Lecture # 21

Chapter # 04

Impairment of Assets

IAS-36
Question # 05 page # 235 Autumn-05 Q # 02 (11 Marks):
On October 01, 2004 ARC Limited, in the course of improvement and enhancement of its production facility
bought a plant having invoice value of Rs. 25 million for the production of its popular brand of electrical goods.
Mr. Aslam, one of the directors, was assigned the duty of supervising the installation of the plant. Other
information is given below:
(a) A special trade discount of 25% was allowed by the supplier due to efforts of the agent involved in the
deal, who had close association with Mr. Aslam. Normally the supplier allows only 10% trade discount
to his customers.
(b) The following costs were incurred on site preparation:
Rs. in '000'
i. Salary of civil engineers and labour 1,200
ii. Civil and electrical work (refer (c) below) 2,800
iii. Electrical item received from the company's own production department at cost
plus 10% profit (similar items are sold to customers at cost plus 30% profit) 330
iv. Remuneration of employees during site preparation 600

(c) Civil and electrical work includes cost of certain instruments amounting to Rs. 150,000, which were
poorly handled by the workers and were totally damaged. Now they carry no value.
(d) On January 01, 2005 test run was started and successfully completed on January 31, 2005 at a cost of
Rs. 550,000. The sale proceeds of test production were Rs. 320,000.
(e) The company is presently obliged to dismantle plant at end of life and present value of dismantling
cost is Rs. 250.
(f) The plant went into normal production from February 01, 2005 and attained 45% capacity during the
period ended on June 30, 2005. The company, at this stage, discovered that the actual capacity of the
plant is about 85% of the capacity declared by the supplier. The matter was discussed with the
supplier and his agent. The agent finally agreed to pay a compensation of 3% on invoice value and
issued his credit note to this effect on June 30, 2005.
(g) The company accounts for its assets under cost model and on June 30, 2005 it estimated
Rs. 21 million as the fair value of the plant. It is further estimated that in case of disposal the
following expenditure will have to be incurred: Rs. ‘000’
- Cost of transportation 100
- Terminal benefits of labour to be laid off 300
- Legal costs 100
- Stamp duty 50
(h) Depreciation is to be charged at 10% on straight-line basis from the commencement of normal
production.
Required: Calculate the following, also submit your explanation if necessary:
(a) Initial recognition of the cost of plant. (05)
(b) Impairment loss, if any, as at June 30, 2005 and accounting treatment thereof. (06)
Question # 03 page # 234 Autumn-21 Q # 02 (07 Marks):
The draft financial statements of Barbary Cement Limited (BCL) for the year ended 31 December 2020
include a plant having a carrying value of Rs. 400 million. Due to technological change, the remaining
useful life of the plant has been reduced to 4 years. Following information has been gathered for
impairment testing of the plant:
Inflows from sale of product to be manufactured by the plant for the year 2021 are estimated at Rs. 200
million. These inflows are subject to 10% decrease in each subsequent year due to declining demand.
(i) Outflows from operational cost for 2021 are estimated at Rs. 80 million. These outflow would
increase by 5% in each subsequent year despite decline in demand due to inflation and increase
in plant’s wear and tear.
(ii) BCL’s net profit is subject to income tax of 20%.
(iii) Depreciation on plant is calculated using straight line method.
(v) The plant’s net disposal proceeds at the end of the useful life is estimated at Rs. 100 million.
(vi) Pre-tax and post-tax discount rates are 12% and 9.6% per annum respectively.
(vii) A technologically advanced plant with similar capacity can be purchased at Rs. 350 million. BCL
has received an offer to buy the existing plant for Rs. 250 million. BCL will have to incur shipping
cost of Rs. 7 million, to dispatch the existing plant to the purchaser.
Required: Compute the impairment loss to be recognized as at 31 December 2020. (07)