IAS 36 Impairment Practice Questions

UNIT 2 - Practice Questions (IAS 36 : Impairment of Assets)
1. The following information relates to three assets:
A B C
$’000 $’000 $’000
Carrying Value 100 150 120
Net realizable Value 110 125 100
Value in Use 120 130 90
Required:
What is the recoverable amount of each asset?
2. A company owns a car that was involved in an accident at the year end. It is barely
useable, so the value in use is estimated at $1,000. However, the car is a classic and there
is a demand for the parts. This results in a fair value less costs to sell of $3,000. The
opening carrying value was $8,000 and the car was estimated to have a life of eight years
from the start of the year.
Required:
Identify the recoverable amount of the car and any impairment required.
3. An entity owns a property which was originally purchased for $300,000. The property
has been revalued to $500,000 with the revaluation of $200,000 being recognized as
other comprehensive income and recorded as revaluation reserve. The property has a
current carrying value of $460,000 but the recoverable amount of the property has just
been estimated at only $200,000.
Required:
What is the amount of impairment and how should this be treated in the financial
statements?
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4. A company runs a unit that suffers a massive drop in income due to the failure of its
technology on 1 January 2008. The following carrying values were recorded in the books
immediately prior to the impairment:
$M
Goodwill 20
Technology 5
Brands 10
Land 50
Buildings 30
Other Net Assets 40
The recoverable value of the unit is estimated at $85 million. The technology is
worthless, following its complete failure. The other net assets include inventory,
receivables and payables. It is considered that the book value of other net assets is a
reasonable representation of its net realizable value.
Required:
Show the impact of the impairment on 1 January.
5. December 2004
Advent is a publicly listed company. Details of Advent's non-current assets at 1 October

20X8 were:
Land and Plant Telecommunications Licence
building
$m $m $m $m
Cost/valuation 280 150 300 730
Acc. Depre./amortisation (40) (105) (30) (175)
Net book value 240 45 270 555
The following information is relevant:
(i) The land and building were revalued on 1 October 20X3 with $80 million
attributable to the land and $200 million to the building. At that date the estimated
remaining life of the building was 25 years. A further revaluation was not needed
until 1 October 20X8 when the land and building were valued at $85 million and
$180 million respectively. The remaining estimated life of the building at this date
was 20 years.
(ii) Plant is depreciated at 20% per annum on cost with time apportionment where
appropriate. On 1 April 20X9 new plant costing $45 million was acquired. In
addition, this plant cost $5 million to install and commission. No plant is more
than four years old.
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(iii) The telecommunications licence was bought from the government on 1 October
20X7 and has a 10 year life. It is amortised on a straight line basis. In September
20X9, a review of the sales of the products related to the licence showed them to
be very disappointing. As a result of this review the estimated recoverable
amount of the licence at 30 September 20X9 was estimated at only $100 million.
There were no disposals of non-current assets during the year to 30 September
20X9.
Required
Prepare extracts from the statement of financial position relating to Advent's non-
current assets as at 30 September 20X9 (including comparative figures), together
with any disclosures (other than those of the accounting policies) under current
International Financial Reporting Standards. (9 marks)
6. December 2005
(a) IAS 36 Impairment of assets was issued in June 1998 and subsequently amended
in March 2004. Its main objective is to prescribe the procedures that should
ensure that an entity's assets are included in its statement of financial position at
no more than their recoverable amounts. Where an asset is carried at an
amount in excess of its recoverable amount, it is said to be impaired and IAS 36
requires an impairment loss to be recognised.
Required
(i) Define an impairment loss explaining the relevance of fair value less costs to
sell and value in use; and state how frequently assets should be tested for
impairment; (6 marks)
(ii) Explain how an impairment loss is accounted for after it has been calculated.
(5 marks)
(b) The assistant financial controller of the Wilderness group, a public listed
company, has identified the matters below which she believes may indicate an
impairment to one or more assets:
(i) Wilderness owns and operates an item of plant that cost $640,000 and had
accumulated depreciation of $400,000 at 1 October 20X4. It is being
depreciated at 121% on cost. On 1 April 20X5 (exactly half way
through the year) the plant was damaged when a factory vehicle collided
into it. Due to the unavailability of replacement parts, it is not possible to
repair the plant, but it still operates, albeit at a reduced capacity. Also it is
expected that as a result of the damage the remaining life of the plant from
the date of the damage will be only two years. Based on its reduced
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capacity, the estimated present value of the plant in use if $150,000. The
plant has a current disposal value of $20,000 (which will be nil in two
years' time), but Wilderness has been offered a trade–in value of $180,000
against a replacement machine which has a cost of $1 million (there would
be no disposal costs for the replaced plant).
Wilderness is reluctant to replace the plant as it is worried about the long–
term demand for the produce produced by the plant. The trade–in value is
only available if the plant is replaced.
Required
Prepare extracts from the statement of financial position and income statement of
Wilderness in respect of the plant for the year ended 30 September 20X5. Your
answer should explain how you arrived at your figures. (7 marks)
7. June 2012
(a) The objective of IAS 36 Impairment of assets is to prescribe the procedures that
an entity applies to ensure that its assets are not impaired.
Required:
Explain what is meant by an impairment review. Your answer should include

reference to assets that may form a cash generating unit. (4 marks)
(b) (i) Telepath acquired an item of plant at a cost of $800,000 on 1 April 2010
that is used to produce and package pharmaceutical pills. The plant had an
estimated residual value of $50,000 and an estimated life of five years,
neither of which has changed. Telepath uses straight-line depreciation. On
31 March 2012, Telepath was informed by a major customer (who buys
products produced by the plant) that it would no longer be placing orders
with Telepath. Even before this information was known, Telepath 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:
$’000
year ended: 31 March 2013 220
31 March 2014 180
31 March 2015 170
On 31 March 2015, the plant is still expected to be sold for its estimated
realisable value.
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Telepath has confirmed that there is no market in which to sell the plant at
31 March 2012.
Telepath’s cost of capital is 10% and the following values should be used:
value of $1 at: $
end of year 1 0·91
end of year 2 0·83
end of year 3 0·75
ii) Telepath owned a 100% subsidiary, Tilda, that is treated as a cash

generating unit. On 31 March 2012, there was an industrial accident (a gas
explosion) that caused damage to some of Tilda’s plant. The assets of
Tilda immediately before the accident were:
$’000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
–––––––
12,000
–––––––
As a result of the accident, the recoverable amount of Tilda is $6·7 million
The explosion destroyed (to the point of no further use) an item of plant
that had a carrying amount of $500,000.
Tilda has an open offer from a competitor of $1 million for its patent. The
receivables and cash are already stated at their fair values less costs to sell
(net realisable values).
Required:
Calculate the carrying amounts of the assets above at 31 March 2012

after applying any impairment losses. (11 marks)
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UNIT 2 - Practice Questions (IAS 36 : Impairment of Assets)

1. The following information relates to three assets:

What is the recoverable amount of each asset?

Show the impact of the impairment on 1 January.

Advent is a publicly listed company. Details of Advent's non-current assets at 1 October

The following information is relevant:

Explain what is meant by an impairment review. Your answer should include

ii) Telepath owned a 100% subsidiary, Tilda, that is treated as a cash

Calculate the carrying amounts of the assets above at 31 March 2012

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