NATIONAL UNIVERSITY

MANILA
FINANCIAL ACCOUNTING AND REPORTING 2nd TERM A.Y. 2019-2020
FAR.121 – Impairment of Non-Financial Assets RROcampo
DISCUSSION QUESTIONS
1. PAS 36 applies to which of the following assets?
a. Financial assets within the scope of PFRS 9 c. Non-current assets held for sale
b. Inventories d. Intangible assets
2. PAS 36 does not apply to which of the following assets?
a. Investment in associate
b. Investment property that is measured using the cost model
c. Property, plant and equipment that is measured using the revaluation model
d. Biological assets measured at fair value less costs to sell
3. Under PAS36 Impairment of assets, which ONE of the following statements best describes the term 'impairment loss'?
a. The removal of an asset from an entity's statement of financial position
b. The systematic allocation of an asset's cost less residual value over its useful life
c. The amount by which the recoverable amount of an asset exceeds its carrying amount
d. The amount by which the carrying amount of an asset exceeds its recoverable amount
4. Recoverable amount is
a. The amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and
accumulated impairment losses.
b. The price that would be received to sell an asset in an orderly transaction between market participants at the
measurement date less incremental costs directly attributable to the disposal of an asset or cash-generating
unit, excluding finance costs and income tax expense.
c. The present value of the future cash flows expected to be derived from an asset or cash-generating unit.
d. The higher of an asset's fair value less costs of disposal and its value in use.
5. Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit.
Examples of such costs include
a. Finance costs
b. Income tax expense
c. Termination benefits (as defined in PAS 19)
d. Direct incremental costs to bring an asset into condition for its sale
6. Costs of disposal do not include
a. Legal costs
b. Stamp duty and similar transaction taxes
c. Costs of removing the asset
d. Costs associated with reducing or reorganizing a business following the disposal of an asset
7. Which statement is correct in determining recoverable amount?
a. If the carrying amount is less than fair value less costs of disposal or value in use, it is not necessary to calculate
the other amount.
b. If fair value less costs of disposal cannot be determined, then recoverable amount is value in use.
c. For assets to be disposed of, recoverable amount is fair value less costs of disposal.
d. All the statements are correct.
8. External sources of information indicating that an asset may be impaired include
a. Significant changes with an adverse effect on the entity have taken place during the period, or are expected to
take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be
used.
b. Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will
be, worse than expected.
c. Market interest rates have decreased during the period and are likely to affect the discount rate used in
calculating an asset’s value in use.
d. The carrying amount of the net assets of the entity is more than its market capitalization.
9. Significant changes with an adverse effect on the entity have taken place during the period, or are expected to
take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used
include
I. The asset becoming idle.
II. Plans to discontinue or restructure the operation to which an asset belongs.
III. Plans to dispose of an asset before the previously expected date.
IV. Reassessing the useful life of an asset as finite rather than indefinite.
a. I, II and III only b. I, II and IV only c. II, III and IV only d. I, II, III and IV
10. Internal sources of information indicating that an asset may be impaired include
a. There are observable indications that the asset’s value has declined during the period significantly more than
would be expected as a result of the passage of time or normal use.
b. Significant changes with an adverse effect on the entity have taken place during the period, or will take place in
the near future, in the technological, market, economic or legal environment in which the entity operates or in
the market to which an asset is dedicated.

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FAR.121 – Impairment of Non-Financial Assets RROcampo
c. Market interest rates or other market rates of return on investments have increased during the period, and
those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the
asset’s recoverable amount materially.
d. Evidence is available of obsolescence or physical damage of an asset.
11. Evidence from internal reporting that indicates that an asset may be impaired includes the existence of:
I. Cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are
significantly higher than those originally budgeted.
II. Actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those
budgeted.
III. A significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss,
flowing from the asset.
IV. Operating losses or net cash outflows for the asset, when current period amounts are aggregated with
budgeted amounts for the future.
a. I, II and III only b. I, II and IV only c. II, III and IV only d. I, II, III and IV
12. Riley acquired a non-current asset on 1 January 2015 at a cost of P100,000 which had a useful economic life of ten
years and a nil residual value. The asset had been correctly depreciated up to 31 December 2019. At that date the
asset was damaged and an impairment review was performed. On 31 December 2019, the fair value of the asset less
costs of disposal was P30,000 and the expected future cash flows were P8,500 per annum for the next five years. The
appropriate discount rate is 10% and a five year annuity of P1 per annum at 10% would have a present value of
P3.79. What amount would be charged to profit or loss for the impairment of this asset for the year ended 31
December 2019?
a. P17,785 b. P20,000 c. P30,000 d. P32,215
13. Twinkle Corporation has one division that performs machining operations on parts that are sold to contractors. A
group of machines have an aggregate cost and accumulated depreciation on December 31, 2019 as follows:
Machinery P90,000,000
Accumulated depreciation 30,000,000
The machines have an average remaining life of 4 years. The fair value less costs of disposal of this group of
machines in an active market is determined to be P45,000,000. The financial forecast for this group of machines
reveals the following cash inflows and cash outflows for the next four years:
Cash inflows Cash outflows
2020 30,000,000 12,000,000
2021 32,000,000 17,000,000
2022 26,000,000 14,000,000
2023 16,000,000 6,000,000
Compute for the impairment loss in 2019 assuming that the appropriate discount rate is 8%.
a. P13,598,700 b. P14,299,350 c. P15,000,000 d. P 0
SOLUTION GUIDE:
Net cash flows Period PVF@8% PV, 12/31/19
2020 18,000,000 1 0.9259 16,666,200
2021 15,000,000 2 0.8573 12,859,500
2022 12,000,000 3 0.7938 9,525,600
2023 10,000,000 4 0.7350 7,350,000
46,401,300
14. Autobots Bottling purchased for P800,000 a trademark for a very successful soft drink it markets under the name
OK!. The trademark was determined to have an indefinite life. A competitor recently introduced a product that is
in direct competition with the OK! product, thus suggesting the need for an impairment test. Data gathered by
Autobots suggests that the useful life of the trademark is still indefinite, but the cash flows expected to be
generated by the trademark have been reduced either to P30,000 per year (with a probability of 80%) or to P60,000
per year (with 20% probability). The appropriate risk-free interest rate is 5%. The appropriate risk-adjusted interest
rate is 10%.
The loss on impairment of trademark is
a. P440,000 b. P320,000 c. P200,000 d. P 80,000
15. When deciding on the discount rate that should be used, which factors should be taken into account?
a. Pretax rates
b. The time value of money
c. Risks that relate to the asset for which future cash flow estimates have not been adjusted
d. All of these.
16. When calculating the estimates of future cash flows, which of the following cash flows should not be included?
a. Cash flows from the sale of assets produced by the asset
b. Cash outflows on the maintenance of the asset
c. Cash flows from disposal
d. Income tax payment
17. An entity has an oil platform in the sea. The entity has to decommission the platform at the end of its useful life,
and a provision was set up at the commencement of production. The carrying amount of the provision is P8
million. The entity has received an offer of P20 million (selling costs P1 million) for the rights to the oil platform,
which reflects the fact that the owners have to decommission it at the end of its useful life. The value-in-use of the
oil platform is P26 million ignoring decommissioning costs. The current carrying amount of the oil platform is P28
million. How much should be recognized as impairment loss?

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FAR.121 – Impairment of Non-Financial Assets RROcampo
a. P10,000,000 b. P 2,000,000 c. P1,000,000 d. P0
18. On January 2, 2018, Meadow Inc. purchased a patent with a cost P940,000 a useful life of 4 years. At December 31,
2018, and December 31, 2019, the company determines that impairment indicators are present. The following
information is available for impairment testing at each year end:
12/31/2018 12/31/2019
Fair value less costs of disposal P715,000 P420,000
Value-in-use P750,000 P445,000
No changes were made in the asset's estimated useful life.
The company's 2019 income statement will report
a. Amortization Expense of P235,000.
b. Amortization Expense of P250,000 and Loss on Impairment of P55,000.
c. Amortization Expense of P235,000 and a Loss of Impairment of P25,000.
d. Loss on impairment of P70,000.
Use the following information for the next three questions.
An entity is developing a new production process. During 2018, expenditure incurred was P1,000,000, of which P900,000
was incurred before 1 December 2018 and P100,000 was incurred between 1 December 2018 and 31 December 2018. The
entity is able to demonstrate that, at 1 December 2018, the production process met the criteria for recognition as an
intangible asset. The recoverable amount of the know-how embodied in the process (including future cash outflows to
complete the process before it is available for use) is estimated to be P500,000.
During 2019, expenditure incurred is P2,000,000. At the end of 2019, the recoverable amount of the know-how
embodied in the process (including future cash outflows to complete the process before it is available for use) is
estimated to be P1,900,000.
19. At the end of 2018, the production process is recognized as an intangible asset at
a. P1,000,000 b. P 500,000 c. P100,000 d. Nil
20. How much impairment loss should be recognized in 2019 profit or loss that may be reversed in a subsequent
period?
a. P600,000 b. P200,000 c. P100,000 d. Nil
21. The intangible asset shall be tested for impairment
a. Annually, if there is any indication of impairment.
b. Annually, irrespective of whether there is any indication of impairment.
c. Annually, irrespective of whether there is any indication of impairment when the asset is already available for
use.
d. The intangible asset is not subject to impairment since it is not yet available for use.
22. Which statement is incorrect regarding recognition and measurement of an impairment loss?
a. An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried at revalued
amount in accordance with another Standard.
b. Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other
Standard.
c. After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.
d. None of the above.
23. Skipton Co. bought land in 2010 at a cost of P300,000. In 2013 the land was revalued to P350,000 and in 2018 it was
revalued again to P400,000. At the end of 2019 the land had a value in use of P270,000 and the fair value less costs of
disposal was P285,000.
How much of the impairment loss should be recognized in 2019 profit or loss?
a. P115,000 b. P 30,000 c. P15,000 d. Nil
24. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are
largely independent of those from other assets or groups of assets. If this is the case,
a. Recoverable amount is determined for the cash-generating unit to which the asset belongs.
b. Recoverable amount is the value-in-use.
c. Recoverable amount is the fair value less costs of disposal.
d. Recoverable amount is the carrying value.
25. What is a ‘cash generating unit’ as defined in PAS 36?
a. A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and
liabilities directly associated with those assets that will be transferred in the transaction.
b. Operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity.
c. The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
d. Assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under
review and other cash-generating units.
26. Which statement is incorrect regarding impairment of goodwill in accordance with PAS 36?
a. To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of
cash-generating units, that are expected to benefit from the synergies of the combination.
b. A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit.

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FAR.121 – Impairment of Non-Financial Assets RROcampo
c. Reversal of an impairment loss for goodwill is prohibited.
d. None of the above.
27. Los Company purchased Banos Company for P100,000,000. The net assets of Banos Company on the date of
acquisition amounted to P80,000,000. Thus, there is a goodwill of P20,000,000. Banos Company has three segments,
each of which is considered a cash generating unit. The goodwill is allocated respectively to segments One, Two and
Three, P5,000,000, P6,000,000 and P9,000,000.
On December 31, 2019, Segment One suffered significant losses and its recoverable amount is P30,000,000. On
December 31, 2019, the carrying amounts are as follows:
Segment One P28,000,000
Segment Two 50,000,000
Segment Three 67,000,000
Goodwill 20,000,000
In its 2019 income statement, Los Company should report impairment loss at
a. P3,000,000 b. P2,000,000 c. P5,000,000 d. P1,000,000
28. Which statement is incorrect regarding allocation of impairment loss in a cash-generating unit in accordance with
PAS 36?
a. First, reduce the carrying amount of any goodwill allocated to the cash-generating unit.
b. Then, reduce the carrying amounts of the other assets of the unit pro rata on the basis of the carrying amount
of each asset in the unit.
c. The carrying amount of an asset should not be reduced below the highest of its fair value less costs of disposal
(if determinable), its value in use (if determinable) and zero.
d. None, all the statements are correct.
29. At reporting date, the carrying amount of a cash-generating unit was considered to be have been impaired by
P1,000,000. The unit included the following assets: Land P3,000,000; Building P2,000,000; Goodwill P500,000. The fair
value of land is reliably determined to be P2,800,000. The carrying amount of building after impairment loss is
a. P2,000,000 b. P1,800,000 c. P1,700,000 d. P1,600,000
30. Jenus owns a company called Klassic Kars. Extracts from Jenus' consolidated statement of financial position relating
to Klassic Kars are:
Goodwill P 80,000,000
Franchise costs 50,000,000
Restored vehicles (at cost) 90,000,000
Plant 100,000,000
Other net assets 50,000,000
P370,000,000
An impairment review has estimated that the value of Klassic Kars as a going concern is only P240 million. The
franchise agreement contains a 'sell back’ clause, which allows Klassic Kars to relinquish the franchise and gain a
repayment of P30 million from the franchisor. The restored vehicles have an estimated realizable value of P115
million. How much is the carrying amount of Plant after impairment loss is recognized?
a. P66,666,667 b. P75,000,000 c. P80,000,000 d. P82,800,000
31. Which statement is incorrect regarding ‘corporate assets’?
a. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-
generating unit under review and other cash-generating units.
b. Corporate assets include group or divisional assets such as the building of a headquarters or a division of the
entity, EDP equipment or a research center.
c. The distinctive characteristics of corporate assets are that they generate cash inflows independently of other
assets or groups of assets and their carrying amount can be fully attributed to the cash-generating unit under
review.
d. If there is an indication that a corporate asset may be impaired, recoverable amount is determined for the cash-
generating unit or group of cash-generating units to which the corporate asset belongs, and is compared with
the carrying amount of this cash-generating unit or group of cash-generating units.
32. Which statement is incorrect regarding the reversal of an impairment loss?
a. The increased carrying amount due to reversal should not be more than what the depreciated historical cost
would have been if the impairment had not been recognized.
b. Reversal of an impairment loss is recognized as income in profit or loss.
c. Depreciation for future periods is adjusted.
d. Reversal of an impairment loss is allowed when the recoverable amount of the asset becomes higher than its
carrying amount because of the ‘unwinding’ of the discount.
33. Twig Company reported an impairment loss of P4,000,000 in its income statement for the year 2018. This loss was
related to an equipment which was acquired on January 1, 2017 with cost of P25,000,000, useful life of 10 years and
no residual value. On December 31, 2018 statement of financial position, Twig reported this asset at P16,000,000
which is the recoverable amount on such date. On December 31, 2019, Twig determined that the recoverable
amount of its impaired asset had increased to P19,000,000. The straight line method is used in recording
depreciation of this asset. Compute the amount of gain on impairment recovery to be recognized in 2019 profit or
loss.
a. P5,000,000 b. P4,000,000 c. P3,500,000 d. P0
Use the following information for the next two questions:

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FAR.121 – Impairment of Non-Financial Assets RROcampo
One of the cash-generating units of Tweak Corporation is that associated with the manufacture of wine barrels. At 31
December 2018, Tweak Corporation believed, based on an analysis of economic indicators, that the assets of the unit
were impaired. The carrying amounts the assets of the unit at 31 December 2018 were:
Buildings, net (Depreciated at P60,000 per annum) P240,000
Machinery, net (Depreciated at P45,000 per annum) 180,000
Goodwill 15,000
Inventory 80,000
Receivables, net (Allow. for doubtful debts of P5,000) 35,000
Cash 20,000
Total P570,000
Tweak Corporation determined the value in use of the unit to be P535,000. The receivables were considered to be
collectible, except those considered doubtful.
During 2019, Tweak Corporation increased the depreciation charge on buildings to P65,000 per annum, and to P50,000
per annum for factory machinery. The inventory on hand at 31 December 2018 was sold by the end of 2019. At 31
December 2019, Tweak Corporation, due to a return in the market to the use of traditional barrels for wines and an
increase in wine production, assessed the recoverable amount of the cash-generating unit to be P20,000 greater than
the carrying amount of the unit.
34. How much is the carrying amount of buildings at 31 December 2018 after allocating impairment loss?
a. P230,400 b. P224,300 c. P231,028 d. P228,571
35. How much is the carrying amount of factory machinery at 31 December 2019 after the reversal of impairment loss?
a. P135,000 b. P131,793 c. P131,322 d. P123,271
SOLUTION for #34:
CA before impairment Allocated loss CA after impairment

Buildings P240,000 (P 9,600) P230,400

Machinery 180,000 ( 7,200) 172,800

Goodwill 15,000 (15,000) -

Inventory 80,000 ( 3,200) 76,800

Receivables 35,000 - 35,000

Cash 20,000 - 20,000

Total P570,000 (35,000) P535,000

SOLUTION for #35:

Computation of limit on reversal of impairment loss
Buildings Machinery

CA, 12/31/19- w/o impairment

Buildings (P240T-P60T) P180,000

Machinery (P180T-P45T) P135,000

CA, 12/31/19- w/ impairment

Buildings (P230.4T-P65T) 165,400

Machinery (P172.8T-P50T) . 122,800

Reversal limit P 14,600 P 12,200

Allocation of reversal of impairment loss

CA before reversal Allocated reversal CA after reversal

Buildings P165,400 P11,478 P176,878

Machinery 122,800 8,522 131,322

Total P288,200 P20,000

36. An entity shall disclose the following for each class of assets:
I. The amount of impairment losses recognized in profit or loss during the period and the line item(s) of the
statement of comprehensive income in which those impairment losses are included.
II. The amount of reversals of impairment losses recognized in profit or loss during the period and the line item(s)
of the statement of comprehensive income in which those impairment losses are reversed.
III. The amount of impairment losses on revalued assets recognized in other comprehensive income during the
period.
IV. The amount of reversals of impairment losses on revalued assets recognized in other comprehensive income
during the period.
a. I, II and IV only b. II, and IV only c. II, III and IV only d. I, II, III and IV

 END of FAR.121 
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