CHAPTER 59. IMPAIRMENT OF ASSET Cash generating unit Problem 59-1 (IFRS) At the beginning of current year, Jolo Company acquired all the assets and liabilities of another entity. The acquiree has a number of operating divisions, including one whose major industry is the manufacture of toy train. The toy train division is regarded as.a cash generating unit. In paying P20,000,000 for the net assets of the acquiree, Jolo Company calculated that it had acquired goodwill of P2,400,000. The goodwill was allocated to each of the divisions, and the assets and liabilities acquired are measured at fair value at acquisition date. At year-end, the carrying amounts of the assets of the toy train division were: Building 2,000,000 Inventory 1,500,000 Trademark 1,000;000° Goodwill 500,000 There is a declining interest in toy train because of the aggressive marketing of computer-based toys. The entity measyred the value in use of the toy train division at n at P3,600,000. i mat yearend 1. ‘What amount should be recognized as impairment loss on goodwill? a. 140,000 b. 250,000 c. 500,000 d. 0 2. What amount should be recognized as impaii « allocated to the building? ee eee 400,000 500,000 900,000 . 300,000 Resp 705Solution 59-1 Question 1 Answer c Carrying amount of cash generating unit 5,000,000 Value in use . 3,600,000 Impairment loss ; : 1,400,000 Impairment loss allocated to goodwill , 500,000 Remaining impairmentloss . - 900,000 The carrying amount of, ‘goodwill is fully recognized as inipairment loss. PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash generating unit, the loss is allocated to the assets of the unit in the following order: a. First, to the goodwill, ifany. b. Then, to all other noncash assets of the unit prorata based on their carrying amount. Question 2 Answer a Carrying amount Fraction Building 2,000,000 . 20/45 Inventory F 1,500,000 15/45, Trademark 1,000,000 10/45 4,500,000 The remaining loss of P900,000 is allocated to the assets other than goodwill based on carrying amount. 706x Problem 59-2 (IFRS) Bronze Company operates a production line which is treated asa cash generating unit for impairment review purposes.. Atyearend,thecanying amounts of the noncurrent assets are as follows: - Goodwill ‘ 1,100,000 Machinery : 2,200,000 The value in use of the production line is estimated at P2,700,000 at this time. 1. Whatis the revised carrying amount of goodwill after recognition of impairment? a. 1,100,000 b. — 900,000 c. 800,000 d. $00,000 2. What is the revised carrying amount of machinery after tecognition of impairment? a. 2,200,000 b. 1,800,000 c. 1,600,000 d. 1,900,000 Solution 59-2 Question 1 Answer d ' ‘ Carrying amount of cash generating unit 3,300,000 Value in use 2,700,000 Impairment loss 600,000 - * Goodwill 1,100,000 Impairment loss applied against goodwill only (600,000) Adjusted carrying amount 500,000. Question 2 Answer a The machinery is not impaired. The carrying amount remains at P2,200,000. 707Problem 59-3 (IFRS) Palawan Company determined that the electronics division is a cash generating unit. The entity calculated the value in use of the division to be P8,000,000. The assets of the cash generating unit at carrying amountare as follows: Building ; 5,000,000 Equipment 3,000,000 Inventory 2,000,000 The entity also determined that the fair value less cost of disposal of the building is P4,500,000. 1. Whatis the total impairment loss? a. 2,000,000 b. 4,000,000 c. 3,000,000 d. 0 2. Whatis the impairment loss allocated to building? a. 1,000,000 b. 500,000 c. 750,000 d 0 3. Whatis the impairment loss allocated to equipment? a. 600,000 b. 850,000 c. 900,000 d. 0 4. What is the impairment loss allocated to inventory? a. 400,000 b. 200,000 c.. 600,000 d. 0 708Solution 59-3 Question 1 Answer a Question 3 Answer c Question 2 Answre b Question 4 Answer c Carrying amount of cash generating unit 10,000,000 Value in use 8,000,000 Impairment loss : 2,000;000 Allocation of impairment loss Building (5/10 x 2,000,000) 1,000,000 Equipment (3/10 x 2,000,000) 600,000 Inventory (2/10 x 2,000,000) 400,000 2,000,000 Observe that after allocating the P1,000,000 loss to the building, the carrying amount of the building would be P4, 000, 000 which is lower than its fair value of P4,500,000. PAS 36, paragraph 105, provides that the carrying amount of an asset shall not be reduced below the highest of fair value less cost of disposal, value in use and zero. The amount of impairment loss that would otherwise have been allocated to the asset shall be reallocated prorata to the other _noncash assets of the cash generating unit. Accordingly, only P500,000 loss is allocated to the building and the balance of P500,000 is reallocated to the equipment and inventory prorata. Building Equipment Inventory Allocated loss 1,000,000 600,000 400,000 Reallocated loss: -( 500,000) ~ ‘i (3/5 x,500,000) 300,000 (2/5 x 500,000) : 200,000 Impairment loss 500,000 900,000 600,000 709Problem 59-4 (IAA) At the beginning of current year, Revion Company acquired all of the . outstanding ordinary shares of an acquiree for 44,000,000. The fair value of the acquiree’s identifiable tangible and intangible assets totaled P50,000,00 and the fair value of liabilities assumed by the acquirer was P15,000,000. The acquirer performed the required goodwill impairment test at year-end. Management provided the following data: Fair value of acquiree’s net assets including goodwill 37,000,000 Carrying amount of acquiree’s net assets including goodwill 41,000,000 What amount of goodwill should be reported at year-end after Tecognizing any impairment loss? a. 9,000,000 b. 4,000,000 c. 5,000,000 d. 0 Solution 59-4 Answer c Fair value of acquiree’s net assets including goodwill 37,000,000 Carrying amount of acquiree’s net assets, including goodwill i. 41,000,000 Impairment loss : 4,000,000 Fair value of acquiree’s identifiable assets 50,000,000 Fair value of acquiree’s liabilities 7 15,000,000 Fair value of acquiree’s net assets 35,000,000 Acquisition cost 44,000,000 Goodwill 9,000,000. Impairment loss — all charged against goodwill 4,000,000) Carrying amount of goodwill 5,000,000 710F Problem 59-5 (IFRS) eon oe coken ee anecy ea are Telecommunication . Networking Segment carrying amount ' et car poodwill 2,500,000 3,000,000 Carrying amount of goodwill : 500,000 500,000 Estimated total fair value of segment 2,900,000 2,800,000 Estimated total fair value of segment : other than goodwill 2,100,000 2,500,000 1. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill for the reporting “unit telecommunication? a. 400,000 b. 800,000 c. 500,000 d. 0 2. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill for the reporting unit networking? a. 500,000 b. 200,000 +e. 300,000 d. » 0 Solution 59-5 : . Question 1 Answer ¢ Segment carrying amount — Telecommunication 2,500,000 Estimated total fair value of segment 2,900,000 No impairment loss te Question 2 Answerc Segment carrying amount — Networking, Estimated total fair value of segment Impairment loss — applied to goodwill only Goodwill — Networking (500,000— 200,000) TALProblem 59-6 (AICPA ‘Adapted) During the current year, Nicole Company acquired Jones Company in a business combination. As aresult of the combination, the following amounts of goodwill were recorded for each of the three reporting units of the acquired entity: Retailing 300,000 Service 200,000 Financing . 400,000 Near the year-end, a new major competitor entered the entity’s market and the entity was concerned that this might cause a significant decline in the value of goodwill. Accordingly, the entity computed the implied value of the goodwill for the three major reporting units at year-end as follows: Retailing 250,000 Service . 100,000 Financing 600,000 ‘What amount of goodwill impairment should be recorded for the current year? a. 100,000 b. 250,000 c. 150,000" d. 0 Solution 59-6 Answer c Goodwill Implied value Loss Retailing 300,000 250,000 50,000 Service 200,000 100,000 100,000 Financing -400,000 600,000 * Total impairment loss 150,000 Goodwill impairment is determined at the level of the individual. reporting unit and not at the entity level. Thus, no loss is recognized for the Financing unit because the implied value of goodwill exceeds the carrying amount. 712Problem 59-7 (IFRS) One of the cash generating units of Sanmig Company is the production of liquor. The entity believed that the assets of the cash generating unit: (CGU) are impaired based on an analysis of economic indicators. The assets and liabilities of the cash: generating unit at carrying amount at year-end are: Cash 4,000,000 Accounts receivable 6,000,000 Allowance for doubtful accounts 1,000,000 Inventory 7,000,000 Property, plant and equipment 22,000,000 Accumulated depreciation . 4,000,000 Goodwill 3,C00,000 Accounts payable * 2,000,000 Loans payable 1,000,000 The entity determined that the value in use of the cash generating unit is P30,000,000. The accounts receivable are considered collectible, except those considered doubtful. 1. Whatis the impairment loss on goodwill? a. 3,000,000 b. 1,500,000 c.. 2,000,000 * d. 0 : 2. Whatis the impairment loss on inventory? a. 3,500,000 b. 1,000,000 ¢. 1,120,000 d. 0 3. Whatis the impairment loss on property, plant and equipment? a. 4,000,000 b. 2,880,000 c. 2,400,000 d. 4,200,000 713Solution 59-7 Question 1. Answer a Question 2 Answer c Question 3 Answer b Cash ‘ 4,000,000 Accounts receivable — net . 5,000,000 Inventory 7,000,000 Property, plant and equipment — net 18,000,000 Goodwill 3,000,000 Carrying amount of CGU 37,000,000 Value in use 30,000,000 Impairment loss . = 7,000,000 Impairment loss allocated to goodwill 3,000,000 Remaining impairment loss 4,000,000 Carryingamount Fraction Loss Inventory 7,000,000 7/25 1,120,000 Property, plant and equipment 18,000,000 18/25 2,880,000 25,000,000 . 4,000,000 The impairment loss is not allocated to the accounts receivable because the accounts are considered collectible except those doubtful. Carrying amount of CGU . Observe that the liabilities of the cash senerating unit are ignored in determining the carrying amount of the CGU. PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit includes the carrying amount of only those assets that can be attributed directly or allocated on a reasonable and consistent basis to the cash generating unit and shall generate the future cash inflows used in determining the value in use of the cash ino unit. re Paragraph 76 further provides that the carrying amount of the cash generating unit does not include the carrying amount of any Tecognized liability unless the recoverable amount of the cash generating unit cannot be determined without consideration of this liability. 714Problem 59-8 (IFRS) Brandy Company has two cash generating units. At year-end, the carrying amounts of the assets of one cash generating unit are: Inventory 200,000 Accounts receivable 300,000 Plant and equipment 6,000,000 Accumulated depreciation 2,600,000 Patent 850,000 Goodwill 100,000 The accounts receivable are regarded as collectible. The fair value less cost of disposal of the inventory is equal to the carrying amount. The patent has a fair value less cost of disposal of P750,000. At year-end, the entity undertook impairment testing of the cash generating unit and determined the value in use of the unit at P4,050,000. 1. What is the impairment loss allocated to the plant and equipment? a. 800,000 . b. 700,000 c. 600,000 d. 560,000 2. What is the impairment loss allocated to patent? a, 140,000 b. 100,000 ¢ ¢ 40,000 “da 0. 715Solution $9-8 Question 1 Answer c Question 2 Answer b Inventory 200,000 Accounts receivable * 300,000 Plant and equipment 6,000,000 Accumulated depreciation (2,600,000) Patent . 850,000 Goodwill “100,000 Carrying amount of CGU . 4,850,000 Value in use 4,050,000 Impairment loss 800,000 Impairment loss allocated to goodwill 100,000 Remaining impairment loss —- 700,000 Plant Patent Allocated loss 560,000 140,000 Reallocated loss 40,000 (40,000) 600,000 100,000 Carrying amount Fraction Loss Plant and equipment 3,400,000 « 3:400/4,250 560,000 Patent 850,000 850/4,250 140,000 Total 700,000 The patent shall not be reduced to an amount below the fair value less cost of disposal of P750,000. No impairment loss is allocated to accounts receivable because the accounts are considered collectible. No impairment loss is allocated to inventory because the fair valtie less cost of disposal of inventory is equal to carrying amount. 716Problem 59-9 (IFRS) ‘Uranus Company had various cash generating units. At year-end, one cash generating unit had the following carrying amount of assets: Cash . 600,000 Inventory - 1,400,000 . Land 2,500,000 Plant and equipment _ 9,000,000 Accumulated depreciation - (1,500,000) Goodwill 1,000,000 Carrying amount 13,000,000 The management determined the value in use of the cash generating unit at P8,500,000. The fair value less cost of disposal for the inventory is greater than the carrying amount. i What is the impairment loss allocated to plant and equipment? a. 3,500,000 b. 4,500,000 ¢. 2,625,000 d. 3,375,000 Solution 59-9 Answer c Carrying amount of CGU . 13,000,000 Value in use 8,500,000 . ee Impairment loss 4,500,000 Impairment loss allocated to goodwill 1,000,000 Remaining impairment loss . 3,500,000 Carrying amount —_‘ Fraction Loss Land 2,500,000 25/100 875,000 Plant and equipment 7,500,000 75/100 2,625,000 10,000,000 3,500,000 No impairment loss is allocated to inventory because the fair value less cost of disposal of inventory is higher than carrying amount. 17Problem 59-10 (IAA) Qn December 31, 2019, Zernice Company acquired the following three intangible assets: * A trademark for P3,000,000. The trademark has 4 years remaining in its legal life. It is anticipated that the trademark will be renewed in the future indefinitely. * Goodwill for P5,000,000. ? * Acustomer list for P2,100,000. By contract, the entity has exclusive use of the list for five years. However, itis expected that the list will have an economic life of 3 years. On December 31, 2020, before any adjusting entries for the year were made, the following information was assembled: a. Because ofa decline in the economy, the trademark is now expected to generate cash flows of just P200,000 per year. b. The cash flow expected to be generated by the cash generating unit to which the goodwill is related is P2,000,000 per year for the next 10 years. The carrying amounts of the assets of the cash generating unitare: Identifiable assets . 15,000,000 Goodwill 5,000,000 c. The cash flows expected to be generated by the customer list are P800,000 in 2021 and P500,000 in 2022. d. The appropriate discount rate is 8%. The present value of 1 at 8% is .93 for one period and .86 for two periods. The present value of an ordinary annuity of 1 at 8% for 10 periods is 6.71. ‘ 718 is si ae |: Whatis the impairment loss on trademark? a. 3,000,000 b.. 2,500,000 ec. 500,000 d. 250,000 2. Whatis the impairment loss on goodwill? 6,580,000 5,000,000 1,580,000 0 Rep - What is the impairment loss on customer list? a. . 926,000 b. 800,000 c.. 226,000 d. 0 719Solution 59-10 Question I Answer c Trademark : . 3,000,000 PV of cash flows 2,500,000 Impairment loss on trademark 500,000 " The present value of indefinite cash flows is simply computed by dividing the annual cash flow by the discount rate. Thus, P200,000 . divided by 8% equals P2,500,000. Question 2 Answer b . Identifiable assets 15,000,000 Goodwill 5,000,000 Total carrying amount of assets of CGU 20,000,000 - Present value of cash flows (2,000,000 x 6.71) 13,420,000 Impairment loss on CGU a - 6,580,000 Impairment loss on goodwill . 5,000,000 Impairment loss on other assets 1,580,000 Question 3 Answer c Customer list — January 1, 2020 : 2,100,000 Amortization for 2020 (2,100,000/3) (700,000) Carrying amount — December 31, 2020. 1,400,000 Present value of cash flows 1,174,000 Impairment loss on customer list 226,000 Present value of cash flows: . 2021 (800,000 x .93) 744,000 2022 (500,000 x .86) 430,000 Total present value of cash flows 1,174,600 F790