Impairment of Assets (IAS 36)

3.a) Calculate the carrying amounts of the assets in (i) and (ii) below at 31 March 2015 after
applying any impairment losses as per requirement of BAS 36 Impairment of Assets.

(i) Chin Hung Pharma Ltd. acquired an item of plant at a cost of TK. 800,000 on 1 April 2013
that is used to produce and package pharmaceutical pills. The plant had an estimated
residual value of TK. 50,000 and an estimated life of five years, neither of which has
changed. Chin Hung Pharma Ltd. uses straight-line depreciation. On 31 March 2015, Chin
Hung Pharma Ltd. was informed by a major customer (who buys products produced by the
plant) that it would no longer be placing orders with Chin Hung Pharma Ltd. Even before
this information was known, Chin Hung Pharma Ltd. had been having difficulty finding
work for this plant. It now estimates that net cash inflows earned from the plant for the
next three years will be:
TK. ’000

year ended: 31 March 2016 220

31 March 2017 180

31 March 2018 170

On 31 March 2018, the plant is still expected to be sold for its estimated realisable value.
Chin Hung Pharma Ltd. has confirmed that there is no market in which to sell the plant at 31 March
2015. Chin Hung Pharma Ltd’s cost of capital is 10% and the following values should be used:

value of TK. 1 at: Tk.

end of year 1 0·91

end of year 2 0·83

end of year 3 0·75 5

(ii) Chin Hung Pharma Ltd. owned a 100% subsidiary, RIFF, that is treated as a cash
generating unit. On 31 March 2015, there was an industrial accident (a gas explosion) that
caused damage to some of RIFF’s plant. The assets of RIFF immediately before the
accident were:
Tk.’000

Goodwill 1,800

Patent 1,200

Factory building 4,000

Plant 3,500

Receivables and cash 1,500

Total 12,000

As a result of the accident, the recoverable amount of RIFF is TK.6·7 million. The explosion
destroyed (to the point of no further use) an item of plant that had a carrying amount of TK. 500,000.
RIFF has an open offer from a competitor of TK.1 million for its patent. The receivables and
 cash are already stated at their fair values less costs to sell (net realizable values). ( Nov-Dec 2015)

4. Novotel Ltd acquired, from the licensing authority, a ten year license to operate a unique, ten
channel satellite television network at a cost of Tk. 3.7 million on January 2012. The license
commence on that date. The license purchase was funded by the issue of five million Tk. 1 ordinary
shares at a premium of 20p. Professional fees of Tk. 500,000 were incurred of which Tk. 300,000
related to the issue of the ordinary shares. The remainder related to the legal negotiations for the
network operating license. All of the professional fees are deductible for tax. The current tax rate is
30%. Sateast Ltd. subscribed for 10% of the shares issued. It also paid Tk 500,000 for five million
warrants. Each warrant entitles Sateast Ltd to subscribe for one new ordinary share in Novotel Ltd
from 1 April 2014 for Tk. 2 per share. The market value of one Novotel warrant at 31 December
2012 has been estimated at 11p. Novotel Ltd has signed a four year agreement with Stars Ltd. to
utilize its satellite network for the delivery of its television channel. That agreement commenced
on 1 April 2012. Novotel Ltd. Paid Stars Ltd Tk. 1 million on 1 April 2012. Three further annual
payments of Tk. 600,000 are payable commencing on 1 April 2013. Novotel utilizes approximately
10% of the operating capacity of Star Ltd’s network, which has an estimated useful life of eight
years. Star has agreed a minimum level of service that will be provided.

Novotel operates a simple business model involving only one customer package. Each customer
pays Novotel Tk. 45 per month for television services and commits to an initial 12 month contract.
After that initial period the customer may cancel the contract. Once the initial contract is signed
each customer receives free receiver equipment and free equipment installation. These have a
retail value of Tk. 90 and Tk. 30 if purchased without the contracts. Stars Ltd. offers customers a
similar television package without receive equipment and installation for Tk. 40 per month.
Novotel signed up 20,000 customers during 2012. The average unexpired term of a customer
contract is eight month. Novotel business plan includes ambitious growth targets. The customer
take up has been disappointing. The business plan target number of customers who were needed
to have subscribed to the service by 31 December 2012 in order to achieve eventual break even
has been calculated at 75,000. Sateast ltd. Who wishes to break into this market, has made an
indicative offer of Tk. 3.2 million for Novotel Ltd.’s operating license. The net selling price of the
other intangible and tangible assets is believed to approximate to their carrying amount.

Required:
Discuss the financial reporting treatment in the 31 December 2012 financial statements of Novotel
Ltd. for the issues arising from the establishment of the satellite television network business,

particularly relating to: 24 a. Intangible assets; b. Equity issues; c. Agreement with Star Ltd.; d. Revenue
recognition; e. Impairment; and f. Going concern.

Your answer should effect on the 31 December 2012 financial statements. (Nov-Dec 2013)
2. a. Discuss the indications of impairment of assets from the viewpoint of external and internal
sources as stated in BAS 36. (May-June 2013) 4
b. ABC Ltd., closes its accounts on 30 April. After the catastrophic destruction of Rana Plaza in
Savar, inspection of its freehold building was carried out by specialist professionals after two
weeks of its year end on 30 April 2013. The specialist professionals reported that there were
major problems with the foundations and cracks in the walls. In their view these problems must
have arisen several years ago, even though the visible evidence had only now come to light.
Required: Explain how this event should be dealt with in the financial statements of ABC Ltd.,
for the year ended 30 April 2013. (May-June 2013) 4
c.Vintage Ltd. is a large industrial manufacturer. It operates from a single freehold factory. Its
accounting policy is that non-current assets, other than land and buildings, are measured
subsequent to initial recognition using the cost model in BAS 16 Property Plant and Equipment.
Land and Buildings are re-measured using the revaluation model of BAS 16, with transfers being
made from revaluation surplus to retained earning when permitted.
Vintage Ltd. Is considering the accounting treatment of two separate assets for the year ended on
31 December, 2012.
1. piece of manufacturing equipment was acquired on 1 January 2011 for Tk. 250,000. The useful
life was assessed as five years. On 31 Dec 2012 the government published proposed changes in
the regulations that mean that the company will have to withdraw certain product lines
manufactured on that equipment from sale by 31 December 2014. The net sales proceeds of the
equipment are estimated at Tk. 200,000 and the net cash inflows over the equipment’s
remaining three year life are estimated at Tk. 33,000, 22,000, and 7,000 respectively. Vintage
Ltd. can borrow at 12% pa but estimates that this particular equipment could only be funded at
15% pa.

2. The company’s freehold factory was acquired ten years ago for Tk. 2.2 million (of which Tk.
200,000 was attributable to the land). Its useful life was estimated at 25 years and the residual
value was estimated at Tk. Nil. Five years ago the factory was revalued to Tk. 2.4 million (land
Tk. 200,000) and the overall useful life and residual value remained unchanged. The revaluation
surplus was recognized in other comprehensive income and held in revaluation surplus. On 31
December 2012 the management of Vintage Ltd. noted that the market value of the similar
property has declined significantly and the fair value of the factory was now Tk. 1.2 million
(land Tk. 200,000).

(i) Explain when a company is required to carry out a review for impairment? 4

(ii) Explain, with supporting numerical calculations, the required accounting treatment for

Vintage Ltd’s manufacturing equipment and freehold factory in 2012. (May-June 2013) 8