Diploma in International Public

Sector Accounting Standards

Accounting for impairments –

advanced level

Workbook 4
 Accounting for impairments –
4 advanced level

Learning objectives
− In this workbook we will deal with part of syllabus learning aims B and C,
i.e.:

Aim B: Describe the main requirements of IPSASs (30% of the

Aim C: Apply the requirements of IPSASs to determine the appropriate

treatment of events and transactions in financial statements (40% of
the syllabus).

We started looking at accounting for non-current assets in workbook 3,

when we covered the following accounting standards:

IPSAS 17 Property, Plant and Equipment

IPSAS 5 Borrowing costs

IPSAS 13 Leases

IPSAS 31 Intangible Assets

IPSAS 16 Investment Properties

We will continue in this workbook by looking at the treatment of impairments

to non-current assets, as dealt with in the following IPSAS:

IPSAS 21 Impairment of Non-Cash Generating Assets

IPSAS 26 Impairment of Cash Generating Assets

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 Impairment of non-current assets: Overview

4.1 Impairment of non-current assets: Overview

An asset recognised in the statement of financial position should not be
reported at a value above the amount that could be recovered from using or
selling the asset.

During periods where general prices are increasing there is an assumption that
recoverability of the reported value of such assets will not be an issue.

It is important that an organisation considers the values its assets are

measured at in the context of not only the individual organisation but also the
sector in which it operates. Whenever an asset’s recoverable amount falls to
an amount less than its carrying amount, it is said to be impaired. Its value
in the statement of financial position is therefore reduced to this recoverable
amount and, in most instances, an expense is recognised in the statement of
financial performance.

Impairment is a loss in the value of an asset i.e. when its carrying amount
recognised in the statement of financial position is greater than its recoverable
amount. Impairment represents a loss in the future economic benefits or
service potential of an asset, over and above the systematic recognition of
the loss of the asset’s future economic benefits or service potential through
depreciation.

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 Sources of accounting guidance

4.2 Sources of accounting guidance

There are two IPSAS which provide guidance on the impairment of assets:

• IPSAS 21 Impairment of non-cash-generating assets

• IPSAS 26 Impairment of cash-generating assets

In the private sector assets are ultimately held to generate a commercial return
i.e. to maximise profit. In the public sector the majority of assets are held for
their service potential rather than for generating revenue streams, although
there are a number of circumstances in which public sector organisations may
hold some assets with the primary objective of generating a commercial return.
This distinction between cash and non-cash-generating assets has driven the
decision to issue two accounting standards.

IPSAS 26 also applies to the impairment of goodwill. We will discuss this when
we look at IPSAS 40 Public Sector Combinations in Workbook 7.

IPSAS 21 Impairment of Non-Cash-Generating Assets should be applied to

non-cash-generating assets. What distinguishes a non-cash-generating asset
is that it is not held with the primary objective of generating a commercial
return. For example, homes owned by a housing association in order to provide
affordable, subsidised housing to local refugees and asylum seekers may
generate cash in the form of rental income, but as the primary purpose of
holding the homes is to provide a service to the local community, this would be
an example of a non-cash generating asset.

IPSAS 26 Impairment of Cash-Generating Assets should be applied to cash

generating assets. The primary purpose of cash-generating-assets is to
generate a commercial return. An example in the public sector might include
medical equipment purchased specifically by a hospital to earn revenue in its
private patient cosmetic surgery clinic.

Key definitions

Cash-generating assets Assets held with the primary

objective of generating a commercial return.

Non-cash-generating assets Assets other than cash-generating assets.

Exercise 4.1: Examples of cash-generating and non-cash-

generating assets

Can you think of examples of cash-generating assets and non-cash

generating assets?

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 The impairment process

4.3 The impairment process

4.3.1 Assessment of impairment

An entity is required to assess at each reporting date whether there is an
indication of impairment. If such an indication exists, the entity should calculate
the recoverable amount of the asset. If the recoverable amount of the asset is
less than its carrying amount, then the carrying amount of the asset should be
reduced to its recoverable amount. That reduction is an impairment loss.

Key definitions
Impairment loss An impairment is a loss in the future economic
benefits or service potential of an asset, over and above systematic
recognition of the loss of the asset’s future economic benefits or service
potential through depreciation.

Recoverable amount The higher of an asset’s fair value less costs to

sell and its value in use.

Recoverable service amount The higher of a non-cash-generating

asset’s fair value less costs to sell and its value in use.

In practical terms, an impairment loss of a cash generating asset is the amount

by which the carrying amount of an asset exceeds its recoverable amount. For
a non-cash generating asset, it is the amount by which the carrying amount
exceeds its recoverable service amount.

The recoverable amount of an asset is that which can be recovered through

continuing to use the asset or by selling it. IPSAS 21 uses the term recoverable
service amount, as the value of a non-cash-generating asset is based on its
service potential. When this workbook refers to the recoverable amount, this
includes the recoverable service amount where relevant.

We will learn exactly what these terms mean in Section 4.4 of this workbook.

An entity is required to assess at each reporting date whether there is an

indication of impairment. If such an indication is identified, the asset’s
recoverable amount should be calculated and compared to its carrying
amount.

In addition, regardless of whether there have been any indicators of impairment

during the period, there are specific situations where the recoverable amount of
the asset should be assessed for impairment annually.

The scenarios requiring annual assessments of recoverable amount are:

• where the entity has intangible assets that have been identified as having
indefinite lives
• where the entity has an intangible asset that is not yet ready for use

The impairment test in these circumstances may be carried out at any time
during the period, provided that it is carried out at the same time each
period.

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 The impairment process

4.3.2 The impairment process

The stages in the process of identifying and accounting for an impairment loss
are as follows:

1. Assess whether there is an indication that an asset may be impaired.

Note that if there is no such indication, then normally no further action
is required. There are some exceptions to this rule, noted above,
where annual impairment testing is needed.

2. If there is an indication of impairment, identify the asset’s recoverable

amount.

3. Reduce the asset’s carrying amount to its recoverable amount, usually by

treating the loss as a separately disclosed expense.

4.3.3 Indications of impairment

When an entity is assessing whether there is an indication that an asset
may be impaired, it should consider both external and internal sources
of information. Some of the sources of information are relevant to both
cash-generating and non-cash-generating assets but in some cases the
information is specific to that type of asset.

External sources of information

• A significant decline in the asset’s market value. This may arise, for
example, as a result of a new competitor entering the market. (IPSAS 26)

• Significant changes in the technological, market, economic or legal or

government policy environment in which the entity operates. This could be
as simple as a change in customer tastes. (IPSAS 21 and IPSAS 26)

• Increases in market interest rates which are likely to affect discount rates.
(IPSAS 26)

• Cessation, or near cessation, of the demand or need for services provided

by the asset. (IPSAS 21).

Internal sources of information

• Obsolescence or physical damage to the asset. (IPSAS 21 and IPSAS 26)

• Significant changes in how an asset is used or is expected to be used,

including the asset becoming idle and plans to discontinue or restructure
the division in which an asset is used. (IPSAS 21 and IPSAS 26)

• Performance of the asset being below that planned, for example actual
net cash flows generated by the asset being below that budgeted, or the
service performance of an asset being significantly worse than expected.
(IPSAS 21 and IPSAS 26)

• A decision to halt the construction of the asset before it is complete or in a

useable condition. (IPSAS 21 and IPSAS 26).

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 The impairment process

Exercise 4.2: Impairment indicators for non-cash generating

assets

Provide examples of indications of impairment for non-cash-generating

assets.

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 Measuring the recoverable amount

4.4 Measuring the recoverable amount

4.4.1 Overview
After having identified potentially impaired assets the asset’s recoverable
amount must be measured.

The recoverable amount is the higher of

• fair value less costs to sell

• value in use

Remember that for a non-cash-generating asset IPSAS 21 uses the term

recoverable service amount, but we still need to find the higher of fair value less
costs to sell and value in use. We will, however, use a different method to
calculate value in use.

Organisations will always choose to use their assets in the best possible way, in
order to maximise economic benefits, whether this is in the form of income
generation or service potential. This means that the recoverable amount will
always be the higher of the fair value less costs to sell and the value in use,
because the organisation will choose the best option, whether that’s keeping and
using the asset or selling it.

4.4.2 Fair value less costs to sell

Fair value is the amount obtainable from a sale in an arm’s length transaction
between a willing buyer and seller, less the costs of disposal.

4.4.3 Value in use: (a) Cash-generating assets

The ‘value in use’ calculation is a measure of the future cash flows expected to be
derived from an asset.

Key definition

Value in use of a cash-generating asset The present value of the estimated

future cash flows expected to be derived from the continuing use of an asset and
from its disposal at the end of its useful life.

Since cash flows are likely to be over several periods, they should be
discounted to take account of the time value of money, i.e. based on their
present value.

IPSAS 26 requires that the following elements are reflected in the calculation of a
cash-generating asset’s value in use:

a. an estimate of the future cash flows the entity expects to derive from the
asset.

b. expectations about possible variations in the amount or timing of those

future cash flows.

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 Measuring the recoverable amount

c. the time value of money, represented by the current market risk free rate of
interest.
d. the price for bearing the uncertainty inherent in the asset.

e. other factors, such as illiquidity, that market participants would reflect in

pricing the future cash flows the entity expects to derive from the asset.
There are two steps involved in calculating the value in use of an asset.

1. Estimate the future cash inflows and outflows that are expected to arise in
relation to the asset. Inflows should include an estimate for the ultimate
disposal of the asset.

2. Discount the scheduled cash flows to arrive at a present value. The

discount rate to be used should be the risk-free rate of interest adjusted to
reflect the risk associated with the particular asset and entity. This risk-
adjusted rate of interest should reflect the return that an investor would
require if he/she were to make an investment with cash flows similar to
those expected from the asset. Risk-adjusted rates are used in the
discounting process and are an indication of the risk/return profile of an
entity.
It is not always necessary to calculate both the asset’s fair value and its value in
use. If either one of these figures is greater than the asset’s current carrying
amount then there is no impairment. This is particularly useful in cases of
property where there is an active market and it is relatively straightforward and
inexpensive to calculate the fair value.

Cash generating units

The recoverable amount should be determined on an individual asset basis as
far as possible. If, however, the individual asset does not generate cash flows
largely independent from other assets, then the asset is grouped with other
assets to form what is referred to in IPSAS 26 as a ‘cash-generating unit’.
Key definition
Cash generating unit A cash-generating unit is the smallest identifiable
group of assets held with the primary objective of generating a commercial
return that generates cash inflows from continuing use that are largely
independent of the cash inflows from other assets or groups of assets.

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 Measuring the recoverable amount

Exercise 4.3: Identifying cash generating units

A bus company has a single contract with a local authority to service five
different bus routes in and around the city. One of the routes is making
deficits because it services a remote area and, as a result, the number of
passengers collected is much lower than on the other four routes which
are more highly populated and are generating surpluses.
Which of the following options correctly identifies the cash-generating
unit?
Each route is a separate cash-generating unit.

The five routes combined are a single cash-generating unit.

The four surplus making routes are one cash-generating unit and the
deficit making route is a separate cash-generating unit.

4.4.4 Value in use: (b) Non-cash-generating assets

IPSAS 21 defines value in use of a non-cash-generating asset as follows. Note
how the definition differs from the value in use of a cash-generating asset −
here there is no mention of cash flows because a non-cash-generating asset is
held primarily for service potential.

Key definition

Value in use of a non-cash-generating asset The present value of the

asset’s remaining service potential.

The value in use is determined using the most relevant of the following
approaches:

a. Depreciated replacement cost approach: The present value of the

remaining service potential of the asset is determined as the depreciated
replacement cost of the asset. The replacement cost of an asset is the cost
to replace the asset’s gross service potential. This cost is depreciated to
reflect the asset in its used condition.

b. Restoration cost approach: Restoration cost is the cost of restoring

the service potential of an asset to its pre-impaired level. Under this
approach, the present value of the remaining service potential of the asset
is determined by subtracting the estimated restoration cost of the asset
from the current cost of replacing the remaining service potential of the
asset before impairment.

c. Service units approach: The current cost of the remaining service

potential of the asset before impairment is reduced to conform with the
reduced number of service units expected from the asset in its impaired
state.

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 Measuring the recoverable amount

The choice of the most appropriate approach to measuring value in use

depends on the availability of data and the nature of the impairment. The
worked examples which follow shortly in Section 4.5.2 illustrate these methods
of calculating value in use.

4.5 Recognising an impairment loss

The recoverable amount is compared to the current carrying value. If the
recoverable amount of an asset is less than its current carrying amount, the
asset should be reduced to its recoverable amount. The difference is an
impairment loss.

An impairment loss is recognised immediately in the statement of financial

performance unless the asset is carried at a revalued amount, when any
impairment loss is treated as a revaluation decrease.

Following the recognition of an impairment loss, any depreciation charged in

respect of the asset in future periods will be based on the revised carrying
amount, less any residual value expected, over the remaining useful life of the
asset as per IPSAS 17.

4.5.1 Cash generating assets

The following worked examples explain how impairment losses are calculated
and recognised for cash-generating assets:

Illustration: Recognising an impairment loss (1)

An entity has a property that was originally acquired for £1m. The entity
measures property using the cost model in IPSAS 17. The following approach
would be followed under IPSAS 26 and IPSAS 21.

The current carrying amount for the property is £800,000. Due to a crash in the
local property market, the entity has undertaken an impairment review.

The fair value less costs to sell of the property is now estimated to be only
£500,000 and the value in use of the property is calculated as being £600,000.

The recoverable amount is the higher of fair value less costs to sell (£500,000)
and value in use (£600,000).

The recoverable amount of the property is therefore £600,000.

Current carrying value £800,000

Recoverable amount £600,000
Impairment £200,000

The impairment of £200,000 should be recognised immediately in the statement of

financial performance.

Dr Statement of financial performance expense − Impairement expense £200,000

Cr Property non-current asset £200,000

Depreciation charged in respect of the asset in future periods will be based on

the revised carrying amount, less any residual value expected, over the
remaining useful life of the asset.

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 Measuring the recoverable amount

Illustration: Recognising an impairment loss (2)

A piece of machinery was originally acquired for £100,000. It was expected to
have a useful life of ten years and no residual value.

At the start of year six, there was a downturn in demand due to a competitor
product entering the market, and this has led to an impairment of the asset. The
impairment has been calculated as being £20,000. The asset’s remaining useful
life is not affected.

At the end of year five, the asset had a carrying amount of:

£100, 000 × 5/10 years = £50, 000

Carrying value £50,000

Impairment £20,000
New carrying value £30,000

Depreciation = £30,000/5 = £6,000

The impairment of £20,000 should be recognised immediately in the statement of

financial performance.

Dr Statement of financial performance − expense £20,000

Cr Machinery non-current asset £20,000

Depreciation is also recorded:

Dr Statement of financial performance − depreciation £6,000

Cr Machinery accumulated depreciation £6,000

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 Measuring the recoverable amount

Worked example: IPSAS 26 Impairment of cash-generating assets

At the beginning of 20X3, Government R, through its Department of

Power, puts into service a power plant that it constructed for £250
million.

At the beginning of 20X7, power plants constructed by competitors are

put into service, resulting in a reduction in the revenues produced by
the power plant of Government R. The reductions in revenue have
resulted due to the volume of electricity being generated decreasing
from expectations. Also, the prices for electricity and stand-by capacity
are lower than expected.

The reduction in revenue is evidence that the economic performance

of the asset is worse than expected. Consequently, Government R is
required to determine the asset’s recoverable amount.

Government R uses straight-line depreciation over a 20-year life for the

power plant and anticipates no residual value.

It is not possible to determine the fair value less costs to sell of the
power plant. Therefore, recoverability can only be determined through
the calculation of value in use.

To determine the value in use for the power plant, Government R

complies with IPSAS 26 and prepares cash flow forecasts derived from
the most recent financial budgets/forecasts approved by management
and estimates subsequent cash flows based on declining growth rates.

Government R selects a discount rate which represents a rate that

reflects current market assessments of the time value of money and
the risks specific to Government R’s power plant. A value in use of
£121.1 million is calculated.

Explain how the impairment will be calculated and accounted for in

Government R’s financial statements.

Solution to worked example

First, we need to calculate the carrying amount of the asset:

Historical cost £250 million

Accumulated depreciation £250m / 20 × 4 £50 million
Carrying amount £200 million

In the absence of a fair value less costs to sell figure we use the value
in use figure as the recoverable amount £121.1 million.

Government R compares the recoverable amount of the power plant

to its carrying amount.

Carrying amount £200 million

Recoverable amount £121.1 million
Impairment loss £78.9 million

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 Measuring the recoverable amount

Because the carrying amount exceeds the recoverable amount by £78.9

million, an impairment loss of £78.9 million is recognised immediately in
surplus or deficit.

Dr Statement of financial performance − impairment £78.9 million

expense

Cr Power plant non-current asset £78.9 million

Carrying amount of asset after impairment loss £121.1 million.

Depreciation charged in respect of the asset in future periods will be

based on the revised carrying amount (£121.1m), less any residual value
expected, over the remaining useful life of the asset.

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 Recognising an impairment loss

4.5.2 Non-cash generating assets

The following worked examples explain how impairment losses are calculated
and recognised for non-cash generating assets:

Worked example: IPSAS 21 Non-cash-generating assets

(Depreciated replacement cost approach)

In 20X1, the City of Diffcar purchased a new mainframe computer at a

cost of £10 million. Diffcar estimated that the useful life of the computer
would be seven years, and that on average 80% of central processing
unit (CPU) capacity would be used by the various departments. A buffer
of excess CPU time of 20% was expected and needed to accommodate
scheduling jobs to meet peak period deadlines.

Within a few months of acquisition, CPU usage reached 80%, but

declined to 20% in 20X5 because many applications of the departments
were converted to run on desktop computers or servers. A computer
is available on the market at a price of £500,000 that can provide the
remaining service potential of the mainframe computer using the
remaining applications.

How would this impairment be accounted for?

Solution to worked example

The indication of impairment is the significant long-term change in the

technological environment resulting in conversion of applications from
the mainframe to other platforms, and therefore decreased usage of the
mainframe computer.

Impairment loss is determined using the depreciated replacement cost

approach as follows:

Acquisition cost £10,000,000

Accumulated depreciation (£10,000,000 × 4 ÷ 7) (£5,714,286)
Carrying amount £4,285,714

Replacement cost £500,000

Accumulated depreciation (£500,000 × 4 ÷ 7) £285,714
Recoverable service amount £214,286

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 Recognising an impairment loss

Therefore, the impairment loss £4,285,714 − £214,286 = £4,071,428, to

be accounted for as follows:

Dr Impairment expense £4,071,428

Cr Mainframe computer non-current asset £4,071,428

Carrying amount of asset after impairment loss £214,286.

Depreciation charged in respect of the asset in future periods will be

based on the revised carrying amount, less any residual value expected,
over the remaining useful life of the asset.

Exercise 4.4: City of Diffcar

In 20X1, the City of Diffcar purchased a software license for an application
for its new mainframe computer for £350,000. Diffcar estimated that
the useful life of the software would be seven years, and that it would
receive economic benefits and service potential from the software on a
straight-line basis over the life of the software. By 20X5, usage of the
application had declined to 15% of its originally anticipated demand.
A license for a software application to replace the remaining service
potential of the impaired software application costs £70,000.

Calculate and account for the impairment loss.

Worked example: IPSAS 21 Non-cash-generating assets

(Restoration cost approach)

In 20X4, North District Primary School acquired a bus at the cost of

£20,000 to help students from a nearby village to commute free of charge.

The school estimated a useful life of 10 years for the bus. In 20X9, the bus
sustained damage in a road accident, requiring £4,000 to be restored to a
usable condition. The restoration will not affect the useful life of the asset.

The cost of a new bus to deliver a similar service is £25,000 in 20X9.

Impairment is indicated because the bus has sustained physical damage

in the road accident.

How would this impairment be calculated and accounting for in the

school’s financial statements?

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 Recognising an impairment loss

Solution to worked example

Impairment loss using the restoration cost approach would be determined

as follows:

Accumulated depreciation (£20,000 × 5 ÷ 10)

Carrying amount £10,000

Replacement cost
Accumulated depreciation (£25,000 × 5 ÷ 10)
Depreciated replacement cost (undamaged state)
Less: restoration cost £4,000
Recoverable service amount £8,500

Impairment loss £10,000 − £8,500 = £1,500

Dr Impairment expense £1,500

Cr Vehicle non-current asset £1,500

Carrying amount of asset after impairment loss £8,500.

Depreciation charged in respect of the asset in future periods will be

based on the revised carrying amount, less any residual value expected,
over the remaining useful life of the asset.

Exercise 4.5: City of Moorland

In 20X0, the City of Moorland built an office building at a cost of £50
million. The building was expected to provide service for 40 years.

In 20Y9, after 19 years of use, fire caused severe structural damage. For
safety reasons, the office building is closed, and structural repairs costing
£35.5 million are to be made to restore the office building to a habitable
condition.

The replacement cost of a new office building is £100 million.

Calculate and account for the impairment loss.

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 Recognising an impairment loss

Worked example: IPSAS 21 Non-cash-generating assets (Service

units approach)

In 20X3, Ornong City Council constructed a 20-storey office building for

use by the Council in downtown Ornong at the cost of £80 million. The
building was expected to have a useful life of 40 years.

15 years later in 20Y8, National Safety Regulations required that the

top four stories of high rise buildings should be left unoccupied for the
foreseeable future. The building has a fair value less costs to sell of
£45 million in 20Y8 after the regulations came into force. The current
replacement cost of a similar 20-story building is £85 million.

Impairment is indicated because the extent of use of the office building

has changed from 20 floors to 16 floors as the result of new National
Safety Regulations. The reduction in the extent of use is significant and
the occupation of the building is expected to remain at the reduced level
(16 floors) for the foreseeable future.

Calculate and account for the impairment loss.

Solution to worked example

Impairment loss using the service units approach would be determined as

follows:

Acquisition cost £80,000,000

Accumulated depreciation (£80,000,000 × 15 ÷ 40) £30,000,000
Carrying amount £50,000,000
£85,000,000
Replacement cost (20-story building)
Accumulated depreciation (£85,000,000 × 15 ÷ 40) £31,875,000

Depreciated replacement cost (before adjustment for £53,125,000

remaining service units)
£42,500,000
Value in use of the building after the regulation came into
force (£53,125,000 × 16 ÷ 20)

Fair value less costs to sell of the building after regulation £45,000,000
came into force
£45,000,000
Recoverable service amount (higher of value in use and
fair value less costs to sell)

The impairment loss is therefore £50,000,000 − £45,000,000 = £5,000,000.

This would be accounted for as follows:

Dr Impairment expense £5,000,000

Cr Building non-current asset £5,000,000

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 Reversing an impairment loss

The carrying amount of asset after recognising the impairment loss is

£45,000,000.

Depreciation charged in respect of the asset in future periods will be

based on the revised carrying amount, less any residual value expected,
over the remaining useful life of the asset.

Exercise 4.6: Department of Education

In 20X2, the Department of Education purchased a new printing machine
at a cost of £40 million. The Department estimated that the useful life of
the machine would be 40 million copies of books to be printed over 10
years for use by elementary school students.

In 20X7, it was reported that an automated feature of the machine’s

function does not operate as expected, resulting in a 25% reduction in
the machine’s annual output level over the remaining 5 years of the useful
life of the asset. The replacement cost of a new printing machine is £45
million in 20X7.

Calculate and account for the impairment loss.

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 Reversing an impairment loss

4.6 Reversing an impairment loss

If the recoverable amount subsequently increases, in certain circumstances
the impairment may be reversed. A reversal of an impairment loss reflects an
increase in the estimated future economic benefits or service potential of an
asset or group of assets. The increased future economic benefits or service
potential may be through use or sale.

The increased carrying amount attributable to a reversal of an impairment loss

should not exceed the carrying amount that would have been determined (net
of amortisation and depreciation) had no impairment loss been recognised for
the asset in prior years.

The reversal of any impairment is recognised consistently with the original

recognition of the impairment loss. The reversal will therefore be recognised
in surplus or deficit unless the asset is carried at a revalued amount, when
any impairment loss is treated as a revaluation increase.

If the reversal of the impairment is in relation to a cash-generating unit, then

the reversal is recognised on a pro-rata basis with the carrying amount of the
assets.

Exercise 4.7: Reversal of impairment loss

In assessing whether there is any indication that an impairment loss may
no longer exist or may have decreased, what sources of information
should the entity consider?

Worked example: IPSAS 26 Reversal of impairment of

cash-generating assets

Continuing with the information from the previous worked example,

Government R and power plant, by 20X9 some competitors had closed
down power plants and this has meant that the negative impact on the
revenues of Government R has been less than projected at the end of
20X7. This favourable change requires the government to re-estimate the
recoverable amount of the power plant.

Calculations show that the recoverable amount of the power plant is now
£157.7 million.

How would this be accounted for in Government R’s financial statements

for 20X9?

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 Reversing an impairment loss

Solution to worked example

We need to calculate the carrying amount of the asset:

Carrying amount 20X7: £121.1 million
Remaining economic life: 16 years

Depreciation charge 20X7 £121.1m/16 = £7.6 million

So, the opening carrying amount of the asset in 20X9 is:

£121.1 million − £7.6 million(20X7) − £7.6 million(20X8) = £105.9 million

Government R compares the recoverable amount of the power plant to its

carrying amount.

Carrying amount £105.9 million

Recoverable amount £157.7 million
Impairment reversal £51.8 million

Government R reverses part of the impairment loss previously recognised.

The impairment loss recognised previously totalled £78.9 million (see
previous worked example). Therefore, the impairment reversal will be
recognised in Government R’s statement of financial performance as part
of the reporting of the surplus or deficit for the financial period.

Government R also checks that the increased carrying amount attributable

to a reversal of an impairment loss will not exceed the carrying amount
that would have been determined (net of amortisation and depreciation)
had no impairment loss been recognised for the asset in prior years.
At the beginning of 20X7, prior to the impairment, the carrying amount of
the power plant was £200 million. The plant had an estimated remaining
useful life of 16 years, so annual depreciation would be £12.5 million per
year. The carrying amount of the power plant at the beginning of 20X9,
has no impairment taken place, would have been:

£200 million less depreciation of 2 x £12. 5 million = £175 million.

This is more than the recoverable amount following the reversal of the
impairment, and hence the Government R recognises the full amount of
the reversal.

Dr Power plant non-current asset £51.8 million

Cr Impairment reversal £51.8 million

The carrying amount of the asset after impairment reversal is therefore

£157.7 million.

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 Reversing an impairment loss

4.7 Redesignation of assets

It may be appropriate in certain circumstances to redesignate assets from
cash-generating assets to non-cash-generating assets or the other way round
This should only occur when there is clear evidence that such a redesignation
is appropriate. A redesignation, by itself, does not necessarily trigger an
impairment test or a reversal of an impairment loss. The indications of
impairment should be considered after redesignation for non-cash-generating
assets (IPSAS21) and at subsequent reporting dates for cash-generating
assets (IPSAS26).

4.8 Disclosure requirements

IPSAS 21 and IPSAS 26 have extensive disclosure requirements in relation to
impairments. You need to learn these for your Dip IPSAS exam since Aim B3 of
the syllabus requires you to know the disclosure requirements of examinable
accounting standards.

4.8.1 Disclosure requirements common to both standards

Entities must disclose the following for each group of assets:

a. The amount of impairment losses recognised in surplus or deficit during

the period and the line item(s) of the statement of financial performance in
which those impairment losses are included.
b. The amount of reversals of impairment losses recognised in surplus or
deficit during the period and the line item(s) of the statement of financial
performance in which those impairment losses are reversed.
c. The amount of impairment losses on revalued assets recognized
directly in revaluation surplus during the period; and
d. The amount of reversals of impairment losses on revalued assets
recognized directly in revaluation surplus during the period.

For each material impairment loss recognised or reversed in the period:

a. The events and circumstances that led to the recognition or reversal of the
impairment loss.
b. The amount of the impairment loss recognised or reversed.
c. The nature of the asset.
d. The segment to which the asset belongs, if the entity reports segment
information in accordance with IPSAS 18.

For the aggregate of impairment losses and aggregate reversals of impairment

losses recognised during the period for which no information is disclosed in
accordance with the previous paragraph:
a. The main classes of assets affected by impairment losses (and the main
classes of assets affected by reversals of impairment losses).
b. The main events and circumstances that led to the recognition of these
impairment losses and reversals of impairment losses.

Further disclosures are required for entities that report segment information in
accordance with IPSAS 18 Segment Reporting.

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 Reversing an impairment loss

4.8.2 IPSAS 21 Impairment of Non-Cash-

Generating Assets
The following disclosure requirements relate to IPSAS 21 only, since they are in
relation to the recoverable service amount of non-cash-generating assets and
hence have no relevance for cash-generating assets:
For each material impairment loss recognised or reversed in the period:

a. Whether the recoverable service amount of the asset is its fair value less
costs to sell or its value in use.

b. If the recoverable service amount is fair value less costs to sell, the basis
used to determine fair value less costs to sell (such as whether fair value
was determined by reference to an active market).

c. If the recoverable service amount is value in use, the approach used to

determine value in use.

Entities are encouraged, but not required, to disclose key assumptions used to
determine the recoverable service amount of assets during the period.

4.8.3 IPSAS 26 Impairment of Cash-Generating Assets

Entities must disclose the criteria for distinguishing cash-generating assets
from non-cash-generating assets, and in addition to the requirements common
to both standards listed above must disclose the following for each for each
material impairment loss recognised or reversed during the period:
For a cash-generating unit:
a. A description of the cash-generating unit (such as whether it is a product
line, a plant, a business operation, a geographical area, or a reported
segment).
b. The amount of the impairment loss recognised or reversed by class of
assets, and, if the entity reports segment information in accordance with
IPSAS 18, by reported segment based on the entity’s reporting format.
c. If the aggregation of assets for identifying the cash-generating unit has
changed since the previous estimate of the cash-generating unit’s
recoverable amount (if any), a description of the current and former
way of aggregating assets and the reasons for changing the way the
cash-generating unit is identified.

For a cash-generating asset or cash-generating unit:

a. Whether the recoverable amount of the asset is its fair value less costs to
sell or its value in use.
b. If the recoverable amount is fair value less costs to sell, the basis used
to determine fair value less costs to sell (such as whether fair value was
determined by reference to an active market).
c. If the recoverable amount is value in use, the discount rate(s) used in the
current estimate and previous estimate (if any) of value in use.
Further extensive disclosures are required in relation to cash-generating units
containing intangible assets with an indefinite life, including the assumptions
used to determine the recoverable amount of assets.

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 Summary

4.9 Summary
Impairments can be an important issue for public sector organisations since
they often have significant amounts of taxpayers’ funds invested in non-
current assets, and hence correctly accounting for any impairment in the
value of these assets is an important part of reporting the organisation’s
financial position and performance.

We have covered many exercises in this workbook, each one designed to test
your understanding of the rules for different types of impairment calculation.
You might like to attempt some of the additional exercises that follow in order
to see how an impairment affects the preparation of the primary financial
statements, but at the very least ensure that you have attempted the exam
standard multiple choice questions which are located at the end of this
workbook.

Exercise 4.8: Freedom Fields Hospital

Freedom Fields Hospital was set up 8 years ago to provide government

funded and private medical treatment to patients. The trial balance of the
hospital as at 31 December 20X8 is as follows:

£’000 £’000
Buildings 10,550
Land 2,000
Equipment 5,800
Buildings accumulated depreciation 3,600
Equipment accumulated depreciation 300
Bank 201
Staff costs 2,925
General expenses 1,420
General grant for operating activities 3,250
Inventories at 31 December 20X8 85
Other revenue 520
Receivables 125
Private patient income 1,260
Short-term investments 80
Payables 644
General reserves 1,420
Capital contributed by government 4,800
Accumulated surpluses 5,072
Revaluation reserve 2,452
Suspense account 132

23,318 23,318

205
 Summary

1. On 1 January 20X6, the hospital purchased an advanced laser skin

repair machine for use in its private cosmetic surgery department at a
cost of £1.5m. At the time of purchase, the hospital estimated that the
life of the machine would be 6 years with a residual value of £200,000
and that the machine would be in almost constant use for all 6 years
generating income from private patients.
The machine was used heavily for the first 2 years of its life, but
during early 20X8, use of the machine has declined as a result of the
development of a far more advanced laser machine which gives longer
lasting results for patients. Many of the department’s cosmetic surgery
patients have now started to use a local private sector clinic which
offers the newer treatment.
It is estimated that the value in use of the machine is now £250,000.
Similar second-hand machines of this type are currently available for
sale for £180,000, although the hospital would have to pay 3% sales
commission to a selling agent if it wished to sell the machine. The
useful economic life of the asset remains unchanged but it will now
have no residual value at the end of its life.
2. On 1 January 20X8, an X-Ray machine was acquired by finance lease.
The fair value of the machine is £900,000, and the terms of the lease
require the hospital to make 10 annual lease payments in advance of
£102,000 commencing 1 January 20X8. The annual lease payment for
20X8 has been debited to the suspense account, but no other entries
have been made in relation to the leased asset.
3. The remaining balance of the suspense account relates to the annual
payment on an operating lease entered into on 1 July 20X8 for a
photocopying machine. The lease is for 3 years, and the hospital
managed to negotiate a discount for the first year of the lease,
meaning that the lease payments are £30,000 on 1 July 20X8 and
£50,000 on 1 July 20X9 and 20Y0.

4. Depreciation has still to be accounted for:

• All equipment, apart from items which have been impaired, are
depreciated using the straight line method over their average usual
economic life of ten years. Assets which have been impaired are
depreciated over their remaining useful economic life.
• Buildings are depreciated using the straight line method over 40
years.
a. Explain your treatment of item 1), above, with reference to the relevant
IPSAS and including an explanation of how the depreciation charge for
20X8 on the asset will be calculated.
b. From the information above, prepare the statement of financial
performance for Freedom Fields Hospital for the year ended 31
December 20X8, and a statement of financial position at that date.

206
 Summary

Exercise 4.9: Red Tile Housing Association

Red Tile Housing Association is a government funded organisation which

provides affordable housing to families on low incomes. Its trial balance as
at 31 December 20X3 is as follows:
Debit Credit
£ £
Rental income 1,194,000
Government funding 499,700
Home repairs and maintenance expenses 640,000
Loan interest 1,000
Inventory (at 1 Jan 20X3) 24,500
Wages and salaries 226,750
General expenses 775,000
Land 550,000
Buildings 1,720,000
Equipment 25,000
Accumulated depreciation: buildings (at 1 1,057,500
Jan 20X3)
Accumulated depreciation: equipment (at 3,750
1 Jan 20X3)
Bank 48,500
Short-term investments 15,000
Trade receivables 31,450
Trade payables 15,460
Long-term loan 40,000
Accumulated surplus (at 1 Jan 20X3) 46,490
Capital contributed by government 700,300
General reserve 500,000
4,057,200 4,057,200

1. Land was valued at £550,000 five years ago and is considered to have
an infinite useful economic life. An impairment review has revealed that he
value in use of the land is now only £480,000, whilst its fair value less costs
to sell is £460,000.

207
 Summary

An impairment review was also carried out on buildings during the

year, and it is estimated that the value in use of buildings is
£650,000 and the fair value less costs to sell is £630,000. The total
useful economic life of buildings is 50 years, of which 38 were
remaining. The association’s policy is to depreciate buildings on a
straight line basis with no residual value.

2. Equipment which originally cost £5,000 was disposed of during 20X3.

Accumulated depreciation on this asset at 1 January 20X3 was £1,250.
The asset was sold at a profit of £3,000. No entries relating to the
disposal or cash received have been made as the disposal proceeds
were not received until 3 January 20X4.

3. Equipment is depreciated straight line. The remaining useful life of the

remaining plant and machinery has been reviewed and is estimated to
be 5 years from 1st January 20X3. Assets are not depreciated in the
year of disposal.

4. The total value of inventory held at 31 December 20X3 was valued at

£35,700.

5. During the year, an additional £120,000 capital was contributed to

the association by central government. This amount has not been
accounted for in the trial balance above.

6. Government funding in the trial balance includes all amounts received

during the year. In addition, £25,000 was received on 7 January 20X4
which related to the 20X3 financial year.

a. Give three examples of possible impairment indicators which may have

prompted the Red Tile Housing Association to perform an impairment
review on its land and buildings.

b. Prepare the association’s statements of financial performance and

changes in net assets/equity for the year-ended 31 December
20X3 and its statement of financial position as at that date.

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 Summary

Answer

Exercise 4.1

You will have probably thought of many different examples but here are
some possible ideas:

Cash-generating assets (IPSAS 26):

• Hospital building with fee-paying patients where the hospital receives

no government subsidy Deeds office earning land registry fees.

Non-cash-generating assets (IPSAS 21):

• School

• Hospital

• Transport depot

• Administrative offices

It should be noted that some assets may be both cash-generating and

non-cash-generating.

In certain instances, an asset may generate cash flows although it is

primarily held for service delivery purposes. For example, a public library
may use a photocopier primarily as part of its day to day operations
(service delivery) but it may also generate fees from users who wish
to photocopy items. If the assets that generate cash flows cannot be
distinguished from the non-cash-generating assets then IPSAS 21 will
apply.

In other instances, an asset may generate cash flows and also be used for
non-cash-generating purposes. The extent to which the asset is held with
the objective of providing a commercial return needs to be considered
to determine whether the entity should apply the provisions of IPSAS 26
or IPSAS 21. If the non-cash-generating component is an insignificant
component of the arrangement as a whole, the entity applies IPSAS 26
rather than IPSAS 21.

In some cases, it may not be clear whether the primary objective of holding
an asset is to generate a commercial return. In such cases it is necessary
to evaluate the significance of the cash flows. It may be difficult to
determine whether the extent to which the asset generates cash flows is
so significant that IPSAS 26 is applicable, rather than IPSAS 21. Judgment
is needed to determine which standard to apply. An entity develops
criteria so that it can exercise that judgment consistently in accordance
with the definition of cash-generating assets and non-cash-generating
assets.

209
 Summary

Answer

Exercise 4.2

You will have probably thought of many different examples but here are
some possible ideas:

External sources of information

• Significant changes in the technological, market, economic or legal

or government policy environment in which the entity operates. This
could be as simple as a change in customer tastes. Examples of
significant changes could include:

◦ medical diagnostic equipment that is rarely or never used

because a newer machine embodying more advanced
technology provides more accurate results

◦ a drinking water plant that cannot be used because it does

not meet new environmental standards

• Cessation, or near cessation, of the demand or need for services

provided by the asset:

◦ a school closed because of a lack of demand for school

services, rising from a population shift to other areas. It is not
anticipated that this demographic trend affecting the demand
for the school services will reverse in the foreseeable future

◦ a stadium whose principal occupant does not renew its

occupancy agreement, with the result that the facility is expected
to close

Internal sources of information

• Obsolescence or physical damage to the asset:

◦ a building damaged by fire or flood

◦ a bridge that is weight-restricted due to identification of

structural deficiencies

◦ a naval destroyer damaged in a collision

• Significant changes in how an asset is used or is expected to be

used, including the asset becoming idle and plans to discontinue or
restructure the division in which an asset is used:

◦ a mainframe computer that is underutilised because many

applications have been converted or developed to operate
on servers or PC platforms. A significant long-term decline
in the demand for an asset’s services may translate itself
into a significant long-term change in the extent to which the
asset is used

210
 Summary

a school building that is being used for storage rather than for
educational purposes
Performance of the asset being below that planned, for example actual
net cash flow generated by the asset being below that budgeted or, the
service performance of an asset being significantly worse than
expected:
an internal health department report on operations of a rural clinic
may indicate that an x-ray machine used by the clinic is impaired
because the cost of maintaining the machine has significantly
exceeded that originally budgeted

A decision to halt the construction of the asset before it is complete or

in a useable condition:
construction was stopped due to identification of an archaeological
site of specific importance

discovery or environmental condition, such as a nesting ground for

a threatened or endangered species
construction was stopped due to a decline in the economy

Answer

Exercise 4.3

The correct answer is option b); the five routes combined are a single
cash-generating unit.

All five routes are part of one contract therefore the bus company does
not have the ability to withdraw from individual routes. The five routes are
contracted for as a group. The five routes should therefore be grouped
together as one cash-generating unit.

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 Summary

Answer

Exercise 4.4

The indication of impairment is technological change, brought about by

the loss of mainframe computer capacity.

Acquisition cost £350,000

Accumulated depreciation (£350,000 × 4 ÷ 7) £200,000
Carrying amount £150,000

Replacement cost £70,000

Accumulated depreciation (£70,000 × 4 ÷ 7) £40,000
Recoverable Service Amount £30,000

Impairment loss (£150,000 − £30,000) £120,000

Dr Statement of financial performance £120,000
Cr Software license non-current asset £120,000

Carrying amount of asset after impairment loss £30,000

Answer

Exercise 4.5

Impairment is indicated because the office building has sustained physical

damage due to the fire.

Impairment loss using a restoration cost approach would be determined

as follows:

Acquisition cost £50,000,000

Accumulated depreciation (£50,000,000 × 19 ÷ 40) £23,750,000
Carrying amount £26,250,000

Replacement cost (of a new building) £100,000,000

Accumulated depreciation (£100,000,000 × 19 ÷ 40) £47,500,000
Depreciated replacement cost (undamaged) £52,500,000
Less: restoration cost £35,500,000
Recoverable Service Amount £17,000,000

Impairment loss (£26,250,000 − £17,000,000) £9,250,000

Dr Statement of financial performance £9,250,000
Cr Building non-current asset £9,250,000

Carrying amount of asset after impairment loss £17,000,000

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 Summary

Answer

Exercise 4.6

Impairment is indicated by evidence from internal reporting that the

service performance of the printing machine is worse than expected.
Circumstances suggest that the decline in the service potential of the
asset is significant and of a long-term nature.

Impairment loss using a service units approach is determined as follows:

Acquisition cost £40,000,000

Accumulated depreciation ( £40,000,000 × 5 ÷ 10) £20,000,000
Carrying amount £20,000,000

Replacement cost £45,000,000

Accumulated depreciation ( £45,000,000 × 5 ÷ 10) £22,500,000
Depreciated replacement cost before adjustment for £22,500,000
remaining service units

Recoverable Service Amount (£22,500,000 × 75%) £16,875,000

Impairment loss (£20,000,000 − £16,875,000) £3,125,000
Dr Statement of financial performance £3,125,000
Cr Software license non-current asset £3,125,000

Carrying amount of asset after impairment loss £16,875,000

Answer

Exercise 4.7

External sources of information

The asset’s market value has increased significantly during the period
(IPSAS 26)

Market interest rates have decreased during the period (IPSAS 26)

Resurgence of the demand or need for services provided by the asset

(IPSAS 21)

Significant long-term changes with a favourable effect on the entity

have taken place during the period, or will take place in the near future,
in the technological, legal, or government policy environment in which
the entity operates. (IPSAS 21 and IPSAS 26)

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 Summary

Internal sources of information

Significant long-term changes with a favourable effect on the entity

have taken place during the period, or are expected to take place in
the near future, in the extent to which, or manner in which, the incurred
during the period to improve or enhance an asset’s performance or
restructure the operation to which the asset belongs. (IPSAS 21 and
IPSAS 26)

A decision to resume construction of the asset that was previously

halted before it was completed or in a usable condition. (IPSAS 21 and
IPSAS 26)

Evidence is available from internal reporting that indicates that the

service performance or economic performance of the asset is, or will
be, significantly better than expected. (IPSAS 21 and IPSAS 26)

Answer

Exercise 4.8
a. Impairment of machine

As the asset used to generate income from private patients, it is a cash

generating asset and hence the impairment needs to be accounted for
in accordance with IPSAS 26 Impairment of cash-generating assets.

The asset needs to be written down to the lower of its net carrying
amount and its recoverable amount in order to ensure that the amount
shown in the hospital’s financial statements does not overstate the
value of the asset. The asset’s recoverable amount is the higher of its
value in use and its fair value less costs to sell.

The recoverable amount is calculated as follows:

Value in use 250

Fair value less costs to sell (£180K − 3%) 175
Therefore, recoverable amount is the higher of these, i.e. 250

We must then compare this to the asset’s net carrying value to

determine how much, if any, impairment has occurred.

The net carrying value as at the beginning of the year is as follows:

£’000
Cost 1,500
Accumulated depreciation: 2 years × [(£1,500K − £200K) / 6] (434)
Carrying value at start of year 1,066

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 Summary

The impairment is therefore £1,066K − £250K = £816,000. The

accounting entry will be as follows:

Dr Operating expenses (statement of financial performance) £816,000

Cr Equipment non-current asset (statement of financial £816,000
position)

Following the recognition of an impairment loss, any depreciation

charged in respect of the asset in future periods will be based on
the revised carrying amount, less any residual value expected, over
the remaining useful life of the asset as per IPSAS 17 (and per the
hospital’s depreciation policy). The depreciation charge for the year
will therefore be £250,000 / 4 remaining years (no residual value) =
£62,500.

b. Freedom Fields Hospital statement of financial performance for

the year-ended 31 December 20X8

Workings £’000
Operating revenue:
Private patient income 1,260
Grants 3,250
Other revenue 520
Total operating revenue 5,030
Operating expenses:
Wages, salaries and employee (2,925)
benefits
Depreciation 626 + 264 (W1) (890)
Impairment expense (a) (816)
Other operating expenses 1,420 + 22 (W3) (1,442)
Total operating expenses (6,073)

Surplus from operating activities (1,043)

Financing transactions W2 (24)

Surplus for the year (1,067)

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 Summary

Freedom Fields Hospital statement of financial position as at 31

December 20X8

Workings £’000
ASSETS
Current assets
Inventories 85
Receivables 125
Prepayments W3 8
Short-term investments 80
Cash and cash equivalents 201
499
Non-current assets
Land W1 2,000
Buildings W1 6,686
Equipment W1 4,958
13,644
Total assets 14,143

LIABILITIES
Current liabilities
Payables 644
Finance lease W2 102
746
Non-current liabilities
Finance lease W2 746
Total liabilities 1,466

Net assets 12,677

NET ASSETS/EQUITY
Capital contributed by government 4,800
Revaluation reserve 2,452
General reserves 1,420
Accumulated surpluses 4,005
Total net assets/equity 12,677

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 Summary

Working 1: Property, plant and equipment

Buildings Equipment
£’000 £’000
Cost or valuation
As at 1 January 20X8 2,000 10,550 5,800
Impairment (a) (816)
Additions 900
As at 31 December 20X8 2,000 10,550 5,884
Accumulated depreciation
As at 1 January 20X8 3,600 300
Charge for the year (below) − 264 626
As at 31 December 20X8 − 3,864 926
Carrying value
As at 1 January 20X8 2,000 6,686 4,958

Depreciation
264
Equipment: 10 year life for assets excluding impaired asset: 563
(5,884 − 250) / 10
Plus depreciation on impaired asset (a) 63

Total − to statement of financial position

Working 2: Finance lease £’000

Fair value 900
Payments (10 × 102) 1,020
Total finance cost 120

Sum of digits: Don’t forget that with leases with payments in advance,
you need to deduct 1 from sum of digits, i.e. calculate for 9 years as
year 10 is interest free.

A useful formula can save you time when you have a long lease with a
lot of years to add up:

n(n+1)/2 where n = number of years. So here 9(9 + 1) / 2 = 45

Year 1 interest = 9/45 × 120 = 24
Year 2 interest = 8/45 × 120 = 21

217
 Summary

Lease B/f Payment C/f after Interest C/f

table £’000 £’000 payment £’000 £’000
£’000
Year 1 900 (102) 798 24 822
Year 2 822 (102) 720 21 741

Working 3: Operating lease

Matching principle: recognise straight line over period of lease; only 6
months use in 20X8 (1 July − 31 December)

Total cost of lease (30 + 50 + 50)

6 months / 3 years cost on straight line basis (130/3 = 43 × 22
6/12)
20X8 paid
Difference − prepayment

Answer

Exercise 4.9

a. Answers will vary so credit would be given for any reasonable

suggestion. Suggested answers include:

External sources of information

Private sector housing provider in local area providing affordable

house for sale or rent and thus the association’s tenants leave the
association’s homes.

Increases in market interest rates which are likely to affect discount

rates.

Internal sources of information

Physical damage to homes (for example flooding)

Performance of the asset being below that planned, for example

actual net cash flows generated by the asset being below
that budgeted, or the service performance of an asset being
significantly worse than expected. This could arise if tenants do not
pay rent, or if homes are vacant for long periods of time.

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 Summary

b. Red Tile Housing Association: Statement of financial performance

for the year-ended 31 December 20X3

Workings £’000
Operating revenue:
Rental income 1,194,000
Government funding 499,700 + 25,000 524,700
Total operating revenue 1,718,700
Operating expenses:
Wages, salaries and (226,750)
employee benefits
Depreciation 17,105 + 3,500 W1 (20,605)
Impairment of NCA W2 (82,500)
Repairs and maintenance 640,000 + 24,500 − (628,800)
35,700
Other operating expenses (775,000)
Total operating expenses (1,733,655)

Surplus from operating (14,955)

activities
Gain on sale of NCA 3,000
Financing transactions (1,000)
(Loan interest)
Surplus for the year (12,955)

Red Tile Housing Association: Statement of changes in equity for

the year-ended 31 December 20X3

Capital General Accumulated Total

contribute
by govt.
£’000 £’000 £’000 £’000
Balance at 31 December 700,300 500,000 46,490 1,246,790
20X2
Capital contribution from 120,000 120,000
government
Net deficit for year (12,955) (12,955)
Balance at 31 December 820,300 500,000 33,535 1,353,835
20X3

219
 Summary

Red Tile Housing Association: Statement of financial position as at

31 December 20X3

Workings £’000
ASSETS
Current assets
Inventories 35,700
Receivables 31,450 + 6,750 (W4) + 63,200
25,000
Short-term investments 15,000
Cash and cash equivalents 48,500 + 120,000 168,500
282,400
Non-current assets
Land W1 480,000
Buildings W1 632,895
Equipment W1 14,000
1,126,895
Total assets 1,409,295

LIABILITIES
Current liabilities
Payables 15,460
Non-current liabilities
Loan 40,000
Total liabilities 55,460

Net assets 1,353,835

NET ASSETS/EQUITY
Capital contributed by 700,300 + 120,000 820,300
government
General reserves 500,000
Accumulated surpluses 46,490 + 12,955 33,535
Total net assets/equity 1,353,835

220
 Summary

Working 1: Property, plant and equipment

Buildings Equipment

Cost or valuation
As at 1 January 20X3 550,000 1,720,000 25,000
Impairment (70,000) (12,500)
Disposals (5,000)

As at 31 December 20X3 480,000 1,707,500 20,000

Accumulated depreciation
As at 1 January 20X3 1,057,500 3,750

Disposals (1,250)

2,500
Charge for the year (W3) − 17,105
As at 31 December 20X3 − 1,074,605
Carrying value
As at 31 December 20X3 480,000 632,895 14,000

Buildings
Working 2: Impairments Land
£
£
Carrying amount:
(Buildings = 1,720,000 − 1,057,500) 550,000 662,500
Recoverable amount:
Value in use 480,000 650,000
Fair value less costs to sell 460,000 630,000
Higher = recoverable amount 480,000 650,000
Therefore, impairment 70,000 12,500
Total to statement of financial performance 82,500

Working 3: Depreciation
Buildings: Spread new net carrying value over remaining
useful economic life so:
(£1,707,500 − £1,057,500) / 38 years =
Equipment: Change in life so spread net carrying value
over remaining useful economic life:
(£25,000 − £5,000 − £2,500 (W1)) / 5 years = 3,500

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 Summary

Working 4: Disposal proceeds

Net book value at disposal: £5,000 − £1,250 3,750
Profit on disposal 3,000
Therefore, total disposal proceeds (receivables) 6,750

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