight-line method on a monthly basis. On 31 March 2020, Space Car Bhd estimated that the fair value less cost to sell and value in use of the motor vehicles is RM 650,000 and RM700,000 respectively. Space Car Bhd applies cost model to record its assets. Financial year end of Space Car Bhd is on 31 December annually. Required: a.

Calculate the impairment loss (if any) of the motor vehicles on 31 March 2020. 1/1/2019 31/12/2019 31/3/2020

Cost of the MV AD (1,000,000 / 5) AD (1,000,000 / 5 years) x 3 / 12 CA of MV RA : FVLCTS = 650,000 VIU = 700,000 RA is the higher value RA < CA – impairment loss

1,000,000 (200,000) (50,000) 750,000

700,000 50,000 (5 marks)

b.

Prepare the followings for Space Car Bhd assuming that on 31 December 2020, the government able to resolve issues related to the pandemic and the economy has shown up positively to the demand of car rental services. The estimated fair value less cost to sell as at 31 December 2020 is RM720,000 and the remaining useful life is 4 years. i. ii.

the journal entries in relation to reversal of impairment loss an extract of Statement of Financial Position as at 31 December 2020 4

Workings: EUL = 5 years = 60 months 1/1/2019 = 12 mths Up to 31/3/2020 = 3 mths A total used up to 15 months RUL = 60 – 15 = 45 months CA with impairment loss 31/3/2020 New CA 700,00 31/12/2020 Depreciation (700,000 /45 mnths) x 9 months (140,000) New CA for 2020 560,000 RA 720,000 RA > CA = no impairment loss, CA remains at 560,000 CA without impairment loss 31/12/2020 Cost of MV AD (1,000,000 / 5 years) x 2 years CA

1,000,000 (400,000) 600,000

Reversal of impairment is restricted to 600,000 – 560,000 = Dr

Acc Impairment 50,000 Cr SOPL – reversal of impairment = Cr Accumulated depreciation

40,000

40,000 10,000 (10 marks)

To find reversal amount: 1. Compare RA 720,000 and CA 600,000; choose the lower amount, which is the 600,000 2. Compare 600,000 with CA with impairment 560,000 3. Reversal amount is up to 600,000 – 560,000 = 40,000 Without impairment Cost Less AD CA W/O impairment CA with impairment Reversed up to

1,000,000 (400,000) 600,000 560,000 40,000

AD of MV with impairment loss = 250,000 + 140,000 = 390,000 AD of MV without impairment loss = 400,000 Increase in AD by RM10,000 Extract Statement of Financial Position as at 31 Dec 2020 RM Non current asset PPE (1,000,000 – 400,000) 600,000

5

Extract Statement of Profit or loss for the year ended 31 Dec 2020 RM Income Reversal of impairment loss

40,000

Expenses Depreciation

200,000

6

Q5 – TEST SEPT 2019 – CGU (impairment loss & reversal of impairment) NHG Barakah Berhad is in the industry of producing banana chips. On 1 January 2014, the carrying amount of the identifiable assets consists of the following: Chip blanching machine Chip frying machine Chip washing & peeling machine Goodwill

RM 60,000 30,000 20,000 20,000

The identifable assets were recognised as a cash-generating unit and were depreciated at 10% using the reducing balance method, except for goodwill. Unexpectedly, demand for banana chips had dropped tremendously in 2016 due to fact that Moko disease bacterium that that existed in banana root can harm human health. The arising issues had caused the cash-generating unit to be less productive and subsequently affected NHG Barakah Berhad business cash flows. In respond to these, impairment test on the identifiable assets was conducted on 31 December 2016. The value in use was estimated at RM57,000. The fair value was RM60,000 and the costs to sell the assets were estimated at RM2,000. VIU = 57,000 FVLCTS = 60,000 – 2,000 = 58,000 RA = 58,000 During the year of 2017 and 2018, Ministry of Agriculture had able to identify a mechanism to mitigate the negative effects of Moko disease bacterium. The mechanism was proven to be effective and had resulted in an increase in the demand of banana chips. The production of banana chips had increased for the years and subsequently brought positive revenues for NHG Barakah Berhad. On 31 December 2018, it was determined that the recoverable amount for the cash-generating unit was RM50,000. Required:

7

a.

Determine the carrying amount for each of the assets as at 31 December 2016

i. Carrying amount for each asset as at 31 December 2016. Chip blanching machine

Chip washing & peeling machine

Chip frying machine

Goodwill

Total

CA as at 1 January 2014

60,000

20,000

30,000

20,000√

130,000

2014

(6,000) √

(2,000) √

(3,000)

-

(11,000)

CA

54,000

18,000

27,000

20,000

119,000

2015

(5,400)

(1,800)

(2,700)

-

(9,900)

CA

48,600

16,200

24,300

20,000

109,100

2016

(4,860)

(1,620)

(2,430)

-

(8,910)

CA

43,740

14,580

21,870

20,000

100,190

RA = the higher of VIU and FVLCTS

-

-

-

VIU

57,000√

FVLCTS (60,000 – 2,000)

58,000√ √

Therefore, RA

58,000

IL (100,190 – 58,000)

42 190√√

Impairment loss allocation: Allocate first to Goodwill

(20,000)√

Balance (42,190-20,000)

22,190√

Balance allocate to other assets i.e (43,740√/ 80,190√ x 22,190√= 12,104)

(12,104)

(4,035) √

(6,051) √

New CA as at 31 December 2016 (CAWI)

31,636 √

10,545

15,819

-

58,000

There is an impairment loss of RM42,190 because the carrying amount , is higher than recoverable amount, RM58,000. (Recoverable amount is the higher of fair value less cost to sell , RM58,000 [ 60,000 – 2,000 ] and value in use , RM57,000). There is also goodwill of RM20,000 in the CGU. Because the impairment loss of RM42,190 is greater than the amount of goodwill, RM20,000. Therefore, allocate first against carrying value of goodwill, the excess of RM22,190 is to be allocated on a pro rata basis of carrying amount of other assets in CGU

8

The carrying amount after impairment loss as at 31 December 2016 is RM58,000. workings: total CA= 43740+14580+21870=80190 43,740 / 80,190 x 22,190 = 12,104 14,580 / 80,190 x 22,190 = 4,035 21,870 / 80,190 x 22,190 = 6,051 Carrying amount for each asset as at 31 December 2018. Chip blanching machine

Chip & washing peeling machine

CA as at 1 January 2017

31,636

10,545

15,819

58,000

2017

(3,164)

(1,055)

(1,582)

(5,801)

CA

28,472

9,490

14,237

52,199

2018

(2,847)

(949)

(1,424)

(5,220)

CA

25,625

8,541

12,813

46,979

RA with impairment

-

-

-

50,000

RIL i.e (25,625 √/46,979√ x 3,021)√

1,648

549

824

(RA-CA)

CA as at 31 December 2018

27,273√of

Chip frying machine

Total

3,021√√ 9,090√of

13,637√o f

50,000

Workings for reversal of impairment loss: CA without impairment 31/12/2016 CA (100,190 – 20,000) Less Dep 2017 (10% x80190) CA 2017 Less: Dep 2018 (10% x 72171) Revised CA

= 80,190 (8019) 72,171 (7,217) 64,954

To find reversal amount: 1. Compare RA 50,000 and CA 64,954; choose the lower amount, which is the 50,000 2. Compare 50,000 with CA with impairment 46,979 3. Reversal amount is up to 50,000 – 46,979 = 3,021 The carrying amount without impairment (CAWOI) The carrying amount as at 31 December 2016, (RM100,190 – 20,000) = RM80,190√√ 9

Less: Accumulated depreciation for 2017 & 2018 (RM8,019 & 7,217) = RM15,236 √√ The carrying amount as at 31 December 2018, RM64,954. Reversal amount The lower of RA, RM50,000 √ and CA w/o impairment, RM64,954 √ of = RM50,000 Therefore, the reversal amount is RM3,021. Workings: 25,625/46,979 x 3,021 = 1,648 8,541/46,979 x 3,021 = 549 12,813/46,979 x 3,021 = 824 (15 marks) b.

Explain briefly how an impairment loss of the following assets would be recognised in the financial statement: I. Property, plant and equipment valued at cost model II. Property, plant and equipment valued at fair value model

I.

II.

Property, plant and equipment measured at cost (non-revalued asset) The impairment loss for non-revalued asset is recognised immediately in the profit or loss. √ Property, plant and equipment measured at fair value (revalued asset)

However, the impairment loss on a revalued asset shall be treated as revaluation decrease√ in accordance with MFRS116.√ Any impairment loss shall first√ be recognized in other comprehensive income (OCI) √ and then is written off√ against the asset revaluation reserve balance (if any) √ . Any balance√ of the impairment loss (if any) is recognised in the profit or loss √ as an expense. √ (10√ x 0.5 = 5 marks) (5 marks)

10

Q6.

Impairment loss of CGU

In 2015, Mutiara Bhd acquired the equity of Diamond Bhd for a total purchase consideration of RM500 million. Mutiara Bhd then recorded RM100 million of goodwill with this acquisition since the fair value of Diamond Bhd’s net assets was RM400 million. After the acquisition, Diamond Bhd’s assets became the smallest group of assets that managed to significantly generate cash flows to the company, and works independently from the other assets or group of assets. There for Diamond Bhd is considered as a cashgenerating-unit (CGU) to Mutiara Bhd. As a CGU, includes goodwill within its carrying amount, it must be tested annually for impairment, or more frequently if there is an indication that the goodwill might be impaired. At the end of 2018, the Diamond Bhd’s net assets have a carrying amount of RM380 million and a recoverable amount of RM350 million. Required: Identify if impairment exists and determine the impairment loss of the CGU’s assets. Step 1

CGU Carrying amount Recoverable amount RA < CA = impairment loss

2

Allocation of IL to 1. goodwill 2. identifiable assets

Identifiable assets (RM’million) 380

Carrying amount before impairment Less : Impairment loss Carrying amount after impairment loss

Goodwill (RM’million)

Total (RM’million)

100

480 350 130

100

(100) 30

380

100

(30) 350

(100) 0

Journal entry Dr SOPL

Impairment loss Cr Goodwill Cr identifiable assets

130 100 30

11

350

Q7 – TLT (Example 11 page 585) The identifiable non-monetary assets of a cash-generating-unit (CGU) consist of the following: RM’000 20,000 15,000 5,000 10,000 50,000

Plant premises Machinery Equipment Motor vehicles Identifiable assets

Goodwill on acquisition attributable to this CGU is RM25,000,000. The unit could be sold for a net cash proceed of RM34,000,000 (FVLCTS) and value in use of RM38,000,000. (VIU) - RA 38,000,000 Required: Perform the impairment test and show how the impairment loss shall be allocated. Plant Machinery Equipment Motor premises vehicles CA before 20,000 15,000 5,000 10,000 impairmen t RA RA < CA – impairment loss Allocation of IL to 1. goodwill 2. to identifiable assets (20 / 50) x (15/50) 12,000 = 12,000 4,800 3,600 11,400 New CA 15,200 after impairmen t (RA)

Goodwill 25,000

12

75,000 38,000 37,000

25,000 x (5 / 50) x (10/50) X = 12,000 = 12,000 = 1,200 2,400 3,800 7,600

Total

(25,000) 12,000

38,000

Q8 – TLT (Example 12 page 586) The identifiable non-monetary assets of a cash-generating-unit (CGU) consist of the following: RM’000 30,000 20,000 15,000 10,000 75,000

Freehold land and building Plant Machinery Equipment Identifiable assets

The fair value less cost to sell of the unit as a whole is RM48,000,000. Its value in use is estimated at RM50,000,000. FVLCT = 48,000 VIU = 50,000 RA = 50,000 The fair value less cost to sell of the freehold land and building on a stand-alone basis is estimated at RM25,000,000. The fair value less cost to sell of other assets individually is undeterminable. Required: Perform the impairment test and show how the impairment loss shall be allocated FH Land & Plant Bldg 30,000 20,000

CA before IL RA Impairment loss (RA < CA) Initial allocation of IL (30/75) x 25,000 = (10,000) 5,000 Reallocated IL Less : (5000) Allocated IL New CA 25,000 (RA)

(20/75) 25,000 6,667 (20/45) 5,000 (2,222) 8,889 11,111

x = x =

Machinery

Equipment

Total

15,000

10,000

75,000 50,000 25,000

(15/75) 25,000 5,000 (15/45) 5,000 (1,667) 6,667 8,333

IL for FHLB = 10,000 – 5,000

13

(10/75) 25,000 3,333 x (10/45) = 5,000 (1,111) 4,444

x =

5,556

x = x =

50,000