Accounting 3

2021

Study guide
IAS 36 Impairment of Assets

Unit 7
(Updated by Dharmini Fakir – March 2021)

Table of contents

1. Learning outcomes
2. Prescribed reading material
3. Introduction
4. Notes – outline
5. Tutorial pack
Unit 7 – IAS 36 2021
1. Learning outcomes:

When you have completed this unit you should be able to:

1.1. Identify an asset that has been impaired, by referring to:

1.1.1. External factors and
1.1.2. Internal factors;
1.2. Identify a cash generating unit;
1.3. Calculate an impairment loss for an individual asset and a cash generating unit
(simple CGU calculations only);
1.4. Account for the reversal of an impairment loss; and
1.5. Correctly disclose an impairment loss as well as the reversal of an impairment
loss.

2. Prescribed reading material:

The prescribed literature for this unit is as follows:
2.1. International Financial Reporting Standards (IFRSs):
IAS 36 Impairment of assets. Note the following exceptions
 IAS 36 excluding para 54, 83, 84-87, 96-99, 100-103
 cover only what is specified in this handout re CGU’s – only para 65-
79, 90, 96,104-108 are applicable
 para 134-137 (ignore)
2.2. Gripping GAAP:
Chapter 11 Impairment of assets (excluding sections 3.3.5, 6.4, 8.3)

3. Introduction:

This unit deals with IAS 36 – Impairment of assets. The main objective of IAS 36 is to
provide procedures that an entity should follow to ensure that its assets are not overstated.
Assets such as inventories, construction contracts, deferred tax assets, employee
benefits, investment property carried at fair value are excluded from this statement as
the recoverability of these items is dealt with in the relevant statements.

You have already covered revaluation increases and decreases in PPE. An impairment
loss of a revalued item of PPE shall be treated as a revaluation decrease in accordance
with IAS 16.

The topic is mostly examined as part of an integrated question with other IFRS Standards,
e.g. IAS 16 Property, Plant and Equipment, where the student will have to calculate and
discuss at what amounts assets should be disclosed to comply with the principles of IAS
36 and the other IFRS Standards.

The principles of impairment apply to individual assets or to cash generating units. The
impairment of individual assets will be covered thoroughly. The impairment of cash
generating units will be covered at a basic level.

The importance of the principles studied in the statement should be emphasized. Easy
marks can be obtained by students in this section.

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Unit 7 – IAS 36 2021
4. Notes:

At year end:
1. Calculate the carrying amount (CA)
(PPE: reassess residual value, useful life and depreciation method ito IAS 16.51 and .61)

2. Calculate the recoverable amount (RA) for

a. Assets where there is an indications that the asset may be impaired?
b. Goodwill
c. Intangible assets with an indefinite useful life
d. Intangible assets no yet available for use

3. If RA < CA then recognize an impairment loss

a. In profit or loss
b. In other comprehensive income (if the asset was previously revalued)

4. Adjust depreciation in future periods

Indicators of impairment:
External sources Internal sources

Example 1 (Gripping GAAP Chap 11, Example 1)

Lilguy Ltd performed an indicator review at its financial year end (31/12/20X8) to assess
whether this asset might be impaired. Initial information collected for the purpose of
review includes:
 Budgeted net cash inflows: these are slightly reduced because a drop
in the market demand for the plant’s output is expected during 20X9
after which demand is expected to cease altogether.
 The present value of future net cash inflows for the plant: R230 000
 The market price per share in Lilguy Ltd: R2.20 (there are 100 000
issued shares)

The summary of the totals in the statement of financial position is as follows:

 Assets: R400 000
 Liabilities: R100 000
 Equity: R300 000
Required: Discuss whether the recoverable amount must be calculated at its financial
year ended 31 December 20X8.
(students to attempt example 2 in Gripping GAAP on their own)
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Unit 7 – IAS 36 2021
You can use the following steps to calculate an impairment loss.

Step 1: Calculate the carrying amount

(PPE, in accordance with IAS 16: reassess residual value, useful life, depr method)

Step 2: Calculate the recoverable amount

The recoverable amount will be the higher of:

 Fair value less cost to sell (Step 2A)

 Value in use (Step 2B)

Step 2A: Calculate fair value less cost to Step 2B: Calculate value in use
sell (para 28,29) (para 30-53A and appendix A.A1-A14)

What is fair value less cost to sell? What is value in use?

Fair value: The price that would be
received to sell an asset or paid to
transfer a liability in an orderly transaction
between market participants at the
measurement date. (IFRS 13)
Present value (PV) of estimated future
cash flows expected to be derived from
an asset or cash-generating unit.
Calc of pv involves: cf fv n i

More about the calculation: More about the calculation:

 Fair value is a market-based  Estimate the future cash flows

measurement, not an entity-specific expected to be derived from the asset
measurement.  based on assumptions by
 Based on management, and
 observable market  the most recent financial
transactions, budgets approved by
 other market information management.
 valuation techniques  use of budgets/forecasts
limited to five years, unless a
 Cost of disposal = incremental costs longer period can be justified.
directly attributable to disposal of an  cash flows beyond five years
asset or CGU, excluding finance cost calc using a steady or
and tax expense. declining growth rate

 cash inflows from continuing use (cf)

 cash outflows necessary to generate
cash inflows (cf)
 net cash flow on disposal of asset (fv)

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Unit 7 – IAS 36 2021
 Future cash flows should be estimated
for the asset in its current condition.
 Benefits of future restructuring
taken into account when entity
committed to it.
 Day-today servicing costs
taken into account, not costs to
improve/enhance assets
performance.

 Tax & finance cost not included

Discount rate: (para 55-57, A15-A19)

 a pre-tax rate
 that reflects current market
assessments of the:
 time value of money, and
 the risks specific to the asset
 asset specific rate must be used,
 if not available use surrogates with
adjustments for specific risks (country,
currency, price risks)
 wacc
 incremental borrowing rate
 other market borrowing rates

 The discount rate is independent of

the entity’s capital structure and the
way the entity financed the purchased
the asset.

Step 3: if RA > CA => no impairment loss

If RA < CA => recognize an impairment loss

 Adjust the carrying amount of the asset down to the recoverable amount
 Remember to adjust the depreciation charge for future periods to allocate the
asset’s revised carrying amount, less its residual value, on a systematic basis
over its remaining useful life.

Journal (if asset is non-revalued);

Dr Impairment loss (P/L) xxx

Cr Asset – acc depn/imp losses (SOFP) xxx

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Unit 7 – IAS 36 2021
Example 2 (impairment of single asset):
Assume the following information regarding an asset:
Cost (1/1/20X8) - R600 000; Useful life - 12 years; Residual value - R0

At 31 December 20X9:
The asset can be sold right now to a knowledgeable,
willing buyer for: R302 000
Cost of dismantling the asset, if sold: R2 000

Revised remaining useful life of asset: 5 years

Revised residual value R8 000

The asset will generate the following cash flows

per year over the remaining useful life, if the asset is
not sold: R70 000
Pre-tax discount rate: 8%
The asset will realize the following upon ultimate
disposal at the end of the useful live: R8 000

Suggested solution:
Step 1: Calculate the carrying amount
CA 31/12/20X8 = R600 000 – R50 000 (20X8 depn) = R550 000
Revised 20X9 depn = (R550 000 – 8 000) / 6 yrs = R90 333
CA 31/12/20X9 = R550 000 – 90 333 = R459 667

Step 2: Calculate the recoverable amount

= R300 000

The recoverable amount will always be the higher of:

 Fair value less cost to sell (R300 000)
 Value in use (R284 934)

Step 2A:Calculate fair value less cost to Step 2B: Calculate value in use
sell PMT: 70 000
= Selling price R302 000 N: 5
Less: dismantling costs (R2 000) I: 8%
R300 000 FV: 8 000
Present value = R284 934

Step 3: Compare recoverable amount to carrying amount. If the recoverable amount

is lower, the difference between the recoverable amount and carrying amount will be
the impairment loss.
 New carrying amount of asset: R300 000
 Impairment loss: R459 667 – R300 000 = R159 667
 Revised depreciation for future periods: (R300 000-8 000)/5 year = R58 400
pa

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Unit 7 – IAS 36 2021

Example 3 (Gripping GAAP Chap 11, Example 5)

Management’s most recently approved budget shows a machine’s future cash flows as
follows:

20X7 20X8 20X9

Future cash inflows(outflows)
Maintenance cost (100) (120) (80)
Operational costs (Elec, water, labour etc) (200) (220) (240)
Interest on finance lease (80) (50) (40)
Tax payments on profits (16) (20) (28)
Cost of increasing the machine’s capacity - (220) -
Depreciation (80) (80) (80)
Expenses to be paid in respect of 20X6 accruals (30) - -
Basic inflows: see note 1 1,000 1,200 1,400
Extra profits resulting from the upgrade 20 50
Net cash inflows 494 510 982
(assuming no cash flow from disposal of the asset)
Note 1: Machine Plant
Cash inflows stem from 40% 60%

The useful life of the machine is expected to last for 5 years. The growth rate in the
business in 20X6 was an unusual 15% whereas the average growth rate over the last 7
years is:
 In the industry 10%
 In the business 8%

Required: Calculate the future net cash flows to be used in calculation of the value in
use of the machine at 31 December 20X6 assuming that a 5-yuear projection is
considered to be appropriate.
(adjust the table below to calculate net cash inflows)

20X7 20X8 20X9 20X0 20X1

Future cash inflows(outflows)
Maintenance cost
Operational costs (Elec, water, labour etc)
Interest on finance lease
Tax payments on profits
Cost of increasing the machine’s capacity
Depreciation
Expenses to be paid in respect of 20X6 accruals
Basic inflows: see note 1
Extra profits resulting from the upgrade
Net cash inflows

CREATE LINKAGE TO CASH FLOWS CONSIDERED IN CAPITAL BUDGETING IN

AFM321E

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Unit 7 – IAS 36 2021
Reversal of an impairment loss

 Assess at each reporting date for indications that a prior impairment loss may no
longer exists or may have decreased.
 An impairment loss may only be reversed if there has been a change in the estimates
used to determine the asset’s recoverable amount since last impairment.
 Increased carrying amount may not exceed the carrying amount had no impairment
loss been recognised.
 Reversal of an impairment loss is recognised immediately profit or loss, unless it is a
revalued asset. Then the reversal is treated as a revaluation increase (per IAS 16).
 After reversal of an impairment loss is recognised, the depreciation charge in future
must be adjusted accordingly.

Example 2 continued (reversal of an impairment loss):

At 31 December 20X10 it was established that the reason for the impairment has been
removed, and at 31 December 20X10 the recoverable amount was determined as
R450 000.

Suggested solution:

The reversal is calculated as follows:

R
Carrying amt at 31/12/20X9 300 000

Depreciation for 20X10 -58 400

Carrying amt at 31/12/2010 prior to testing for impairment/reversal 241 600

Recoverable amount 450 000

Potential reversal of impairment loss (450000-241600) 208 400

Reversal of impairment – 127 734

Limited to the carrying amount that would have been if there had
been no prior impairment loss (R459 667 – 90 333)

Revised carrying amount 369 334

Example 3 – GAAP Graded Questions 2014 – Question 11.9

(only the plant)

Note about example 12B in Gripping GAAP Chapter 11:

If the recoverable amount on a revalued asset is greater than what the carrying amount
would have been had the asset never been impaired, as in Example 12 B
– in the textbook they limit the reversal to the carrying amount based on the previously
revalued amount less depreciation.
- in some questions the fact that the recoverable amount has increased above what the
carrying amount would have been based on the previous revaluation, will be treated as a
new revaluation.
We will be clear in any test/exam question as to whether the increase in the recoverable
amount should be treated as a new revaluation.

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Unit 7 – IAS 36 2021
Cash-generating units and goodwill (para 65-108 - further notes)

You do not need to cover all of the detail in paragraphs 65 to 108. These paragraphs will
be considered and applied in more detail in the second semester when we cover business
combinations.

The following outline covers those aspects relating to CGU’s that are relevant for
Accounting 3 in the first semester:

Identifying the CGU to which an asset belongs (refer IAS 36 IE 1)

 CGU=> 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.
(refer to example in IAS 36.68 Busses)
 If it is not possible to estimate the recoverable amount of an individual asset, an entity
shall determine the recoverable amount of the CGU to which the asset belongs. (why
would it not be possible to estimate the RA of an individual asset?)
(refer to example in IAS 36.67 Railway line)
 A group of assets forms a CGU if the entity does sell/could sell the output on an active
market (even if some of the output is used internally).
(refer to example in IAS 36 illustrative examples IE 5)
 CGU’s shall be identified consistently from period to period.

Recoverable amount and carrying amount of a CGU

 Apply paragraphs 19-57 (same principles as for a single asset) to calculate the RA of
a CGU (the higher of fair value less cost to sell and value in use).
 Include the carrying amount of only those assets that can be attributed directly, or
allocated on a reasonable and consistent basis, to the CGU and will generate the
future cash inflows used in determining the CGU’s value in use. (include tangible and
intangible assets, non-current and current assets).

Goodwill
 Goodwill does not generate cash flows independently from other assets or groups of
assets and, therefore, the recoverable amount of goodwill as an individual asset
cannot be determined.
 Goodwill acquired in a business combination may be allocated to CGU’s.
 A CGU to which goodwill has been allocated shall be tested for impairment annually.
The allocated goodwill will therefore be subject to impairment testing with all the other
assets of the cash-generating unit.

Corporate assets – ignore

Impairment loss for a CGU

 Shall be recognized if the recoverable amount is less than the carrying amount of the
CGU.
 Shall be allocated to reduce the carrying amount of the assets of the unit in the
following order:
o First to reduce the CA of any goodwill allocated to the CGU;
o Then to the other assets pro rata on the basis of the CA of each asset in the
CGU
(but do not reduce the CA of an individual asset below the highest of:
 FV less cost to sell
 Value in use
 Zero.)
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Unit 7 – IAS 36 2021
Example 5 – CGU without goodwill (Based on Gripping GAAP ch 11 example 16)

A cash generating unit, measured under the cost model, which has a recoverable amount
of R12 000 includes the following assets:

Carrying  Recoverable 
amount amount
Equipment 3000 unknown
Vehicles 2000 unknown
Plant 6000 5000
Factory building 4000 5000
Total CGU 15000 12000

Carrying amount
Recoverable amount
Impairment loss

CA  Impairment 
Allocation to individual assets: before allocation CA after
1st round:
Equipment 3000
Vehicles 2000
Plant 6000
Factory building 4000
Total CGU 15000

2nd round:
Equipment
Vehicles
Plant
Factory building
Total CGU

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Unit 7 – IAS 36 2021
Example 6 – CGU with goodwill (Based on Gripping GAAP ch 11 example 19)

On 31 December 20X4, as a result of a government ban on a product produced by Banme

Limited, the affected CGU must be impaired to its recoverable amount of R2 000 000.

On this date, the details of the individual assets in the unit (each measured using the cost
model) were:

Remaining  Residual  Recoverable 

31/12/20X4 useful lfie value Carrying amount amount
Goodwill 5 yrs nil                2,000,000 unknown
Plant  5 yrs nil                3,000,000 unknown
Building 5 yrs nil                5,000,000 unknown
            10,000,000       2,000,000

Impairment 
Allocation to individual assets: CA before allocation CA after
Goodwill     2,000,000
Plant      3,000,000
Building     5,000,000
Total CGU  10,000,000     8,000,000                2,000,000

One year later, the ban was lifted and the CGU was brought back into operation. Its
revised recoverable amount is R4 000 000. Calculate the individual carrying amounts and
recoverable amounts at this date:

Reversal of 
31/12/20X5 CA before impairment CA after
Goodwill                 ‐
Plant         600,000
Building     1,000,000
Total CGU     1,600,000

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Unit 7 – IAS 36 2021

Accounting 3
2021

Tutorial pack

IAS 36 Impairment of assets

Unit 7
Questions in
GAAP Graded
questions:
11.1-11.2 Core concepts For pre-reading
11.3 Theory and impairment loss of an individual asset For pre-reading
11.4 Theory - should the RA be calculated? Self-study
11.5 Theory – internal indicators of impairment
11.6 Theory – external indicators of impairment
11.7 Theory and calc - VIU
11.9 Impairment reversal – Revaluation model Self -study
11.10 Cash generating unit – Theory Self-study
11.11 Cash generating unit – impairment loss Hand-in
11.12 Cash generating unit – impairment loss PART A Self-study
only
11.13 – 11.16 Cash generating unit – impairment loss Self-study

Remember the questions from Unit 5 PPE includes impairments and reversals of
impairments for individual assets
7.9 Cost model Already
covered*
7.12 Cost model Already
covered*
7.13 Cost model Already
covered*
7.14 Cost model Already
covered*
7.15 Cost model Already
covered*
*If you have not covered these questions, stop and go back to refresh your principles
Question attached:
Lovell PPE, borrowing costs, impairment loss of CGU Class example

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Unit 7 – IAS 36 2021

IAS 36 QUESTION 1 38 MARKS (50 MINUTES)

You are an expert on International Financial Reporting Standards. Various listed

companies consult with you on technical matters. You are currently engaged in the
following matters of Lovell Limited (Lovell) for the financial year ended 31 December 2014:

1. Office building

Lovell acquired an office building on 1 January 2010 at a total cost of R5 000 000. The
office building was immediately available for use as intended by management. The office
building is used as Lovell’s head office, from where all the operations of Lovell are
administered. On
1 January 2010 the useful life of the office building was estimated as 25 years and the
residual value as R500 000.

Lovell has always accounted for buildings on the cost model. The useful life and the
residual value of the office building did not change at any date. Assume that the value of
the land on which the office building is situated is negligible. The building is not deductible
for tax purposes.

The directors decided on 30 September 2014 that the office building will no longer be used
as the head office of Lovell but will be leased to Cheetah Limited, an independent third
party, from 1 October 2014.

On 30 September 2014 the fair market value of the office building to R5 200 000. At 31
December 2014 the fair market value of the office building amounted to R5 350 000.

It is the accounting policy of Lovell to account for all investment properties at fair value.

2. Warehouse building

In late 2013 the management of Lovell made a decision to construct a warehouse building.
In order to raise finance for the project a loan was raised from Babsa Bank. The loan for
R2 880 000 was received on 1 January 2014 and is repayable in annual instalments
commencing 31 December 2014. The loan bears interest at 8% p.a. The funds were
placed into a call account which earned interest of R62 000 during 2014.

Apart from the loan from Babsa Bank the only other source of finance available for the
building project is a bank overdraft from Nodbank at an interest rate of 9% p.a. All of the
interest on the overdraft has been expensed in profit or loss.

On 1 January 2014 an amount of R200 000 was paid to the architect to commence work
on the plans. Physical construction commenced on 1 February 2014. Progress payments
were made to the contractor on the following date:
R
28 February 2014 1 000 000
30 April 2014 1 000 000
31 August 2014 1 200 000

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Unit 7 – IAS 36 2021

IAS 36 QUESTION 1 (continued)

The warehouse building was completed on 30 September 2014. At this date the useful
life of the warehouse building was estimated at 20 years with a nil residual value, and
depreciation is to be calculated on the straight-line basis. In terms of Lovell’s accounting
policy for buildings the warehouse building will be revalued for the first time on 1 January
2016.

3. Electronic device manufacturing operation

On 1 January 2012 Lovell purchased an electronic device manufacturing operation from

Gaius Limited. The electronic devices are exported to North America in terms of an export
licence. No impairment loss was recognized in respect of the electronic device
manufacturing operation (identified as a cash generating unit) for 2012 and 2013 and there
was also no indication of impairment in respect of any of the individual assets of the
electronic device manufacturing operation for 2012 or 2013.

Due to significant changes in the global electronic device market Lovell had to significantly
scale down its manufacturing of electronic devices during December 2014. Sales of
electronic devices also dropped significantly during December 2014.

The financial manager of Lovell calculated the carrying amount of the cash generating unit
and prepared information for the value in use calculation for the electronic device
manufacturing operation for purposes of impairment testing.

Carrying amount Additional information

at 31 December
2014 (correctly
calculated)
Factory building 5 350 000
Machinery (cost model) 8 750 000
Export licence(cost model) 2 300 000 Expires on 31 December 2019
Inventory (already at lower of 1 850 000
cost and net realizable value)
Goodwill 1 958 750
Total 20 765 000

The cash flow budgets and forecasts prepared by financial manager reflect the following:
Net cash inflow per
year
R
2015 4 100 000
2016 – 2018 4 500 000
2019 3 950 000

Lovell had financed the purchase of the electronic device manufacturing division by means
of a four year loan. The final payment of this loan of R900 000 in 2015 has been included
in the net cash inflows for 2015 above.

Lovell expects to sell the machinery for R1 000 000 and incur costs in dismantling the
machinery of R150 000 (a provision for dismantling was raised on initial recognition of the
machinery). Both of these cash flows have been included in the net cash inflows for 2019
above.

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Unit 7 – IAS 36 2021

IAS 36 QUESTION 1 (continued)

An appropriate before tax discount rate, compounded annually, is 11% per annum.

4. Taxation
Assume a tax rate of 28% and capital gains are included in taxable income at 80%. Ignore
VAT.

Required:
a) Referring to the office building (1 above)
i. Prepare the journal entries in the books of Lovell Limited for the period
30 September 2014 up to and including 31 December 2014 that will result
from the above information.
(8)
Taxation related entries are not required. Journal narrations are not required.

ii. Explain what the consequences are of the reclassification of the office
building from property, plant and equipment to an investment property
on the measurement of deferred tax.
(3)
Do not discuss the temporary difference that arose on initial recognition.

b) Referring to the office building (1 above) and the warehouse building (2 above):
Prepare the property, plant and equipment note to accompany the Statement of
Financial Position of Lovell Limited for the year ended 31 December 2014 for
these items only.
(10)
Show them in two separate columns. Narrative disclosure is not required.
The total column is not required. Comparatives are not required.

c) Referring to the Electronic Device Manufacturing operation (3 above):

Prepare the journal entry in the books of Lovell Limited to record the impairment
loss on 31 December 2014.
(14)

Include in your workings:

- a detailed calculation of VIU – if you have made adjustments to the cash flows
given in the question, give a brief reason why;
- a detailed allocation of the impairment loss to the assets in the CGU – if you have
not allocated the impairment loss to certain assets give a brief reason why.

Taxation related entries are not required. Journal narrations are not required.

Show your workings clearly.

Work to the nearest R1.
Your answers must comply with International Financial Reporting Standards.

Presentation marks: Arrangement and layout, clarity of explanation, logical argument

and language use
(3)

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NCA integrated question 1 SOLUTION SUGGESTED SOLUTION

Part (a)
Investment property journal entries
Dr Office building              855 000 jnl                1,0
Cr Accumulated depreciation ‐ office building            855 000 calc                2,0

Dr Office building          1 055 000 jnl                1,0

Cr Revaluation surplus (OCI)        1 055 000 calc                1,0

Dr Investment property          5 200 000 jnl                0,5

Cr Office building       5 200 000 jnl                0,5

Dr Investment property (5350‐5200)             150 000 jnl                1,0

Cr Fair value gain on investment property (P/L)           150 000 calc                1,0
               8,0
As the company was holding the office building as PPE to recover its carrying amount through use deferred tax 
was provided on the revaluation surplus at the normal tax rate 28%.                    1
When the office building was reclassified to investment property, IAS 12 has a rebuttable presumption that the 
carrying amount of the investment property will be recovered through sale.                    1
The deferred tax would therefore be measured using the CGT rate, that is 80% X 28%.                    1
                   3                   11

Part (b) MARKS
Notes to the financial statements of Lovell Limited for the year ended 31 December 2014
 Warehouse   Office   Warehouse 
Property, plant and equipment  Office Building  Building  Building  Building 
 R   R 
Gross carrying amount          5 000 000                    ‐                0,5
Accumulated depreciation            (720 000)                    ‐                1,0
Carrying amount at 31 December 2013          4 280 000                    ‐
Revaluation ‐ 30 September 2014          1 055 000                0,5
Transfer to Investment Property        (5 200 000)                0,5
Additions       3 400 000                  0,5
Capitalised borrowing costs           110 800                  0,5
Depreciation             (135 000)            (43 885)                0,5                  0,5
Gross carrying amount                      ‐       3 510 800                0,5                  0,5
Accumulated depreciation                      ‐            (43 885)
Carrying amount at 31 December 2014                      ‐       3 466 915                3,5                  2,0

Workings:
Office building HCA TB TD DT
2010/01/01          5 000 000                    ‐ exempt                ‐
2010/12/31            (180 000)                    ‐ exempt                ‐
2011/12/31            (180 000)                    ‐ exempt                ‐
         4 640 000                   ‐ exempt                ‐
2012/12/31            (180 000)                    ‐ exempt                ‐
         4 460 000                    ‐                         ‐                ‐
2013/12/31            (180 000)                    ‐ exempt                ‐
Start calculation here ‐‐‐‐‐‐>                        31 12 2013          4 280 000                    ‐                         ‐                ‐
2014/09/30            (135 000)                    ‐ exempt                ‐
         4 145 000                    ‐                         ‐                ‐
Revalue before transferring to IP          1 055 000                    ‐               (200 000)          56 000
Balance when transferred out of PPE (tax @ 28% on 
amount above cost ‐ recovery through use)          5 200 000       5 000 000               (200 000)        (56 000)
NCA integrated question 1 SOLUTION SUGGESTED SOLUTION

Balance when transferred into IP (tax @ 80% of 28% 
on amount above cost ‐ recovery through sale)          5 200 000       5 000 000               (200 000)        (44 800)
NCA integrated question 1 SOLUTION SUGGESTED SOLUTION

Warehouse building
Specific borrowings:
Loan 1/1/2014 (9/12 months) 9/12       2 880 000 8%       172 800                  1,5
Interest earned on excess funds        (62 000)                  1,0
Capitalised borrowing costs       110 800

Depreciation Useful life
Costs incurred on construction          3 400 000
Capitalised borrowing costs             110 800                  1,0
         3 510 800                     20 3 months          43 885                  1,0
                 4,5
              10,0
Part (c )
Journal entries for the year ended 31 December 2014
Allocation of impairment loss
Dr Impairment loss (p/l)          3 920 394 (must show p/l)                  1,0
Cr Goodwill       1 958 750                  0,5
Cr Accumulated impairment losses and dep ‐ 
machinery       1 553 338                  0,5
Cr Accumulated impairment losses and dep ‐ export 
licence           408 306                  0,5

Workings:
Carrying amount of CGU (given)     20 765 000
Calculation of value in use
2015 (4 100 000+900 000 do not include cash 
outflows from financing activities)          5 000 000       4 504 505 cf1                  2,0
2016‐2018 (3 years)          4 500 000       9 906 952 cf2,cf3,cf4                  2,0
2019 (3 950 000 + 150 000 do not include cash 
outflows that relate to obligations that have been 
recognised as liabilities)          4 100 000       2 433 150 cf5                  2,0
NPV, int = 11%     16 844 606
Impairment loss (CA ‐ RA (VIU))       3 920 394                  1,0

Allocated to R
Factory building                      ‐ no allocations as not in scope of IAS 36                  1,0
Machinery          1 553 338 allocate in proportion to CA                  1,0
Export licence             408 306 allocate in proportion to CA                  1,0
Inventory                      ‐ no allocations as not in scope of IAS 36                  1,0
Goodwill          1 958 750 allocate to GW in full                  1,0
         3 920 394               14,5
Presentation (arrangement, layout, clarity of explanation, logical argument, language use)                  3,0
TOTAL               38,5