IAS-36 Impairment of Assets

Q.No.1:
Khan & Company acquired the whole business (for a purchase consideration of Rs. 5.2
million) on January 1, 2013 from Afridi Transport, a company that operates CNG Rickshaws in
Karachi. Statement of financial position (at fair value) of Afridi Transport on the date of
acquisition shows the following:
Rupees
Goodwill 500,000
Operating license 1,500,000
Parking complex and office 600,000
Workshop 600,000
20 CNG Rickshaws 2,000,000

 On March 1, 2013, CNG cylinders of three rickshaws exploded. Fortunately no one was
injured, but the 3 rickshaws were beyond repair having no residual value. The estimated
value in use of the whole of the business after this accident was assessed at Rs. 3.2
million. Three rickshaws would be written off as they no longer existed and were no
longer part of the cash generating unit.
 Number of passengers was below expectations after the accident. They were not using
CNG rickshaws because of their fear of a similar accident occurring to the remaining
rickshaws. As per market research report, value of business was reassessed on June 30,
2013 at Rs. 2.6 million.
 On June 30, 2013, Khan & Company received an offer of Rs. 700,000 in respect of the
operating licence that is transferable. The operating licence is for fifteen (15) years.
 The carrying values of the parking complex and office area were based on their ‘values in
use’.
 The CNG rickshaws are valued at their net selling prices.

Required:
Work out the carrying value of the assets of Afridi Transport after recognizing the
impairment losses at:
a) March 1, 2013.
b) June 30, 2013.

Q.No.2(a):Briefly state the accounting treatment of impairment loss of assets under IAS-36.

Q.No.2(b):Following information relates to a cash generating unit as of December 31, 2011:

(Rs. in Millions)
Machinery 50
Building 16
Goodwill 15
Current assets 24
105
 The company's policy is to carry out an impairment review annually which has estimated
the recoverable amounts to be Rs.85 million.

Required:
 Advice, how the impairment loss will be allocated under IAS-36 - Impairment of
Assets.
 Give necessary journal entry for the impairment loss adjustment.

Q.No.3: Friends Company Limited consists of three cash generating units. One of its cash
generating units' assets comprises the following:
RS. in milion
Property, plant and equipment 26
Goodwill 2
Patent rights 1
Inventory 12
Total 41

On December 31, 2015, an exercise with regard to assessment of impairment losses revealed that
the recoverable amount of the assets of the cash generating unit is Rs. 35 million.
Following information is relevant
 The goods worth Rs. 1 million were destroyed by fire.
 The patent rights have no market value.
 Revaluation Surplus account showing a Credit balance of Rs. 1 million as of January 1,
2014 represents an upward revaluation of the property, plant and equipment.
Required:
As a Management Accountant, you are required to:
1) Allocate the impairment losses to the above-mentioned assets.
2) Account for the same in the books of accounts in accordance with the requirements of
IAS 36 by preparing a journal entry.

Q.No.4:An asset is considered to be impaired if its carrying value is more than its recoverable
amount. In order to assess whether an asset has impaired, IAS 36 describes a number of
indications based on internal and external sources of information. What are these indications?
Q.No.5: A division of IMPS has the following non-current assets, which are stated at their
carrying values at 31 December Year 4:

Rs. m Rs. m

Goodwill 70

Property, Plant and equipment

Land and buildings 320

Plants and machinery 110

430

500

Because these assets are used to produce a specific product, it is possible to identify the cash
flows arising from their use. The management of IMPS believes that the value of these assets
may have become impaired, because a major competitor has developed a superior version of the
same product and, as a result, sales are expected to fall.

The following additional information is relevant:

Forecast cash inflows arising from the use of the assets are as follows:

Year ended 31 December Rs. m

Year 5 185

Year 6 160

Year 7 130

i. The directors are of the opinion that the market would expect a pre-tax return of 12% on
an investment in an entity that manufactures a product of this type.
ii. The land and buildings are carried at valuation. The surplus relating to the revaluation of
the land and buildings that remains in the revaluation reserve at 31 December Year 4 is
Rs. 65 million. All other non-current assets are carried at historical cost.
 iii. The goodwill does not have a market value. It is estimated that the land and buildings
could be sold for Rs. 270 million and the plant and machinery could be sold for Rs. 50
million, net of direct selling costs.

Required

a) Calculate the impairment loss that will be recognized in the accounts of IMPS.
b) Explain how this loss will be treated in the financial statements for the year ended 31
December Year 4.

Question No.6

1)- Acqua & Co. manufactures different tyres for the auto industry in Pakistan. It is the
fundamental policy of the company to conduct its business with honesty, integrity and in
accordance with the highest ethical and legal standards. The Chief Financial Officer (CFO) of
the company is interested to know the impairment of the assets as per IAS 36 – Impairment of
Assets. The Finance department has gathered following information regarding two independent
situations:

Situation 1:

Acqua & Co. acquired an item of plant at a cost of Rs. 1,000,000 on January 01, 2015. The plant
had an estimated residual value of Rs. 100,000 and an estimated life of 5 years, neither of which
has changed. Acqua & Co. uses straight-line method of depreciation. On December 31, 2016.
Acqua & Co. came to know that it had been having difficulty finding work for this plant. Acqua
& Co. has confirmed that there is no market in which to sell plant at December 31, 2016. It now
estimated that net cash inflows, earned from the plant for the next three years, will be as under:

Rupees

Year ended December 31, 2017 300,000

Year ended December 31, 2018 230,000

Year ended December 31, 2019 150,000

On December 31, 2019, the plant is still expected to be sold for its estimated realizable value.
Acqua & Co. cost of capital is 10%.

Situation-2
Acqua & Co. owned a 100% subsidiary, Fairway Company, that is treated as a cash generating
unit as per the definition of IAS 36 – Impairment of Assets. On December 31, 2016, there was
terrorist attack that caused damages to some of the Fairway’s plant. The asset of the Fairway,
immediately before the incident, were:

Rs. ‘000’

Goodwill 1,200

Patent 1,000

Factory Building 3,500

Plant 3,000

Receivables and cash 1,000

Additional Information:

 As a result of the incident, the recoverable amount of Fairway Company is Rs. 6,000,000.
 The incident destroyed, to the point of no further use, an item of plant that had a carrying
value of Rs. 500,000.
 Fairway Company has an open offer, from a competitor, of Rs. 800,000 for its patent.
The receivables and cash are already stated at their fair value less costs to sell (net
realizable values).
Required:

Calculate the carrying values of the assets in both situations at December 31, 2016 after applying
any impairment losses.

Question No.7: A cash generating unit consists of the following assets at their carrying values as
at December 31,2018:

Rs. ‘000’

Building Rs.45,000

Plant Rs.20,000

Goodwill Rs.15,000

Current assets Rs.30,000

Total Rs.110,000
An impairment review was undertaking on December 31,2018 and it was found that the
estimated recoverable amount of the cash generating unit was Rs. 80 million.

Required:

How the amount of impairment loss of the cash generating unit will be allocated to different
assets as per IAS 36- Impairment of Assets?

Practice Question:

On 1 January Year 1 Entity Q purchased for Rs. 240,000 a machine with an estimated useful life
of 20 years and an estimated zero residual value. Depreciation is on a straight-line basis.

The asset had been re-valued on 1 January Year 3 to Rs. 250,000, but with no change in useful
life at that date. On 1 January Year 4 an impairment review showed the machine’s recoverable
amount to be Rs. 100,000 and its remaining useful life to be 10 years.

Required:

a) The carrying amount of the machine on 31 December Year 2 and hence the revaluation
surplus arising on 1 January Year 3.

b) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).

c) The impairment loss recognised in the year to 31 December Year 4.

d) The depreciation charge in the year to 31 December Year 4.