IMPAIRMENTS

IAS 36
Check RTJ’s slides for a laka summary of the standards

Appendix A deals with how to measure and account for the discount rate (2 approaches)

 Traditional approach (best estimate)

 Expected cash flow, like Week 8 MAF

Appendix C is very important

 Gives u the different methods to adopt when NCI at

o FV or
o Prop share (gross up GW)
 (GW/ Owned%) – GW
 Example 58/0.6 - 58

In Book B

Examples 2 – 4 have a good recap of simple things

Example 7 is for all the NCI methods

Example 8 has corporate assets (but the 2nd lvl test didn’t need impairment so not over laka)

 Still good for 1st lvl test and how to allocate for example, HO and research

Tutorials

11.11 – Advanced

Question

 Was a BC so you had to take all the FV of the assets

 Wholly owned do no NCI
 There was no GW
 Had a group impairment of the sub’s CGU

Required

 Calculate the cost of acquisition (ie the purchase price)

 Compute the amount of the impairment, in group FS

Answer

 Make sure to take the DT consequences of each asset when doing BC

o Diff bet the FV and CA at BC date
 You don’t need to reallocate Impairment surplus like how the tuts do it:
 Just do one impairment:
o Start with the asset that has limitation
o Then reduce the denominator by that assets CA
o Reduce the impairment total by the impairment already allocated to limited asset
 Get ‘Impairment allocated for rest of assets’
11.13 – Advanced

Question

 Parent company was in Road-freight business

 Bought wholly-owned Sub Botswana (FC is Rand so no changes)
 Gave R600 of the GW amount to Road-freight division
 Balance was shares bet Botswana 2 divisions
 CA of assets at year end given
 Bought a Foreign company 60%, plant undervalued
o NCI at prop share so have to gross up GW
 GW was split equally between 2 divisions

Required

 An essay for when it would be appropriate for impairment tests to be conducted

 Compute the amount of the impairment, in group FS

Answer

 Listed on the JSE, prepare interim FS 6 months

 If on New York SE then may need to prepare more frequently (quarterly)
 Top essay format to use when got impairment essay
 Have to PV the consideration transferred for the foreign company as
o Bought in June but only going to be paid in December
o Half ‘I’ since 6 months
 When calc CA of the assets:
o Add the diff bet the FV and CA for – You only did this because CA at YE was given
 R+D that was now ready for use, depreciate for 1 year
 Plant, depreciate for 2 years
 Very good format to follow for Foreign and local Subs
 Translate the Foreign amounts only at:
o Spot Rate at YE
o Translate right at the end, only the impairment amount
 Make sure to allocate impairment:
o First to GW
o Then to Notional GW
o Then to remaining assets qualifying under IAS 36

11.17 – Advanced

Question Part A

 Had a plant that was impaired

 Then economy was stable
 Manager wanted to credit profit and debit plant

Required

 Discuss whether the proposed transaction for the year ended 31 December 20.7 is
acceptable in terms of International Financial Reporting Standard
Solution

 Can only reverse impairment to the extent of previous impairments

 Any additional impairments above CA
o Will be treated under the reval model as reval surplus
o Thus, it does not go to P/L but in fact OCI and accumulated in Equity

Question Part B

 2 divisions (CGUs)
 HO corporate asset
 FVCOD given for some assets
 VIU for 1 CGU and the entire company given

Required

 Compute the amount of the impairment loss to be allocated to each of Bart Limited’s
assets

Solution

 Have to do 2 lvl testing

 Impair the division which VIU was given, but the FVCOD was higher, so use that
 In 2nd lvl test:
o Include the other division CGU
o Include the HO corporate asset
o Take the CA (after impairment) of the assets from 1st lvl test

11.18 – Advanced

Question

 2 divisions (CGUs)
 Corporate asset – Admin Building
 FVCOD of Admin building given as 49k (1k less than CA)
 Scrapping value of plant given as 1k
 VIU for both CGU given
o VIU for division B is higher than CA

Required

 Compute the amount of the impairment loss to be allocated to each of Hard Limited’s
assets

Solution

 Since plant has scrapping value (this should be its RA):

o Take CA – SV (RA) = Impairment for plant
 Do 1st lvl test for Division A, without the plant
o Hence, decrease the VIU given by the scrap value (RA) of plant
 Conduct 2nd lvl test as usual
o Include the Admin building
 o Include the division B assets
o Include CA of 1st lvl test
 This includes the plant’s RA of 1k
 Make sure to allocate impairment:
o First to GW
o Then to Assets which are limited
o Then to remaining assets qualifying under IAS 36
 For these assets, since there is a limited asset, adjust the Imp total and the
CA denominator

11.21 – Advanced

Question (Top Q) – Impairment of a Sub

 RTJ did the video on this q

 2 CGUs given
 Corporate asset
o HO building which was revalued (trigger OCI thinking)
 Some IFRS 3 adjustments
 105k of GW to own company
o 60% to Toy CGU
o 40% to Fashion CGU
 FVCOD of plant and HO given
o This is showing an indication of impairment
 Told that HO building can’t be allocated on consis and reas basis thus 2nd lvl testing needs to
be done
 VIU of both divisions given
 NCI at prop share (gross up GW)

Required

 Compute GW arising from BC

 Prepare the pro-forma journal entries to record the impairment (include DT)

Solution

 Make sure to do DT on the assets during IFRS 3

 Get the GW (very important as used in next part)
 Do 1st and 2nd lvl testing for both divisions
o When allocating impairment to the GW
 Allocate %Owned to GW, limited to the GW amt
 Allocate %Not Owned to Notional GW, limited to the Notional GW amt
 The VIU of plant given, so you have to restrict the impairment to that amount
 Do the summary of impairment loss table, since DT was asked make sure to do assets at CGT
if required
o Total impairment loss
 Then minus the OCI portion
 CA – DHC will give the impairment for OCI
 That will give you the P/L portion
  When doing the journals, don’t forget the journal with NCI
o The NCI P/L you have to take the Imp loss (P/L) minus GW and minus tax
o The NCI OCI take the Imp loss (OCI reval) minus tax

UNSEEN QUESTION 1😉

Required

Critically review the extracts of the notes provided for apparent inconsistencies, errors in
application and non-compliance with IFRS. (SAICA Adapted)

Solution

 You know by now to learn the whole thing

UNSEEN QUESTION 2😉

Required

Discuss, with supporting reasons, the necessity for, and the manner in which you will conduct,
impairment tests on the assets

Solution

 You know by now to learn the whole thing

 NON-CURRENT ASSETS HELD FOR SALE
IFRS 5
Check RTJ’s slides for a laka summary of the standards

Appendix B gives clarity on what to do if period > 1 year but still wants to use IFRS 5

Some juicy Definitions in Appendix A

If sale is expected to occur beyond 1 year – discount costs to sell to PV

Presenting Discontinued operations (DO) is laid out laka in the standards A294

Some assets can meet the classification but not the measurement:

 They’ll be included when calculating the group asset amount but won’t be allocated any
impairment in terms of IFRS 5

Once classified as held for sale, depreciation ceases

General for DO

Calculate the PBT for continuing operations

Then, calculate the Impairment loss on the disposal group

Then, calculate the PBT for discontinuing operations

Then, do CT and DT (movement amt) if needed or not given

Then do the notes for the DO to get P/L from the DO (Very important step)

Do the taxation note and work backwards to get the tax for the CO:

 By taking CT + DT = Total
 Then take the tax expense amts from the notes of DO as is (brackets or no brackets)
 Take you total tax form above and add/minus DO tax as is to get CO tax

Then you can proceed with the rest of the SOCI/PL

 Make sure when doing CO to take out all of the DO things if the total of the company is given
as you want to get the individual amts for the CO division

Book B is critical here:

 Examples 1 – 9 have some good theory approaches

 Example 10 – Allocation of Imp loss on disposal group
 Example 11 – Presenting DO in SOCI
 Example 12 – Presenting NCAHFS in SOFP
Tutorials

12.2 – Intermediate

Question Part A

 1 property IFRS 5
 Other 2 not IFRS 5

Required

 Show how all the investment properties will be disclosed in the statement of financial
position

Solution

 Just show the IFRS asset under Current Assets

 Other assets under NCA

Question Part B

 Disposal group
o Span assets and their dep% and FV given
 FV and COD of the disposal group given to check for Imp

Required

 Calculate the impairment loss, if any, relating to the disposal group

 Show how the disposal group will be disclosed in the statement of financial position

Solution

 Get the CA of the assets

 IP and the FI will be measured at their FV
 The FVCOD is given (but this amt will include the accounts payable liability)
o So, when showing Assets in SOFP, add back the liability amt to the FVCOD
o Show the liability separately

12.14 – Advanced DO

Question

 2 divisions, plastic one going to be DO

 Given TB of the continued operation
 Plastic division operations given under ‘other expenditure and income’
 Other expenditure and income consist of:
o Severance pay for DO given (tax deductible)
o Forex loss for DO (tax deductible)
o Operating profit given
 o Profit on sale of land a factory building, done separately (CA and TB for PY and CY
given)
 Revenues and PBT for both divisions given
 Disposal group with its FVCOD given
 There was a termination penalty not yet paid for 22k (Non-deductible)
 The deferred tax balance was made up only of temporary differences relating to the
company’s property, plant and equipment
 CT and DT for the prior year given (very important for tax workings in SOCI/PL)

Required

 Calculate the current tax (Hint: Prepare a single current tax computation combining the
continuing and discontinued operations)
 Show how the deferred tax balance of R110 700 (credit balance) for PY
 Calculate the deferred tax balance using the carrying amount versus the tax base approach
for CY
 Prepare the statement of profit or loss and other comprehensive income, and statement
of changes in equity (both with comparatives)
 Prepare the statement of financial position. Only the note to the disposal group held for
sale is required.

Solution

 Other expenditure and income were a debit thus negative 86

 Severance pay and profit were included as a total, so minus to show in separate plastic
division
 In the CT computation:
o Minus the 52k loss made (includes Impairment loss on remeasurement to FVCOD)
o 100 – Inclusion rate % (Proceeds – cost)
o Add back accounting profit from disposal
o Include inventory write down
o Include impairment loss
 In the DT computation:
o Only the Plant from DO gets the impairment as it’s the only asset qualifying for IFRS
5
o You can’t give some of the impairment to the inventory if the DO
 In the notes for the DO, add the 22k penalty and tax it as it is non-deductible

12.16 – Advanced

Question

 2 divisions
 Disposal group and a DO
 Plant will be sold for 300k
 Given the revenues and expenses for total company, sometimes the DO
 CA and dep% of the assets in the Disposal group given
 FVCOD of the Disposal group
  Retrenchment costs of 120k as well as 98k penalty
 All besides retrenchment is tax deductible

Required

 Prepare the SOCI/PL and the notes for the DO

Solution

 Disposal happened in September so apportion for 9 months

 Take the NRV on the day before it becomes NCAHFS
 When calculating P/L on disposal of plant:
o Take the Imp loss calculated from disposal group and minus it from the plant to get
proper CA, then compare that to the SP

12.18 – Great essay question for DO

Discuss whether the disposal of the 50% interest in Jupiter Limited comprises a discontinued
operation in terms of IFRS 5.

12.19 – Advanced

Question

Given

 CA before IFRS 5
 Original cost
 FV on IFRS 5
 FV on mid-year
 FV on year end
 Only disposed the ffg year

Required

 Reconcile the carrying amount of the individual assets of the disposal group from
immediately before they were classified as held for sale to the date of their disposal,
indicating where each movement in the carrying amount of the asset is recognised

Solution

 Layout of this solution is best for disposal groups

 Allocate impairments to GW first then pro rate to assets that qualify for IFRS 5
 Right towards the end:
o The CA was lower than FVCOD
 So, you have to take the CA – watch out for these tricks

12.20 – Advanced

Top Essay question for DO

REQUIRED
  Prepare a report to the board of directors detailing all the accounting issues that have
arisen as a result of the flood and the subsequent decision of the board. Reference must
be made to all the applicable International Financial Reporting Standards

UNSEEN QUESTION 1😉

Best to use RTJ question pack for this one as its more difficult

Required

 Prepare all the relevant journal entries

 Only include tax related journals associated with the Factory building

Solution

 You know by now to learn the whole thing

UNSEEN QUESTION 2😉

 Disposal of WH building
 Couldn’t be sold just yet cause of 1 2 flops
 All things for the building given

Required

 Prepare the journal entries in respect of the warehouse building in the Free State for the
year ended 31 December 20.12
o Journal entries for deferred taxation are required where applicable

Solution

 You know by now to learn the whole thing