Exercises – Topic 3: Impairment of assets.

Ex 1: identify impairment
The following information relates to individual equipment items of an entity on the reporting date:
Carrying Amount Fair value less costs to sell Value in use $
$ $
Item #1 119,000 121,000 114,000
Item #2 (note 1) 237,000 207,000 205,000
Item #3 (note 1) 115,000 117,000 123,000
Item #4 83,000 75,000 79,000
Item #5 (note 2) 31,000 26,000 –
Notes
1. Items #2 and #3 are carried at revalued amounts, and the cumulative revaluation surpluses
included in other comprehensive income for the items are $12,000 and $6,000, respectively. Both
items are manufacturing equipment.
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 the cash flows from other assets.

EX 2: identify impairment
A non-current asset had a carrying amount of $ 80.000 in the statement of financial position of an
entity at the beginning of the financial year. The asset had previously been revalued, and there was a
revaluation surplus of $ 5.000 relating to it in the revaluation reserve.
At the end of the financial year, the entity suspected (nghi ngờ) that the asset had been impaired. It
therefore estimated the recoverable amount of the asset and found this to be $ 60.000. The
depreciation charge for the asset for the year would be $ 8.000.

EX 3
On 1 January Year 1 Entity A purchased for $ 240.000 a machine with an estimated useful life of 20
years and an estimated residual value of $ 50 000. Entity Q depreciates such machines on a straight
– line basis. On 1 January Year 4 an impairment review showed the machine’s recoverable amount to
be $ 100,000 and its remaining useful life to be 10 years.
Required:
Calculate the amounts to be included in the statement of comprehensive income for Year 4 if the asset
had been revalued on 1 January Year 3 to $ 25,000, but with non-change in useful life at that date.

Ex 4: impairment loss
A company has acquired another business for $4.5m: tangible assets are valued at $4.0m and goodwill
at $0.5m. An asset with a carrying value of $1m is destroyed in a terrorist attack. The asset was not
insured. The loss of the asset, without insurance, has prompted the company to assess whether there
has been an impairment of assets in the acquired business and what the amount of any such loss is.
The recoverable amount of the business (a single cash generating unit) is measured as $3.1m.

2. Plant for an intermediate step in a production process: CarProd Corp. , a car producer, uses
engines and other components produced by its plant A in a car assembly process that is
performed in its plant B.
Plant A sells 70% of its production to plant B and remaining 30% to external customers.
Plant B sells 90% of its production to external customers and remaining 10% to CarProds'
other plants.
Req
What are the cash generating units for plant A and B in the following 2 scenarios:
a) There is active market for engines and other components produced by plant A and sold to
plant B.
b) There is no active market for engines and other components produced by plant A and sold
to plant B. External
custome
rs
Plant B

Plant A
Internal
customers
External
customers

3. Plants in different regions: Phtalate Corp. is a producer of chemical agents that are
produced in 3 plants operating in 3 different countries. Plant in Cleanlandia produces
chemicals that are used for final products by 2 other plants. Plant in Alandia and plant in
Belandia produce final chemical agents that are sold worldwide from either Alandia or
Belandia. Production levels of these 2 plants are not independent of each other, but depend
on the allocation of sales between the 2 plants.
What are the cash generating units for Phtalate Corp. in the following 2 scenarios:
a) There is active market for chemicals produced by plant in Cleanlandia.
b) There is no active market for chemicals produced by plant in Cleanlandia.
4. Building half-rented to others and half occupied for own use: CarProd owns a headquarters'
building that used to be fully occupied. However, due to financial crisis and subsequent
downsizing, CarProd decided to rent free space to third parties. What is cash generating unit
in relation to building?

Ex 5: CGU Impairment
Electra Corp. owns a number of nuclear power plants in various continents. At the end of
20X3, Electra Corp. is testing a plant in Alandia for impairment. The plant consists of the
following items (with their carrying amounts as of 31 December 20X3):
Atomic reactors, cooling tower, store of nuclear fuel, all with equipment - EUR 55 mil.
(includes initial estimate of decommissioning costs)
Other technical facilities directly related to power plant - EUR 8 mil.
Administrative building with equipment (fully used in plant) - EUR 2 mil.
Receivables of the plant - EUR 2 mil.
Liabilities of the plant - EUR 1 mil.
Provision for decommissioning costs - EUR 15 mil. (equal to their present value).
Remaining useful life of this plant is 10 years (ending 20X13). New electricity producers from
alternative sources forced Electra to decrease production in this plant. With respect to this
situation, Electra's management prepared new financial forecasts for the plant, excluding
decommissioning and restoration costs, financial assets and other liabilities (in table below).
Plant generates cash inflows as a whole.
Electra received offer to sell the plant at the price around EUR 42 mil. This price reflects the
fact that the buyer will assume obligation to decommission the plant and restore the site. Cost
to sell the plant is negligible.
Calculate any impairment loss. Appropriate pre-tax discount rate is 5% p.a.
in EUR '000
Year Cash flow
20X4 10,200
20X5 9,550
20X6 8,900
20X7 8,250
20X8 7,600
20X9 6,950
20X10 6,300
20X11 5,650
20X12 5,000
20X13 4,350
72,750

Ex 5- Reversal
Back to health resort question: During 20X5, new water analysis in Alandia resort owned by
Beautiful Spas showed that water was no longer contaminated. To improve its reputation,
Beautiful Spas (subsidiary of Swimmers) launched massive advertising campaign and as a
result, number of customers significantly increased in comparison with the year 20X3 and
20X4. Based on these facts and as a part of an impairment testing, management prepared new
cash flow projections for Alandia resort.
Based on financial data shown below, advice Swimmers Corp. how to deal with this situation
in group accounts for the year ended 31 December 20X5.
Financial data:

as of 31 Dec 20X3 in EUR '000 - from example on Business Combinations

Accum. depreciation Impairment Carrying
Asset Historical cost
before IL loss in 20X3 amount
Healing springs with land 13,000 1,300 3,849 7,851
Source of healing mud 7,500 750 2,221 4,529
Spa facilities 6,500 650 1,924 3,926
Sport / leisure facilities 4,000 400 1,184 2,416
Administrative buildings 2,500 250 740 1,510
Other PPE 500 100 132 268
Subtotal 34,000 3,450 10,050 20,500
Goodwill 6,000 0 6,000 0
Total 40,000 3,450 16,050 20,500

as of 31 Dec 20X5 in EUR '000

Carrying amount
As would be had no IL
Asset
As shown been recognized in
20X3
Healing springs with land 6,280 9,360
Source of healing mud 3,624 5,400
Spa facilities 3,140 4,680
Sport / leisure facilities 1,932 2,880
Administrative buildings 1,207 1,800
Other PPE 215 320
Subtotal 16,398 24,440
Goodwill 0 6,000
Total 16,398 30,440

Value in use based on managers' projections as of 31 Dec 20X5: 32,000

Fair value less cost to sell based on recent offer: 28,000