IMPAIRMENT OF ASSETS

DEFINITIONS
 Carrying amount: Amount at which an asset is
recognized after deducting any accumulated
depreciation (amortization) and accumulated
impairment losses thereon.

 Fair value: Price that would be received to sell an

asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.

 Costs of disposal: Incremental costs directly

attributable to the disposal of an asset or cash-
generating unit, excluding finance costs and
income tax expense.
DEFINITIONS
 Impairment loss: Amount by which the
carrying amount of an asset exceeds its
recoverable amount.

 Recoverable amount of an asset is the

higher of its fair value less costs of disposal
and its value in use.

 Value in use: is the present value of the

future cash flows expected to be derived
from an asset.
 Epsilon is an entity which prepares financial statements to
30 September each year.

 Purchase of machine On 1 April 2018, Epsilon accepted

delivery of a large and complex machine from an overseas
supplier. The agreed purchase price for the machine was 20
million francs – the functional currency of the supplier.

 Under the terms of the agreement with the supplier 12·6

million francs was payable on 31 July 2018, with the
balance of 7·4 million francs being payable on 30
November 2018.

 The payment due on 31 July 2018 was made in accordance

with the terms of the agreement. Epsilon does not use
hedge accounting.


 On 1 April 2018, Epsilon incurred direct costs of $250,000 in installing
the machine at its premises. Although the machine was ready for
use from 1 April 2018,

 Epsilon did not bring the machine into use until 30 April 2018.
During April 2018 Epsilon incurred costs of $200,000 in training
relevant staff to use the machine.

 The directors of Epsilon estimate that the machine is capable of

being usefully employed in the business until 31 March 2023, and
that it will have no residual value at that date

 Relevant exchange rates (francs to $1) are as follows:

1 April 2018 – 10 francs to $1.
30 April 2018 – 9·5 francs to $1.
31 July 2018 – 9 francs to $1.
30 September 2018 – 8 francs to $1.
Average rate for the period from 1 April 2018 to 30 September
2018 – 9·2 francs to $1.

FINANCIAL REPORTING: APRIL 1, 2018
 Balance Sheet Debit PP&E $2,000,000
 20 million francs / 10 francs per $

 Balance Sheet Credit Equipment Supplier’s Credit

liability: $2,000,000

 PP&E is a non-monetary asset, so exchange rate

fluctuations will not cause change in its carrying
amount.

 Liability to pay the supplier is a monetary liability

PART PAYMENT OF LIABILITY ON JULY 31,
2018
 Balance Sheet Debit Equipment Supplier’s Credit:
$1,400,000
 Franc 12.6 million / 9 franc per $
 Balance Sheet Credit Cash $1,400,000

 Part payment of liability on 31-7-2018 will be reported

using the exchange rate prevalent on that date
CLOSING LIABILITY ON 30/9/2018
 Equipment Supplier’s Credit franc 20,000,000
 Payment made on 31/7/2018 franc 12,600,000
 Payment due on 30/11/2018 franc 7,400,000
 Financial Reporting on 30/9/2018: date on which
financial statements have been prepared
 Balance Sheet Debit Exchange loss: franc
325,000
 Balance Sheet Credit Equipment Supplier’s Credit:
franc 325,000
 Closing liability amount: franc 7,400,000/ franc 8 per $
= $925,000. It will be shown as a current liability.
 Exchange loss: $325,000 [$925,000 – ($2,000,000 -
$1,400,000)
INSTALLATION CHARGES AND TRAINING
FEES
 $250,000 : Installation charges of PP&E – attributable
to cost of getting machine ready for use.
 It will be capitalized and part of PP&E cost
 Balance Sheet Debit PP&E $250,000
 Balance Sheet Credit Cash $250,000

 $200,000 incurred in Training staff to use the machine

is a revenue expense. It will be taken to Statement of
Profit & Loss
 Statement of P/L Debit Training Fee $200,000
 Balance Sheet Credit Cash $200,000
 Decommissioning:

 On 31 March 2023, Epsilon will be legally

required to decommission the machine using
the original supplier.

 The directors of Epsilon estimate that the

cost of safely decommissioning the machine
on 31 March 2023 will be 3 million francs.

 Note: A relevant annual rate to be used in

any discounting calculations is 8% and the
appropriate discount factor is 0·681.
DECOMMISSIONING
 Decommissioning obligation is reliably measureable
and it must be recognized as a provision on April 1,
2018

 Provision amount = PV of estimated future

decommissioning expenditure x PVIF 0.08,5

 = 3 million francs x 0.681 = 2,043,000 francs; = US$

204,300 (using rate of exchange at April 1, 2018)

 Balance Sheet Debit PP&E US$ 204,300

 Balance Sheet Credit Provision for
Decommissioning US$ 204,300
DECOMMISSIONING
 Provision for Decommissioning is a monetary item.
 “Unwinding of discount’ has to be reported as a finance cost
in the Statement of Profit & Loss for the period ended
30/09/2018
 Finance Cost = 2,043,000 x 8% x 6/12 = 81,720 francs
 It has to be translated into US$ using average exchange rate
for the period April 1, 2018 to September 30, 2018 ( 9.2
francs = I US$)
 Statement of Profit & Loss Debit Finance Cost $8,883 (81720
francs / 9.2)
 Balance SheetCredit Provision for Decommissioning $8.883
 On September 30, 2018 Provision for Decommissioning has
to be re-estimated using applicable exchange rate at that
time.
 2,043,000 francs + 81720 francs
DECOMMISSIONING
 Applicable exchange rate on September 30, 2018: 8
francs = 1 US$
 = (2,043,000 francs + 81,720 francs) / 8 = US$
265,590
 September 30, 2018
 Provision for Decommissioning has a balance of
$213,183 ($204,300 on April 1, 2018 + $8,883 on
September 30, 2018)
 Balance required in Provision for Decommissioning =
$265,590
 Shortfall is due to exchange rate fluctuation
 Statement of Profit & Loss Debit Exchange loss
$52,407
 Balance Sheet Credit Provision for
Decommissioning $52,407
 Impairment review:

 During the final few months of the

accounting period ending on 30 September
2018, Epsilon experienced difficult trading
conditions. These difficulties did not affect
the ability of Epsilon to operate as a going
concern.

 In an impairment review of the machine at

30 September 2018, the directors of Epsilon
estimated that the machine’s recoverable
amount was $2·5 million.
 IMPAIRMENT OF ASSETS
Equipment Carrying Fair Value less Value-in-use
Amount cost of disposal

#1 11,900 12,100 11,400

#2 (note 1) 23,700 20,700 20,500
#3 (note 1) 11,500 11,700 12,300
#4 8,300 7,500 7,900
#5( note 2) 3,100 2,600

Note 1: Items #2 and #3 are carried at revalued amounts

and the cumulative revaluation surpluses included in the
equity for the items are 1,200 and 600 respectively. Both the
items are manufacturing equipment.
Note 2: Item #5 is a bus used for transporting employees in
the mornings and evenings. It is not possible to determine
the value-in-use of the bus separately because the bus does
not generate cash-inflows from continuing use that are
independent of CFs from other assets.
IMPAIRMENT LOSS
Individual Carrying Fair value Value- Recoverable
Asset amount less cost in-use amount
of disposal (higher of
two)
#1 11,900 12,100 11,400 12,100
#3 11,500 11,700 12,300 12,300

No impairment loss, as carrying amount is greater than the

recoverable amount in case of asset #1 and #3.

Recoverable amount is higher of two: Fair value less cost of

disposal, and value-in-use
IMPAIRMENT LOSS
Individual Carrying Fair value Value- Recoverable
Asset amount less cost in-use amount
of disposal (higher of
two)
#2 23,700 20,700 20,500 20,700
#4 8,300 7,500 7,900 7,900

Recoverable amount is higher of two: Fair value less cost of

disposal, and value-in-use.
Impairment loss = Carrying amount – Recoverable amount =
3,000, 400
Balance Sheet Debit Revaluation Reserve 1200
P/L Debit Impairment Loss 1800 + 400
Balance Sheet Credit PP&E 3000 + 400
 IMPAIRMENT OF ASSETS
Equipment Carrying Fair Value less Value-in-use
Amount cost of disposal

#1 11,900 12,100 11,400

#2 (note 1) 23,700 20,700 20,500
#3 (note 1) 11,500 11,700 12,300
#4 8,300 7,500 7,900
#5( note 2) 3,100 2,600

Fair value less cost of sale of entire business (#1 to #5) =

54,600
Carrying amount less impairment loss (#1 to #5) = 58,500 –
3,400 = 55,100
Impairment loss is 55,100 – 54,600 = 500 has to be
distributed among #1, #3, and #5 in the ratio of weighted
average of carrying amount on the ground that asset #1 and
#3 have not been impaired earlier, but business value as a
whole has been impaired.