Question

Ghuman Limited has reported a plant in its annual financial reports for the year ended 31
December 2019 at Rs 900,000. The assets has a remaining useful life of 6 years.

The company has been informed by one of its planning managers on 31 December 2020
that the asset is impaired and a thorugh review is required to determine the amount of
such impairment.

Information to be considered

1 Expected sales from the sale of inventory which will be produced from the plant is as
under:
Year Units Selling Price
2,021 12,500 150.00
2,022 11,250 159.00
2,023 9,000 164.00
2,024 24,000 170.00
2,025 23,100 179.00

2 Variable Production cost per unit is expected to Rs 90 in 2021 which is expected to

increase by 10% every year
3 Annual fixed production cost is Rs 485,000 which includes annual depreciation. Fixed
Cost is expecred to increase by 5% p.a.
4 Annual interest cost is Rs 40,500 per anum
5 The company is expecting to upgrade the plant which would increase the production
capacity. The cost of upgradation is Rs 2,000,000. This is expected to be paid at the
end of 2023
6 Annual demand of 2024 and 2025 include 16,000 units each year on account of
expected overhauling
7 Past receivables of Rs 50,000 and payables of Rs 24,800 are expected to be settled on
2021
8 Income tax rate applicable to the company is 32%
9 Fair Value of the asset at 31 December 2020 is Rs 800,000 and cost to sell is Rs
140,000.
10 Applicable interest rate / discount rate is 10%.

Required
Calculate impairment if any
Solution

Carrying amount - 31 Dec 2019 900,000

Depreciation for 2020 (150,000)
Carrying amount - 31 Dec 2020 750,000

Value in use
1 2 3 4 5
Sales units 12,500 11,250 9,000 24,000 23,100
Units due to OverH (16,000) (16,000)
Sales in Current Status 12,500 11,250 9,000 8,000 7,100
Selling Price 150.00 159.00 164.00 170.00 179.00
Variable Cost per unit (90.00) (99.00) (108.90) (119.79) (131.77) 10% inflation

Fixed Cost incld Depr 485,000

Depreciation (150,000)
Cash Based FC 335,000 351,750 369,338 387,804 407,195 5% inflation

Cash flows for Value in use 1 2 3 4 5

Sales (Qty x Rate) 1,875,000 1,788,750 1,476,000 1,360,000 1,270,900
Variable Cost (1,125,000) (1,113,750) (980,100) (958,320) (935,560)
Fixed Cost (335,000) (351,750) (369,338) (387,804) (407,195)
415,000 323,250 126,563 13,876 (71,854)
PV at 10% 377,273 267,149 95,088 9,477 (44,616)
Value in used 704,371

FV less Cost to Sell 660,000

Imapirment Amount

Carrying amount 750,000

Value in use 704,371

FV - CTS 660,000
Recoverable Amount 704,371

Impairment Loss 45,629