IAS 36 Question 2

QUESTION 2 – IAS 36 Impairment of Assets (ICAP C6 S10)

On March 1, 2007 Style Textiles imported an automatic plant for Rs. 27 million. The
commissioning of the plant was completed in December 2007 with a cost of Rs. 3 million.

The commercial production commenced on January 1, 2008 and at that time, the economic life of
the plant was estimated as 8 years.

During an exercise carried out to determine the impairment in the value of plant as on December
31, 2009 the following estimates have been made:
 Due to lack of demand the estimated plant utilization is reduced from 80% to 70%.
 It is estimated that due to under utilization of the plant, the life of the plant will be increased
by 2 years but an overhauling of the plant would have to be carried out at the end of year
2015 at a cost of Rs. 1 million.
 The applicable discount rate is 10%.
 The net annual cash flows (excluding overhauling cost) have been estimated as under:
Rs. in million
Year 2010 2011 2012 2013 2014 2015 2016 2017
Net cash flows 5.0 4.0 3.5 3.2 3.0 2.5 2.3 2.0

The current selling price of a similar plant in the local market is Rs. 15 million. The present
decommissioning cost of the plant is estimated at Rs. 0.2 million.

Required:
Work out the impairment (if any) in the value of the plant as on December 31, 2009. (11)

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IAS 36 Question 2

ANSWER 2 – IAS 36 Impairment of Assets (ICAP C6 S10)

As at 31-12-2009 Rs. in million

Carrying amount W1 23.33

Fair value less cost to sell 15 – 0.2 14.80

Value in use W2 17.49
Recoverable amount is higher of the two (17.49)

Impairment loss to be charged 5.84

W1 – carrying amount of plant Rs. in m

Import cost 27
Commission cost 3
30
Depreciation for the year 2008 [30/8 years] (3.75)
26.25
Depreciation for the year 2009 [26.25/(7+2)years] (2.92)
23.33

W2 – Value in use Rs. in million

Year 2010 2011 2012 2013 2014 2015 2016 2017
Net cash flows 5.0 4.0 3.5 3.2 3.0 2.5 – 1 2.3 2.0
Discount factor 10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 .4665
Present value 4.55 3.31 2.63 2.19 1.86 0.85 1.18 0.93
Value in use 17.49

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