Managerial Level IAS - 36 Financial Accounting

IMPAIRMENT OF ASSETS
Definitions of Key Terms
Recoverable amount of an asset or a cash-generating unit
The recoverable amount of an asset should be measured as the higher value of:
(a) The asset's fair value less costs of disposal
(b) Its value in use

Fair value less costs of disposal

An asset's fair value less costs of disposal is the price that would be received to sell the asset
in an orderly transaction between market participants at the measurement date, less direct
disposal costs, such as legal expenses.

Value-in-use
The value in use of an asset is the present value of the future cash flows expected to be
derived from an asset or cash-generating unit.

Cash-generating unit
A cash-generating unit is the smallest identifiable group of assets for which independent
cash flows can be identified and measured.

Impairment loss
The amount by which the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount.

Identifying a potentially impaired asset

An entity should assess at the end of each reporting period whether there are any
indications of impairment to any assets. The concept of materiality applies, and only
material impairment needs to beidentified.
If there are indications of possible impairment, the entity is required to make a formal
estimate of the recoverable amount of the assets concerned.

IAS 36 suggests how indications of a possible impairment of assets might be recognized.

The suggestions are based largely on common sense.

External sources of information

1. A fall in the asset's market value that is more significant than would normally be
expected from passage of time over normal use.
2. A significant change in the technological, market, legal or economic environment of
the business in which the assets are employed.
3. An increase in market interest rates or market rates of return on investments likely
to affect the discount rate used in calculating value in use.
4. The carrying amount of the entity's net assets being more than its market
capitalization.

Internal sources of information

1. Evidence of obsolescence or physical damage.
2. Adverse changes in the use to which the asset is put.
3. The asset's economic performance.

1 From the desk of Ghulam Mustafa (FCMA), M.A. Economics

Managerial Level IAS - 36 Financial Accounting

Question # 1
A company has an asset with the following details at 31 December 2003.
Expected selling price Rs. 200,000
Cost of delivery to potential customer Rs. 20,000
Legal costs involved in sale agreement Rs. 10,000
Required:
Calculate the fair value less costs to sell of the asset at 31 December 2003.

Question # 2
An asset has the following future cash flow, estimated at 31 December 2003:
Expected cash inflows per year (until disposal) Rs. 110,000
Expected cash outflows per year (until disposal) Rs. 50,000
Expected sale proceeds at end of year 3 Rs. 7,000
Expected disposal costs at end of year 3 Rs. 3,000
Number of years of expected usage 3 Years
Present value factors based on a discount rate of 10%
Present value factor for year 1 0.909
Present value factor for year 2 0.826
Present value factor for year 3 0.751
Required: Calculate the expected value in use at 31 December 2003.

Question # 3
A company has an asset with the following details at 31 December 2003:
Fair value less costs of sell Rs. 170,000
Value in use Rs. 152,164
Required:
A. Calculate the recoverable amount of the asset at 31 December 2003
B. Calculate whether or not the asset is impaired if its carrying amount is
1. Rs. 200 000 2. Rs. 150,000

Question # 4
An entity is reviewing one of its business segments for impairment. The carrying value of
its net assets is $20 million. Management has produced two computations for the value-in-
use of the business segment. The first value ($18 million) excludes the benefit to be
derived from a future reorganization, but the second value ($22 million) includes the
benefits to be derived from the future reorganization. There is no active market for the
sale of the business segments.
Required:
Explain whether the business segment is impaired.

Question # 5
An entity has two cash-generating units, X and Y. There is no goodwill within the units’
carrying values. The carrying values are X $10 million and Y $15 million. The entity has an
office building that has not been included in the above values and can be allocated to the
units on the basis of their carrying values. The office building has a carrying value of $5
million.
The recoverable amounts are based on value-in-use of $9million for X and $19 million for Y.
Required:
Determine whether the carrying values of X and Y are impaired.

2 From the desk of Ghulam Mustafa (FCMA), M.A. Economics

Managerial Level IAS - 36 Financial Accounting
Question # 6
A cash-generating unit has these net assets:
$m
Goodwill 10
Property 20
Plant and equipment 30
60
The recoverable amount has been determined as $45 million.
Required: Allocate the impairment loss to the net assets of the entity.

Question # 7
A cash generating unit, measured under the cost model, which has a recoverable amount of
Rs. 10,000 has the following assets:
Carrying amount (Rs.)
Equipment 3,000
Vehicles 2,000
Plant 6,000
Factory building 4,000
Total 15,000
Required: Calculate and allocate the impairment loss to this CGU and then journalize it.

Question# 8
The calculation refers to an impairment loss suffered by subsidiary Zen at Dec 31, 2004:
Rupees
Goodwill Net Assets Total
C.V as at Dec 31, 2004 300,000 900,000 1,200,000
Impairment Loss (300,000) (200,000) (500,000)
- 700,000 700,000
There has been a favorable change in the estimates of the recoverable amount of Zen’s net
assets since the impairment loss was recognized. The recoverable amount is now
Rs.800,000 at December 31, 2005. The net assets’ carrying value would have been
Rs.720,000 at December 31, 2005. Assets are depreciated at 20% reducing balance.
Required:
Show the accounting treatment for the reversal of the impairment loss as of Dec 31,2005.

Question# 9

(Feb-2013)

3 From the desk of Ghulam Mustafa (FCMA), M.A. Economics

Managerial Level IAS - 36 Financial Accounting
Question# 10

(Feb-2014)
Question# 11

(Aug-2015)
Question# 12

(Feb-2016)

4 From the desk of Ghulam Mustafa (FCMA), M.A. Economics

Managerial Level IAS - 36 Financial Accounting
Question# 13

(Feb-2019)
Question# 14

(Aug-2019)

5 From the desk of Ghulam Mustafa (FCMA), M.A. Economics