Fac3761 105 2022 240129 234357

FAC3761/105/0/2022
Tutorial Letter 105/0/2022
International Financial Accounting

FAC3761
Year module
Department of Financial Accounting

IMPORTANT INFORMATION
This tutorial letter contains all the study material of learning units 6 to 8.
Please register on myUnisa, activate your myLife e-mail address and make sure
that you have regular access to the myUnisa year module website, FAC3761-
22-Y1, as well as your group website.
Note: This is an online module and therefore it is available on myUnisa. However,
in order to support you in your learning process, you will also receive some
study material in printed format.
BARCODE
FAC3761/105
CONTENTS
INTRODUCTION .............................................................................................................................. ii
LECTURERS AND CONTACT DETAILS ........................................................................................ ii
SAICA’S PRINCIPLES OF EXAMINATION LEVELS ...................................................................... ii
LEARNING UNIT 6 ........................................................................................................................... 3
LEARNING UNIT 7 ......................................................................................................................... 38
LEARNING UNIT 8 ......................................................................................................................... 79
i
FAC3761/105
Dear Student,
INTRODUCTION
This tutorial letter contains study material on the following learning units:
 Learning unit 6 – Impairment of assets (IAS 36)

 Learning unit 7 – Non-current assets held for sale and discontinued operations (IFRS 5)
 Learning unit 8 – Provisions, Contingent liabilities, and Contingent assets (IAS 37)
LECTURERS AND CONTACT DETAILS

Please use only the following e-mail address for communication with your lecturers:
FAC3761@unisa.ac.za
You can contact the lecturers of FAC3761 telephonically, by making use of the telephone contact
numbers provided below:
Telephone
Lecturers Office
number
Mrs M Evans Simon Radipere Building, 2-55 (012) 429 8606
Ms R Horn Simon Radipere Building, 2-53 (012) 429 3287
Mr I Phaduli Simon Radipere Building, 2-46 (012) 429 3232
SAICA’S PRINCIPLES OF EXAMINATION LEVELS

Throughout the study material, we will refer you to the following principles of examination levels:
1. Issues at core level

An issue is at core level if it is
 based on a significant conceptual underpinning/foundation of current financial accounting
(that is, based on identification, recognition, measurement, and presentation and disclosure
of elements), or
 prevalent (that is, issues and industries that would commonly be encountered in practice in
the course of an entry-level chartered accountant’s work. Here, the emphasis is on issues
that are of a more general nature.)
At core level, an entry-level chartered accountant must be able to identify the underlying problem,
perform complex calculations and answer integrated questions relating to core level issues.
2. Issues at awareness level

Awareness means that the issue is not core, but it is important for an entry-level chartered
accountant to know about the issue. It is important for them to be able to identify that it is an
issue that potentially has significant accounting implications and requires additional or specialist
International Financial Reporting Standards (IFRS) knowledge.
They would need to be able to identify and describe what the accounting issue is, and read up
on it. Students would also be expected to perform basic processing of the transaction when the
numbers are given (for example, obtained from an expert).
A good example is borrowing costs. In other words, students should be able to do the journal
to capitalise any qualifying borrowing costs to property, plant and equipment (PPE) when the
borrowing cost amount has been supplied.
ii
FAC3761/105
LEARNING UNIT 6
IAS 36
IMPAIRMENT OF ASSETS
IAS 36, Impairment of assets prescribes the procedures that an entity can apply to ensure that its
assets are carried at no more than their recoverable amounts in the financial statements. An asset
is carried at more than its recoverable amount if its carrying amount exceeds the amount to be
recovered through the use or sale of the asset. Under these circumstances an impairment loss
should be recognised.
3
4
FAC3761/105
LEARNING OUTCOMES
Once you have studied and completed this learning unit, you should be able to do the following:
1. Define the objective and scope of the standard.
2. Apply the definitions.
3. Apply the prescribed indications to assess whether an asset may be impaired, as well as the
timing of impairment tests, with specific reference to intangible assets with an indefinite useful
life and intangible assets not yet available for use.
4. Determine the recoverable amount through measurement of the value in use and the fair value
less costs of disposal.
5. Recognise and measure impairment losses for individual assets other than goodwill.
6. Identify cash-generating units and calculate the carrying amount and recoverable amount of a
cash-generating unit.
7. Recognise and measure impairment losses for cash-generating units taking goodwill into
account.
8. Recognise and measure the reversal of impairment losses for individual assets and cash-
generating units.
9. Disclose impairment losses and the reversal of impairment losses in the financial statements.
10. Disclose information for each cash-generating unit to which goodwill or intangible assets with
indefinite useful lives have been allocated.
STUDY MATERIAL
PRESCRIBED:
Gripping GAAP (Latest edition)
The chapters relevant to IAS 36, Impairment of assets.
The following sections are excluded from the Impairment of assets chapter:
 Impairments and the revaluation model
 Impairment reversals and the revaluation model
 Impairment loss reversals relating to CGUs – revaluation model
Please note:
 The textbook refers to the ‘C’ symbol to denote currency, but the module study material refers
to the ‘R’ symbol to denote the South African rand currency.
RECOMMENDED: IFRS Standards - The Annotated IFRS Standards
IAS 36, Impairment of assets
The standard can be accessed online at https://www.ifrs.org/
SAICA’S PRINCIPLES OF EXAMINATION

Knowledge of the concepts and topics in IAS 36, Impairment of assets are included at core level,
except for the following:
 Excluded from the syllabus:
o Revaluation on depreciable assets and hence impairments of revalued depreciable assets.
ONLINE SUPPORT
Kindly log onto myUnisa and navigate to the lesson tools page for IAS 36,
Impairment of assets. The lesson tool provides an overview of the learning unit
to assist you in working through the learning unit. The lesson tool also contains
additional examples and other aids to help you understand the subject matter.
5
IMPAIMENT OF ASSTES -
OVERVIEW
6.1
What is impairment?
6.2
When does impairment take place?
6.2.1
External sources of information
6.2.2
Internal sources of information
6.2.3
Evidence from internal reporting indicating
that an asset may be impaired
Impairment Reversal of impairments

6.3 6.5
When should impairment be applied? What happens if the asset was
6.4
How to calculate an impairment loss impaired in prior years, but it is now
6.7
Impairment losses – cash-generating worth much more?
6.5.1
units External sources of information
6.5.2
Internal sources of information
6.6
Reversal of an impairment loss –
individual assets
Tax implications Disclosure

6.8 6.9
What are the tax implications? Disclosure
6.9.1
Disclosure requirements
6.9.2
Model for disclosure
Questions and Activities

6.10
Comprehensive examples
6.11
E-tutor activity
6.1 WHAT IS IMPAIRMENT?

Impairment will occur when the carrying amount of the asset in the books of the entity exceeds the
asset's recoverable amount. This will lead to an impairment loss.
The impairment loss may be reversed if there is any indication that an impairment loss recognised
for an asset in prior years may no longer exist or may have decreased. (Refer to section 6.6)
6.2 WHEN DOES IMPAIRMENT TAKE PLACE?

An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. An
entity should assess at the end of each reporting period whether or not there is any indication that
an asset may be impaired. If any such indication exists, the entity should estimate the recoverable
amount of the asset. (IAS 36.08–09)
If there is no indication of a potential impairment loss, then the statement does not require an entity
to make a formal estimate of the recoverable amount.
Irrespective of whether there is any indication of impairment, an entity shall also:
 test an intangible asset with an indefinite useful life or intangible asset not yet available for use
for impairment annually by comparing its carrying amount with its recoverable amount; and
 test goodwill acquired in a business combination for impairment annually
In assessing whether or not there is any indication that an asset may be impaired, an entity should
consider, as a minimum, the following indications:
6
FAC3761/105
6.2.1 External sources of information – (IAS 36.12)

 During the period, an asset's market value has declined significantly more than would be
expected as a result of the passage of time or normal use.
 Significant changes with an adverse effect on the entity have taken place during the period, or
will take place in the near future, in the technological, market, economic or legal environment in
which the entity operates or in the market to which an asset is dedicated.
 Market interest rates or other market rates of return on investments have increased during the
period, and those increases are likely to affect the discount rate used in calculating an asset's
value in use and decrease the asset's recoverable amount materially.
 The carrying amount of the net assets of the reporting entity is more than its market
capitalisation.
6.2.2 Internal sources of information – (IAS 36.12)

 Evidence is available of obsolescence or physical damage of an asset.
 Significant changes with an adverse effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or manner in which, an
asset is used or is expected to be used. These changes include the asset becoming idle, plans
to discontinue or restructure the operation to which an asset belongs, plans to dispose of an
asset before the previously expected date, and reassessing the useful life of an asset as finite
rather than indefinite.
 Evidence is available from internal reporting that indicates that the economic performance of an
asset is, or will be, worse than expected.
6.2.3 Evidence from internal reporting indicating that an asset may be

impaired – (IAS 36.14)
Evidence from internal reporting indicating that an asset may be impaired includes the existence of:
 cash flows for acquiring the asset or subsequent cash needs for operating or maintaining it, that
are significantly higher than those originally budgeted;
 actual net cash flows or operating profit or loss flowing from the asset that are significantly worse
than those budgeted;
 a significant decline in budgeted net cash flows or operating profit or a significant increase in
budgeted loss, flowing from the assets; or
 operating losses or net cash outflows for the asset, when current period figures are aggregated
with budgeted figures for the future.
The list is not exhaustive.
The concept of materiality applies in identifying whether or not the recoverable amount of an asset
needs to be estimated. For example, if previous calculations show that an asset's recoverable
amount is significantly greater than its carrying amount, the entity need not re-estimate the asset's
recoverable amount if no events have occurred that would eliminate that difference. Similarly,
previous analysis may show that an asset's recoverable amount is not sensitive to one or more of
the indicators of possible impairments. (IAS 36.15)
As an illustration of the above, if market interest rates or other market rates of return on investment
have increased during the period, an entity is not required to make a formal estimate of an asset's
recoverable amount in the following cases:
 If the discount rate used in calculating the asset's value in use is unlikely to be affected by the
increase in these market rates. For example, increase in short-term interest rates may not have
a material effect on the discount rate used for an asset that has a long remaining useful life.
 If the discount rate used in calculating the asset's value in use is likely to be affected by the
increase in these market rates but previous sensitivity analysis of recoverable amount shows
that:
7
 it is unlikely that there will be a material decrease in recoverable amount because future
cash flows are also likely to increase (eg in some cases, an entity may be able to
demonstrate that it adjusts its revenues to compensate for any increase in market rates); or
 the decrease in recoverable amount is unlikely to result in a material impairment loss.
(IAS 36.16)
If there is an indication that an asset may be impaired, this may indicate that the remaining useful
life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed
and adjusted in accordance with the standard applicable to the asset, even if no impairment loss is
recognised for the asset. (IAS 36.17)
6.3 WHEN SHOULD IMPAIRMENT BE APPLIED?

This standard shall be applied in accounting for the impairment of all assets other than:
 inventories,
 contract assets and assets arising from costs to obtain or fulfil a contract that are recognised in
accordance with IFRS 15, Revenue from contracts with customers,
 deferred tax assets (IAS 12),
 assets arising from employee benefits (IAS 20),
 financial assets that are included in the scope of IFRS 9, Financial instruments,
 investment property that is measured at fair value (IAS 40),
 biological assets related to agricultural activity that are measured at fair value less costs to sell
(IAS 41),
 contracts within the scope of IFRS 17, Insurance contracts that are assets, and
 non-current assets (or disposal groups) classified as held for sale (IFRS 5). (IAS 36.02)
The recognition and measurement of these assets are dealt with by specific applicable standards.
This standard applies to financial assets classified as:
 subsidiaries, associates, and joint ventures; (IAS 36.04)

 assets that are carried at revalued amounts in accordance with other standards such as the
revaluation model in IAS 16, Property, plant and equipment. (IAS 36.05)
A cash-generating unit (Refer to section 6.7)
The smallest identifiable group of assets that generates cash inflows from continuing use that are
largely independent of the cash inflows from other assets or groups of assets. (IAS 36.06)
Corporate assets (Refer to section 6.7)
Assets other than goodwill that contribute to future cash flows of both the cash-generating unit under
review and other cash-generating units. It includes group or divisional assets such as a building of a
headquarters or a division of the entity or a research centre. Corporate assets do not generate cash
inflows independently from other assets or group of assets. (IAS 36.06)
8
FAC3761/105
6.4 HOW TO CALCULATE AN IMPAIRMENT LOSS

Step 1: Understand the basic principle
After identifying an asset that may be impaired at the end of the reporting period (refer to section
6.3), the impairment loss must be calculated.
Definitions:
Impairment loss
Carrying amount Recoverable amount

The amount at which an asset is recognised Less The higher of an asset's fair value less
in the statement of financial position after costs to sell4 and its value in use.5
deducting any accumulated depreciation
(amortisation)1 and accumulated impairment
losses thereon. (IAS 36.06)
1 4
Depreciation (amortisation) Fair value less costs to sell
The systematic allocation of the depreciable The amount obtainable from the sale of an
amount2 of an asset over its useful life3. asset in an arm's length transaction
Note: in the case of an intangible asset, the between knowledgeable, willing parties,
term "amortisation" is generally used instead less the costs of disposal.6
of "depreciation". Both terms have the same
meaning.
2 5
Depreciable amount Value in use
The cost of an asset, or other amount The present value of future cash flows
substituted for cost in the financial expected to be derived from an asset.
statements, less its residual value.
3 6
Useful life is either: Costs of disposal
 the period of time over which an asset Incremental costs directly attributable to
is expected to be used by the entity; or the disposal of an asset, excluding
 the number of production or similar finance costs and income tax expense.
units expected to be obtained for the Examples of costs are legal costs, stamp
asset by the entity. duty, transaction taxes, costs of removing
the asset and direct incremental costs to
bring an asset into condition for sale.
Step 2: Calculate the asset's carrying amount
Refer to learning unit 2 of your study material, where the calculation of carrying amounts is discussed
in detail.
Step 3: Calculate the asset's recoverable amount
The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.
(IAS 36.18)
It is not always necessary to determine both an asset's fair value less costs to sell and its value in
use. For example, if either of these amounts exceeds the asset's carrying amount, the asset is not
impaired. (IAS 36.19)
If there is no reason to believe that an asset's value in use materially exceeds its fair value less costs
to sell, the asset's recoverable amount may be taken to be its fair value less costs to sell. This will
often be the case for an asset that is held for disposal. This is because the value in use of an asset
held for disposal will consist mainly of the net disposal proceeds, as the future cash flows from
continuing use of the asset until its disposal are likely to be negligible. (IAS 36.21)
9
Value in use
The following elements shall be reflected in the calculation of an asset's value in use:
 an estimate of the future cash flows the entity expects to derive from the asset;
 expectations about possible variations in the amount or timing of those future cash flows;
 the time value of money, represented by the current market risk-free rate of interest;
 the price for bearing the uncertainty inherent in the asset; and
 other factors, such as illiquidity, that market participants would reflect in pricing the future cash
flows the entity expects to derive from the asset. (IAS 36.30)
Estimating the value in use of an asset involves the following steps:
 estimating the future cash inflows and outflows to be derived from the continuing use of the
asset and from its ultimate disposal; and
 applying the appropriate discount rate to these future cash flows. (IAS 36.31)
The elements identified above can be reflected either as adjustments to the future cash flows or as
adjustments to the discount rate. (IAS 36.32)
The basis for estimates of future cash flows in measuring value in use:
 Cash flow projections shall be based on reasonable and supportable assumptions that
represent management's best estimate of the set of economic conditions that will exist over the
remaining useful life of the asset. Greater weight should be given to external evidence.
 Cash flow projections shall be based on the most recent financial budgets/forecasts that have
been approved by management but shall exclude any estimated future cash inflows or outflows
expected to arise from future restructurings or from improving or enhancing the asset's
performance. Projections based on these budgets/forecasts shall cover a maximum period of
5 years, unless a longer period can be justified.
 Cash flow projections beyond the period covered by the most recent budgets/forecasts shall be
estimated by extrapolating the projections based on the budgets/forecasts using a steady or
declining growth rate for subsequent years unless an increasing rate can be justified.
(IAS 36.33)
Management must assess the reasonableness of the assumptions on which its current cash flow
projections are based by examining the causes of differences between past cash flow projections
and actual cash flows.
In using information from financial budgets/forecasts, an entity considers whether or not the
information reflects reasonable and supportable assumptions, and represents management's best
estimates of the set of economic conditions that will exist over the remaining useful life of the asset.
(IAS 36.38)
Estimates of future cash flows shall include:
 projections of cash inflows from the continuing use of the asset;

 projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and that can be directly attributed, or allocated on a reasonable and
consistent basis to the asset; and
 net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life. (IAS 36.39)
To avoid double counting, estimates of future cash flows do not include:
 cash inflows from assets that generate cash inflows from continuing use that are largely
independent of cash inflows from the asset under review (for example receivables); and
 cash outflows that relate to obligations that have already been recognised as liabilities (for
example payables, pensions and provisions). (IAS 36.43)
10
FAC3761/105
Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash
flows shall not include estimated future cash inflows or outflows that are expected to arise from:
 a future restructuring to which an entity is not yet committed; or

 improving or enhancing the asset's performance. (IAS 36.44)
Estimates of future cash flows shall not include:
 cash inflows or outflows from financing activities; or

 income tax receipts or payments. (IAS 36.50)
The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its
useful life shall be the amount that the entity expects to obtain from the disposal of the asset in an
arm's length transaction between knowledgeable willing parties after deducting the estimated costs
of disposal. (IAS 36.52)
Discount rate
The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market
assessments of:
 the time value of money; and

 the risk specific to the asset for which future cash flow estimates have not been adjusted.
(IAS 36.55)
A rate that reflects current market assessments of the time value of money and the risks specific to
the asset is the return that investors would require if they were to choose an investment that would
generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to
derive from the asset. This rate is estimated from the rate implicit in current market transactions for
similar assets or from the weighted average cost of capital of a listed entity that has a single asset
(or a portfolio of assets) similar in terms of service potential and risks to the asset under review.
However, the discount rate(s) used to measure an asset's value in use shall not reflect risks for which
the future cash flows estimates have been adjusted. (IAS 36.56)
When an asset-specific rate is not directly available from the market, an entity uses surrogates to
estimate the discount rate. (IAS 36.57)
As a starting point in making such an estimate, the entity might take the following into account:
 the entity's weighted average cost of capital determined using techniques such as the capital
asset pricing model;
 the entity's incremental borrowing rate; and
 other market borrowing rates. (IAS 36 Appendix A.A17)
These rates are adjusted:
 to reflect the way that the market would assess the specific risks associated with the projected
cash flows; and
 to exclude risks that are not relevant to the projected cash flow.
Consideration is given to risks such as country risk, currency risk and price risk and cash flow risk.
(IAS 36 Appendix A.A18)
The discount rate is independent of the entity's capital structure and the way the entity financed the
purchase of the asset. (IAS 36 Appendix A.A19)
An entity normally uses a single discount rate for the estimate of an asset's value in use. However,
an entity uses separate discount rates for different future periods where value in use is sensitive to
a difference in risk for different periods or to the term structure of interest rates. (IAS 36 Appendix
A.A21)
11
Step 4: Recognise the impairment loss in the financial statements
If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is referred to as an
impairment loss. (IAS 36.59)
An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at a
revalued amount under another standard (for example, in accordance with the revaluation model in
IAS 16, Property, plant and equipment). Any impairment loss of a revalued asset shall be treated as
a revaluation decrease under that other standard. (IAS 36.60) (outside the scope of this module).
When the amount estimated for an impairment loss is greater than the carrying amount of the asset
to which it relates, an entity shall recognise a liability if and only if, it is required by another standard.
(IAS 36.62). This, however, falls outside the scope of this module.
After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall
be adjusted in future periods to allocate the asset's revised carrying amount, less its residual value
(if any), on a systematic basis over its remaining useful life. (IAS 36.63)
If an impairment loss is recognised, any related deferred tax assets or liabilities are determined in
accordance with IAS 12, Income Taxes, by comparing the revised carrying amount of the asset with
its tax base. (IAS 36.64)
Journal entry for asset that is carried at cost less accumulated depreciation:
Dr Cr
Date Description R R
Impairment loss (P/L) XXXXX
Accumulated impairment loss (SFP) XXXXX
Recording of impairment loss of asset where no revaluation
was done on asset
6.5 WHAT HAPPENS IF THE ASSET WAS IMPAIRED IN PRIOR YEARS,

BUT IS NOW WORTH MUCH MORE?
This may lead to a reversal of an impairment loss
An entity shall assess at each reporting date whether or not there is any indication that an impairment
loss recognised for an asset in prior years may no longer exist or may have decreased. If any such
indication exists, the entity shall estimate the recoverable amount of that asset. (IAS 36.110)
In assessing whether or not there is any indication that an impairment loss recognised for an asset
in prior years may no longer exist or may have decreased, an entity shall consider, at a minimum,
the following indications:
6.5.1 External sources of information

 The asset's market value has increased significantly during the period.
 Significant changes with a favourable effect on the entity have taken place during the period, or
will take place in the near future, in the technological, market, economic or legal environment in
which the entity operates or in the market to which the asset is dedicated.
 Market interest rates or other market rates of return on investments have decreased during the
period, and those decreases are likely to affect the discount rate used in calculating the asset's
value in use and increase the asset's recoverable amount materially.
12
FAC3761/105
6.5.2 Internal sources of information

 Significant changes with a favourable effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or manner in which, the
asset is used or is expected to be used. These changes include capital expenditure that has
been incurred during the period to improve or enhance an asset in excess of its originally
assessed standard of performance or a commitment to discontinue or restructure the operation
to which the asset belongs.
 Evidence is available from internal reporting that indicates that the economic performance of
the asset is, or will be, better than expected. (IAS 36.111)
If there is an indication that an impairment loss recognised for an asset other than goodwill may no
longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation
(amortisation) method or the residual value may need to be reviewed and adjusted in accordance
with the Standard applicable to the asset, even if no impairment loss is reversed for the asset.
(IAS 36.113)
6.6 REVERSAL OF AN IMPAIRMENT LOSS – INDIVIDUAL ASSETS

An impairment loss recognised for an asset in prior years shall be reversed if, and only if, there has
been a change in the estimates used to determine the asset's recoverable amount since the last
impairment loss was recognised. If this is the case, the carrying amount of the asset shall be
increased to its recoverable amount. That increase is a reversal of an impairment loss. (IAS 36.114)
A reversal of an impairment loss reflects an increase in the estimated service potential of an asset,
either from use or from sale, since the date when an entity last recognised an impairment loss for
the asset.
Please remember to distinguish a change in estimate from other reasons for the increase in the
asset's value. Examples of changes in estimates are:
 a change in the basis of the recoverable amount (i.e. whether the recoverable amount is based
on fair value less costs to sell or value in use);
 a change in the amount or timing of estimated future cash flows or in discount rate if the
recoverable amount was based on value in use; and
 a change in estimate of the components of fair value less costs to sell, if the recoverable amount
was based on the fair value less costs to sell. (IAS 36.115)
An asset's value in use may become greater than the carrying amount simply because the present
value of future cash inflows increases as they become closer. However, the service potential of the
asset has not increased. The impairment loss should not be reversed just because of the passage
of time. (IAS 36.116)
The increased carrying amount of an asset other than goodwill due to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net
of amortisation or depreciation), had no impairment loss been recognised for the asset in
prior years. The amount in excess of what the original carrying amount would have been, is a
revaluation. In accounting for such a revaluation, an entity applies the standard applicable to the
asset. (IAS 36.117-.118)
A reversal of an impairment loss for an asset shall be recognised immediately in profit or loss, unless
the asset is carried at a revalued amount. Any reversal of an impairment loss on a revalued asset
shall be treated as a revaluation increase in accordance with the other standard. (IAS 36.119)
After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for the
asset shall be adjusted in future periods to allocate the asset's revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining useful life. (IAS 36.121)
13
Journal entry for asset that is carried at cost less accumulated depreciation:
Dr Cr
Date Description R R
Accumulated impairment loss (SFP) XXXXX
Reversal of impairment loss (P/L) XXXXX
Reversal of impairment loss of asset. The reversal of
impairment loss is limited to what the carrying amount of
the asset would have been had there been no impairment
previously.
6.7 IMPAIRMENT LOSSES – CASH-GENERATING UNITS

Paragraph 6.3 above indicated that this standard must be applied to the impairment of cash-
generating units (CGU). As stated before, the recoverable amount of an individual asset must be
estimated should an indication for impairment of an individual asset exist. However, if an entity
cannot estimate the recoverable amount of the individual asset, then the recoverable amount of the
CGU to which the asset belongs must be estimated (IAS 36.66).
The recoverable amount of an individual asset cannot be estimated if:
 the asset’s value in use cannot be estimated to be close to its fair value less costs of disposal
(for example, when the future cash flows from continuing use of the asset cannot be estimated
to be negligible); and
 the asset does not generate cash inflows that are largely independent of the cash flows
generated from other assets. (IAS 36.67)
Before a CGU can be tested for impairment, the CGU must be identified.
Step 1: Identification of cash-generating units
Identification of an asset’s CGU is dependent on management’s judgement. (IAS 36.68)
Management must consistently identify, from one period to the next, the CGU for the same assets
or types of assets (IAS 36.72). If there is a justified change to an asset’s CGU, then an entity must
include disclosures of the CGUs change as per IAS 36.130 when an impairment loss or reversal of
impairment loss occurs (IAS 36.73).
In recognising CGUs, the lowest aggregation of assets that generate independent cash flows is
recognised. These cash flows must be independent of the cash flows of other assets or CGUs.
To determine if an individual asset’s cash flows are independent on the cash flows of other assets,
an entity should consider the following factors:
 how management manages the entity’s product lines, business, store locations and other
relevant operations; or
 how management makes a decision on whether to continue with or dispose of the entity’s asset
or operations (IAS 36.69).
EXAMPLE 1
A printing company owns customised software that is no longer needed because demand for the
end products have declined. Since the software is customised, the cash flows generated by the use
of the software is dependent on the cash flows from other assets of the company. Can the impairment
loss be written off for the asset?
14
FAC3761/105
SOLUTION 1
The asset cannot be written down to its recoverable amount because the cash flows generated by
the use of the software is dependent on the cash flows from other assets of the company. Its value
in use cannot be determined and consequently the asset must be identified as part of the CGU to
which it belongs, i.e. to the printing company itself.
CGUs affected by internal pricing
If an asset or group of assets produces output that can be sold in an active market and the entity
also uses some of the produced output internally, then that asset or group of assets are identified as
a CGU (IAS 36.70). This is because the asset or group of assets generate cash flows independently
of other assets or CGUs. (IAS 36.71)
The cash inflows generated by assets or CGUs that produce output used internally may be affected
by internal pricing. Therefore, if internal pricing affects the value in use of the asset or CGU, then
management must estimate the future price of the output that can be achieved in arm’s length
transactions (IAS 36.70). The future prices must be estimated for both cash inflows and cash
outflows affected by the inter transfer pricing (IAS 36.70).
Once a CGU is identified and there is an indication that the CGU may be impaired, the entity must
then determine the recoverable amount of the CGU and compare it to the carrying amount of the
CGU (same as for individual assets). If the carrying amount exceeds (i.e. greater than) the CGU’s
recoverable amount, an impairment loss has been incurred and must be recognised.
Step 2: Calculate the CGU’s carrying amount
The carrying amount of the CGU is determined on a consistent basis with the recoverable amount
of the CGU, in other words, the assets that are included in the recoverable amount calculation must
also be taken into account when calculating the CGU’s carrying amount (IAS 36.75).
The carrying amount of a CGU:
 includes the carrying amount of assets that that can be directly or reasonably and consistently
allocated to a CGU and which will generate cash inflows that will be used in the calculation of
the CGU’s value in use; and
 excludes the carrying amount of a recognised liability unless the liability has to be included in
the calculation of the CGU’s recoverable amount (for example if the buyer of the CGU will assume
the liability) (IAS 36.76).
If a buyer assumes a liability of the entity, then the carrying amount of the liability must be taken
into account in calculating the CGU’s carrying amount and recoverable amount (IAS 36.78).
Step 3: Calculate the CGU's recoverable amount
The recoverable amount for a CGU is calculated in the same manner as the recoverable amount of
an individual asset (IAS 36.74). The recoverable amount is the higher of the CGU’s value in use and
fair value less costs to sell (IAS 36.74).
TESTING OF CGUs FOR IMPAIRMENT

CGUs will be tested for impairment annually when:
 the CGU contains an intangible asset that has an indefinite useful life or the intangible asset is
not available for use and the intangible asset can only be tested for impairment with the CGU
(IAS 36.89); or
 there is goodwill allocated to the CGU (IAS 36.90).
The annual impairment testing of the CGU, in the above circumstances, may be performed any time
during a reporting period, provided that it is tested for impairment at the same time every year (IAS
36.96). However, different CGUs may be tested for impairment at different times (IAS 36.96).
15
Where a CGU does not have goodwill allocated to it nor does it have an intangible asset that has an
indefinite useful life or the intangible asset is not available for use and the intangible asset can only
be tested for impairment with the CGU, then the CGU will only be tested for impairment whenever
there is an indication of impairment (IAS 36.88).
Step 4: Recognise the impairment loss in the financial statements
The impairment loss is recognised for a CGU (including goodwill and corporate assets) if and only if
the carrying amount of the CGU is greater than the recoverable amount. The impairment loss
recognised (if any) will be allocated to reduce the carrying amount of the assets of the CGU in the
following order:
 First reduce the carrying amount of any goodwill allocated to the CGU(s); and
 then reduce the carrying amount of the remainder assets of the CGU(s) pro rata on the basis of
the carrying amount of each asset in the CGU (IAS 36.104).
The reduction in the carrying amount on each asset is treated as an impairment loss of individual
assets as explained before (IAS 36.104).
Limitation on allocation of impairment loss
When allocating an impairment loss on the individual assets of a CGU, an entity must test that the
carrying amount of the individual asset is not reduced to below the highest of:
 its fair value less costs of disposal;

 its value in use; and
 zero (IAS 36.104).
The excess of any impairment loss that would have been allocated to the individual asset must then
be reallocated to the carrying amount of the remainder assets of the CGU(s) pro rata on the basis of
LECTURER’S COMMENT
Refer to the examples in Gripping GAAP dealing with the recognition of
impairment losses of CGUs and the allocation of the impairment loss.
6.8 WHAT ARE THE TAX IMPLICATIONS?

Impairment losses and the reversal thereof are not recognised as tax deductions in terms of the
Income Tax Act. Consequently, temporary differences and therefore deferred tax arises. Refer to
IAS 12 regarding the disclosure requirements.
6.9 DISCLOSURE
6.9.1 Disclosure requirements
(a) An entity shall disclose the following for each class of assets:
 the amount of impairment losses recognised in profit or loss during the period and the
line item(s) of the statement of profit or loss and other comprehensive income in which
those impairment losses are included;
 the amount of reversals of impairment losses recognised in profit or loss during the
period and the line item(s) of the statement of profit or loss and other comprehensive
income in which those impairment losses are reversed;
 the amount of impairment losses on revalued assets recognised in other comprehensive
income during the period; and
 the amount of reversals of impairment losses on revalued assets recognised in other
comprehensive income during the period. (IAS 36.126)
16
FAC3761/105
A class of assets is a grouping of assets of similar nature and use in an entity's operations.
(IAS 36.127)
The information required above may be presented with the other information disclosed for the class
of assets. For example, this information may be included in a reconciliation of the carrying amount
of property, plant and equipment, at the beginning and end of the period, as required by IAS 16,
Property, plant and equipment. (IAS 36.128)
(b) An entity that reports segment information in accordance with IFRS 8, Operating segments,
shall disclose the following for each reportable segment based on an entity's primary
reporting format:
 the amount of impairment losses recognised in profit or loss and in other comprehensive
income during the period; and
 the amount of reversals of impairment losses recognised in profit or loss and in other
comprehensive income during the period. (IAS 36.129)
(Note: Segment reporting does not form part of this module.)
(c) If the impairment loss for an individual asset (including goodwill) or a cash-generating
unit recognised or reversed during the period is material, an entity shall disclose the
following information in the note:
 the events and circumstances that led to the recognition or reversal of the impairment
loss;
 the amount of the impairment loss recognised or reversed;
 for an individual asset:
 the nature of the asset; and
 if the entity report segment information in accordance with IFRS 8, Operating
segments, it shall disclose the reportable segment to which the asset belongs,
based on the entity's primary format. (IAS 36.130 (a)–(c));
 for a CGU:
 a description of the CGU (for example, whether it is a product line, a plant, a
business operation, a geographical area or a reportable segment as defined);
 the amount of the impairment loss recognised or reversed by class of assets and,
if the entity reports segment information in accordance with IFRS 8, by reportable
segment; and
 if the total assets for identifying the CGU has changed the previous estimate of
the CGU’s recoverable amount (if any), a description of the current and former
way of totalling assets and the reasons for changing the way the CGU is identified
(IAS 36.130 (d);
 the recoverable amount of the asset (CGU) and whether the recoverable amount of the
asset (CGU) is its fair value less costs to sell or its value in use (IAS 36.130(e));
 if the recoverable amount is its fair value less costs to sell, the basis used to determine
fair value less costs to sell (such as whether selling price was determined by reference
to an active market or in some other way) (IAS 36.130(f)); and
 if the recoverable amount of the asset is its value in use, the discount rate(s) used in
the current estimate and previous estimate (if any) of value in use. (IAS 36.130(g))
(d) If impairment losses recognised/reversed during the period are material in aggregate to the
financial statements of the reporting entity as a whole, an entity shall disclose a brief
description of the following:
 the main classes of assets affected by impairment losses (reversals of impairment
losses) for which no information is disclosed under the above-mentioned paragraphs;
and
 the main events and circumstances that led to the recognition/reversal of these
impairment losses for which no information is disclosed under the above-mentioned
paragraphs. (IAS 36.131)
17
6.9.2 Model for disclosure
If an asset is impaired, the financial statements should disclose the following:
X LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 31 MARCH 20.X
R
Revenue XXX
Cost of sales (XXX)
Gross profit XXX
Other income (xx + impairment loss reversal)1 XXX
Other expenses (xx + impairment loss)2 (XXX)
Investment income received XXX
Finance charges (XXX)
Profit before tax XXX
Income tax expense (XXX)
Profit for the period XXX
Other comprehensive income:
Impairment loss3 (XXX)
Reversal of impairment loss4 XXX
Other comprehensive income, net of tax XXX
TOTAL COMPREHENSIVE INCOME FOR THE YEAR XXX
1
Refer IAS 36.126(b)
2
Refer IAS 36.126(a)
3
Refer IAS 36.126(c) – impairment loss on revalued assets
4
Refer IAS 36.126(d) – reversal of impairment loss on revalued assets
X LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 20.X
Share Retained
capital earnings Total
R R R
Balance at beginning of year XXX XXX XXX
Changes in equity
Profit for the year/Total comprehensive income XXX
for the year
Balance at end of year XXX XXX XXX
X LTD
NOTES FOR THE YEAR ENDED 31 MARCH 20.X
2. Property, plant, and equipment
R
Carrying amount beginning of year XXX
Gross carrying amount XXX
Accumulated depreciation (XXX)
Depreciation
Reversal of impairment loss through profit or loss (included in other income)1 XXX
Impairment loss1 (XXX)
Included in other expenses (XXX)
Recognised in other comprehensive income during the year (XXX)
Carrying amount at end of year XXX
Gross carrying amount XXX
Accumulated depreciation and impairment losses (XXX)
18
FAC3761/105
3. Profit before tax

Profit before tax is arrived at after taking into account the following:
R
Reversal of impairment loss – Machine A2 XXX
Impairment loss – Machine B3 (XXX)
Machine A is a manufacturing machine that is used in the manufacturing segment.4 The recoverable
amount is its fair value less costs to sell and is based on an arms' length transaction.5 The reversal
of the impairment loss of the machine of Rxxx was caused by a significant increase in the market
value of the asset during the period.6
Machine B is a manufacturing machine that is used in the manufacturing segment.4 The recoverable
amount is its fair value less cost to sell and is based on an arm's length transaction.5 The impairment
of the machine of Rxxx was caused by the occurrence of technological advances that affected this
specific machine.6
1
Refer IAS 36.126(a) and (b) IAS 36.128
2
Refer IAS 36.126(b)
3
Refer IAS 36.126(a)
4
Refer IAS 36.130(c) (for each material impairment loss recognised or reversed during the period)
5
Refer IAS 36.130(e) and (f) (for each material impairment loss recognised or reversed during the
period)
6
Refer IAS 36.130(a) (for each material impairment loss recognised or reversed during the period)
19
6.10 COMPREHENSIVE EXAMPLES
EXAMPLE 2
Blanch Ltd is a company which produces and sells wine. The company has a 31 March year-end.
On 1 April 20.09, Blanch Ltd purchased “Blanch Veritas”, a brand name, for R4 250 000. On
acquisition date an estimated useful life of 8 years and a residual value of Rnil was allocated to the
brand name. The brand name was ready to be used, as intended by management, on acquisition
date.
Due to employee strike action during the current financial year, the Gauteng bottling plant had to use
temporary workers to enable the plant to meet its current volume demands.
The temporary workers were not sufficiently trained in the operation of the machinery. This resulted
in 20 000 bottles, filled during the months of July and August 20.10, becoming spoilt as they had not
been properly sealed. Management only became aware of this problem after the brand received
negative publicity and subsequently decided to recall all those bottles of wine. On 31 March 20.11,
the impact of the negative publicity on the brand name was assessed and the fair value less cost to
sell on that date was estimated to be R2 200 000.
Management expects the brand to generate the following cash flows over its remaining useful life:
Year Net cash

inflow
R
1 April 20.11 – 31 March 20.12 1 200 000
1 April 20.12 – 31 March 20.13 1 000 000
1 April 20.13 – 31 March 20.14 800 000
1 April 20.14 – 31 March 20.15 500 000
1 April 20.15 – 31 March 20.16 500 000
A pre-tax discount rate of 15% is considered to be appropriate.
REQUIRED
Calculate the impairment loss incurred on the brand name on 31 March 20.11.
SOLUTION 2
Calculate the asset's carrying amount
Cost price R4 250 000

Useful life 8 years
Accumulated amortisation (R4 250 000 x 2years/8years) R1 062 500
Carrying amount on 31 March 20.11 R3 187 500
Calculate the asset's recoverable amount

The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.
Fair value less costs to sell
Amount given R2 200 000
20
FAC3761/105
Value in use
Using HP10bii financial calculator: Using Sharp financial calculator:

CF0 0 N0 0
CF1 1 200 000 N1 1 200 000
CF2 1 000 000 N2 1 000 000
CF3 800 000 N3 800 000
CF4 500 000 N4 500 000
CF5 500 000 N5 500 000
i= 15% i= 15%
Comp NPV = R2 860 100 Comp NPV = R2 860 100
OR:
Alternative:
FV = 1 200 000 FV = 1 000 000 FV = 800 000 FV = 500 000 FV = 500 000
N=1 N=2 N=3 N=4 N=5
i = 15% i = 15% i = 15% i = 15% i = 15%
PV = ? PV = ? PV = ? PV = ? PV = ?
R1 043 478 R756 144 R526 013 R285 877 R248 588
Total PV R2 860 100
Therefore, the recoverable amount is R2 860 100 as it is the higher of value in use or fair value less
cost to sell.
Impairment loss
R
Carrying amount 3 187 500
Recoverable amount (2 860 100)
Impairment loss 327 400
EXAMPLE 3
Toys For You Ltd is a company listed on the JSE Security Exchange. The company has a
31 March year-end. The primary segments of the business operations are the manufacturing and
selling of toys and infant clothing.
On 1 April 20.10 Toys For You Ltd obtained a licence to sell Bogus Toys for 25 years. The total cost
of the licence amounted to R2 500 000. The licence is amortised on the straight-line basis over a
period of 25 years, as it is expected that economic benefits relating to the licence will flow to the
entity over this period.
On 31 March 20.12 it is estimated that the licence will generate cash inflows amounting to R750 000
per annum. The annual cash outflow required to generate the inflow amounts to R325 000. Assume
that all cash flows occur annually at 31 March. A pre-tax discount rate of 20% is regarded as
appropriate.
However, the expected future cash flow is now less than the original estimate because a second
licence to sell Bogus Toys was awarded to a major competitor on 30 September 20.11. The original
estimated useful life, however, remains unchanged. The licence can be sold for R2 000 000 on
31 March 20.12. For the year ended 31 March 20.11 the recoverable amount exceeded the carrying
amount of the licence.
Deferred tax is provided for on all temporary differences by using the statement of financial position
approach. There are no other temporary differences other than those identified in the question.
21
The company regards all impairment losses or the reversal thereof above R100 000 as material.
The SA normal tax rate is 28%. The capital gains tax inclusion rate is 80%.
According to Section 11(gC) of the Income Tax Act, the SA Revenue Service allows a tax allowance
on the licence on the straight-line method over 20 years. This allowance is not apportioned for a part
of the year. Toys For You Ltd had a profit before tax of R269 080, before the impairment was taken
into account, for the year ended 31 March 20.12.
REQUIRED
Prepare the notes to the annual financial statements of Toys for You Ltd for the
year ended 31 March 20.12.
Your answer must comply with International Financial Reporting Standards.

Accounting policy notes are not required.
Comparative figures are not required.
Round off all calculations to the nearest rand.
SOLUTION 3
TOYS FOR YOU LTD
NOTES FOR THE YEAR ENDED 31 MARCH 20.12
2. Intangible assets
Purchased
Licence
R
Carrying amount at beginning of year 2 400 000
Cost 2 500 000
Accumulated amortisation (2 500 000/25years) (100 000)
Amortisation (2 500 000/25years) (100 000)
Impairment loss (included in other expenses)1 (calc.3) (207 077)
Carrying amount at end of year (calc.1) 2 092 923
Cost 2 500 000
Accumulated amortisation and impairment loss (407 077)
At year-end the remaining useful life of the licence was 23 years.
3. Impairment loss2
The intangible asset, a licence for the selling of Bogus Toys, was impaired during the year due to a
licence also being awarded to a major competitor of Toys For You Ltd. The impairment loss
amounted to R207 077 and is part of the toys segment of the primary business operations of the
company.
The recoverable amount of the asset is based on the value in use and a pre-tax discount rate of
20%. There was no impairment of the asset in the previous year.
1
The information may be disclosed as part of the profit before tax note or the intangible asset
note. (IAS 36.128)
2
This note is only required if the impairment loss recognised or reversed was material.
Included in profit before tax are the following items:

Expenses R
Amortisation of intangible asset (licence) (calc. 1) included in line item "other expenses" 100 000
Impairment loss (calc. 3) included in “other expenses” 207 077
22
FAC3761/105
5. Income tax expense

R
Major components of tax expense
Current tax expense – current year (calc. 4) 68 342
Deferred tax expense – movement in temporary differences (calc. 5) (50 982)
Tax expense 17 360
6. Deferred tax
R
Analysis of temporary differences:
Accelerated tax allowance 43 982
Deferred tax asset (calc. 5) 43 982
CALCULATIONS
1. Carrying amount and tax base

Adjusted for
Historical impairment Tax base
R R R
Cost price 1 April 20.10 2 500 000 2 500 000 2 500 000
Amortisation/tax allowance
(2 500 000/25years); (2 500 000/20years) (100 000) (100 000) (125 000)
Carrying amount 31 March 20.11 2 400 000 2 400 000 2 375 000
Amortisation/tax allowance
(2 500 000/25years); (2 500 000/20years) (100 000) (100 000) (125 000)
Impairment loss (calc. 3) – (207 077) –
2. Recoverable amount
R
Fair value less costs to sell (given) 2 000 000
Value in use (calculated) 2 092 923

i = 20%
n = 23 years remaining
PMT = 425 000 (R750 000 – R325 000)
PV = 2 092 923
R
Recoverable amount is therefore 2 092 923
3. Impairment loss
R
Carrying amount on 31 March 20.12 2 300 000
[2 500 000 – (2 500 000/25years x 2years)] (calc. 1)
Recoverable amount (calc. 2) (2 092 923)
4. Current tax expense

R
Profit before tax (given) 269 080
Impairment loss (not taken into account) (207 077)
Profit before tax 62 003
Movement in temporary differences – deductible (25 000 + 157 077)1 (calc 5) 182 077
Taxable profit 244 080
Current tax expense (244 080 x 28%) 68 342
23
1 The movement in temporary differences consists of:
R
Amortisation 100 000
Allowance for credit losses3 (20 000 – 12 000) (125 000)
182 077
5. Deferred tax expense

Taxable/
(deductible) Deferred
Carrying Tax temporary tax asset/
amount base differences (liability)
R R R R
Beginning of the year 1 April 20.11 2 400 000 2 375 000 25 000 (7 000)
End of the year 31 March 20.12 2 092 923 2 250 000 (157 077) 43 982
Movement for the year:

R
Deferred tax liability at beginning of the year (7 000)
Deferred tax asset at the end of the year 43 982
Movement for the year (7 000 + 43 982) (or to P/L) 50 982
EXAMPLE 4
The same information as for example 3 applies.
The following details relate to the licence:

Carrying
amount (based
on carrying
amount on Value in Selling
31/03/20.12) use price
Date R R R
31/03/20.13 (calc. 1) 2 001 926 2 001 926 1 900 000
31/03/20.14 (calc. 1) 1 910 929 2 200 000 1 850 000
During 20.14 the competitor to whom the licence was awarded ran into financial difficulties and had
to be liquidated. This had a positive effect on the cash inflows of Toys For You Ltd, which resulted
in the value in use to be R2 200 000 on 31 March 20.14.
Profit before tax before any impairment losses or the reversal thereof was R40 929 for the year
ended 31 March 20.14.
It is not the policy of the company to revalue its assets.
REQUIRED
Prepare the notes to the annual financial statements of Toys For You Ltd for the
year ended 31 March 20.14.
Your answer must comply with the requirements of International Financial

Reporting Standards.
24
FAC3761/105
SOLUTION 4
TOYS FOR YOU LTD
1. Intangible assets
Purchased
Licence
R
Carrying amount at beginning of year 2 001 926
Cost 2 500 000
Accumulated amortisation and impairment loss (calc. 3) (498 074)
Amortisation (calc. 2) (90 997)
Reversal of previous impairment loss through profit or loss (included in other income)
(calc. 4) 189 071
Carrying amount at end of year 2 100 000
Cost 2 500 000
Accumulated amortisation (400 000)
At year-end the remaining useful life of the licence was 21 years.
2. Reversal of previous impairment loss of intangibles
The previous impairment loss of the licence has been reversed due to the liquidation of the major
competitor to whom the licence to sell Bogus Toys had also been awarded. The reversal of the
impairment loss amounted to R189 071. The reversal was limited to the carrying amount that would
have been determined had no impairment loss been recognised for the asset in prior years. It forms
part of the toys segment of the primary business operations.
Included in profit before tax are the following items:
Income R
Reversal of previous impairment loss of licence (calc. 4) (included in “other income”) 189 071
Expenses
Amortisation of intangible asset (licence) – included in line item "other expenses"
(calc. 2) 90 997

R
Current tax expense – current year (calc. 5) 1 939
Deferred tax expense – movement in temporary differences (calc. 6) 62 461
Tax expense 64 400
5. Deferred tax
Analysis of temporary differences: R

Accelerated tax allowance – Intangible asset 28 000
Deferred tax liability (calc. 6) 28 000
25
CALCULATIONS
1. Carrying amount and tax base

Adjusted for
Historical impairment Tax base
R R R
Amortisation (calc. 2) / Tax allowance (100 000) (90 997) (125 000)
Amortisation (calc. 2) / Tax allowance (100 000) (90 997) (125 000)
Carrying amount 31 March 20.14 before
impairment 2 100 000 1 910 929 2 000 000
Impairment loss reversed (calc. 4) – 189 071 –
2. Amortisation for the year

R
Carrying amount at 31 March 20.12 (given) 2 092 923
Amortisation is therefore [2 092 923/23years] 90 997
3. Accumulated amortisation and impairment loss on 31 March 20.13

R
Accumulated amortisation and impairment loss on 31 March 20.12 (from example 3) 407 077
Amortisation for 20.13 (calc. 2) 90 997
498 074
4. The amount of impairment loss to be reversed

R
20.13
Recoverable amount 2 001 926
Therefore, no impairment loss or reversal thereof.
20.14 R
Recoverable amount 2 200 000
Reversal of previously accounted for impairment loss 289 071
Limited to the historical carrying amount 2 100 000
Therefore, the impairment loss to be reversed (2 100 000 – 1 910 929) 189 071
5. Current tax expense

R
Profit before tax (given) 40 929
Reversal of impairment loss (calc 4) 189 071
Profit before tax 230 000
Movement in temporary differences – deductible (123 074 + 100 000)1 (calc 6) (223 074)
Taxable profit 6 926
Current tax expense (6 926 x 28%) 1 939
1 The movement in temporary differences consists of:
R
Amortisation (calc 2) 90 997
Tax allowance (125 000)
Reversal of impairment loss (189 071)
(223 074)
26
FAC3761/105
6. Calculation of deferred tax
Taxable/ Deferred
Carrying (deductible) Tax
amount Tax base temporary asset/
differences (liability)
R R R R
Beginning of the year 1 April 20.13 (calc. 1) 2 001 926 2 125 000 (123 074) 34 461
End of the year 31 March 20.14 (calc. 1) 2 100 000 2 000 000 100 000 (28 000)
Movement for the year:

R
Deferred tax asset at beginning of the year 34 461
Deferred tax liability at the end of the year 28 000
Movement for the year (34 461 + 28 000) (debit to the SCI) 62 461
EXAMPLE 5
Red Ltd is a manufacturing company with a 31 December year-end. The company manufactures
modern office furniture that is popular and used by a large number of corporate companies in South
Africa.
During the previous financial year, Red Ltd merged with a smaller firm as part of a business
combination and consequently the Pretoria branch underwent restructuring. The Pretoria branch can
be viewed as a CGU and goodwill acquired as part of the merger amounted to R55 000.
The following assets, with their carrying amounts at 31 December 20.17, formed part of the Pretoria
branch:
R
Goodwill 55 000
Inventories 950 000
Trade debtors 1 050 000
Land 750 000
Buildings 1 500 000
Machinery 525 000
4 830 000
During the 20.18 financial year, the Pretoria branch suffered losses as the merger with the smaller
firm did not yield the expected cash flows predicted. On 31 December 20.18, management estimated
that the fair value less costs of disposal and value in use of the CGU amounts to R4 000 000 and
R4 135 000 respectively. The value in use was determined using a pre-tax discount rate of 10,5%.
The following additional information is applicable to the assets above:
Residual Estimated
Cost value useful life
R R
Land 750 000 Nil -
Buildings 1 750 000 450 000 25 years
Machinery 650 000 Nil 5 years
Land, buildings, and machinery are accounted for in accordance with the cost model. Depreciation
is provided according to the straight-line method over the expected useful life of the building.
At year-end, the net realisable value of inventories amounted to R945 000 and the carrying amount
of trade debtors was reduced to R900 000.
27
The only fair value less costs of disposal available for individual assets is that of land, for which there
is an active market. On 31 December 20.18, the fair value less costs of disposal amounted to
R700 000.
Assume that land and buildings are regarded as separate classes of assets.
Assume that all amounts are material.
REQUIRED
Prepare the impairment loss note to the annual financial statements of Red Ltd
for the year ended 31 December 20.18.

SOLUTION 5
RED LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.18
1. Impairment loss2
During the 20.18 financial year, the Pretoria branch suffered losses as the merger with the smaller
firm did not yield the expected cash flows predicted. The impairment loss amounted to R358 000.
The recoverable amount of the asset is based on the value in use and a pre-tax discount rate of
10.5%. There was no impairment of the asset in the previous year.
The impairment loss was recognised against the following classes of assets:
R
Goodwill 55 000
Land 50 000
Buildings 198 776
Machinery 54 224
358 000
1
The information may also be disclosed as part of the profit before tax note. (IAS 36.128)
2
This note is only required if the impairment loss recognised or reversed was material.
CALCULATIONS
1. Carrying amount of assets before impairment
Carrying Carrying
amount amount
31 Dec 20.17 Adjustments 31 Dec 20.18
R R R
Goodwill 55 000 - 55 000
Inventories (Valued at lower of cost and net 950 000 (5 000) 945 000
realisable value)
Trade debtors 1 050 000 (150 000) 900 000
Land 750 000 - 750 000
Buildings
(Depreciation (R1 750 000 – R450 000) / 25) 1 500 000 (52 000) 1 448 000
Machinery
(Depreciation 650 000 / 5) 525 000 (130 000) 395 000
4 830 000 (337 000) 4 493 000
28
FAC3761/105
2. Recoverable amount
R
Higher of fair value less costs of disposal and value in use
Fair value less costs of disposal (given) 4 000 000
Value in use (given) 4 135 000
Recoverable amount is therefore 4 135 000
3. Impairment loss
R
Carrying amount on 31 December 20.18 (calc. 1) 4 493 000
Recoverable amount (calc. 2) (4 135 000)
4. Recognise impairment loss

Carrying Carrying
amount Adjustment(s) amount
31 Dec 2018 31 Dec 2018
R R R
Goodwill 55 000 (55 000)1 -
Inventories 945 000 - 945 000
Trade debtors 900 000 - 900 000
Land (limited)3 750 000 (50 000)2 700 000
Buildings (169 203 + 29 573) 1 448 000 (198 776)2 1 249 224
Machinery (46 157 + 8 067) 395 000 (54 224)2 340 776
4 493 000 (358 000)2 4 135 000
Notes:
The impairment loss recognised will be allocated to reduce the carrying amount of the assets of the
CGU in the following order:
1.
First reduce the carrying amount of any goodwill allocated to the CGU.
2. Then reduce the carrying amount of the remainder assets of the CGU pro rata on the basis of
Inventories and trade debtors are not included as they fall outside the scope of IAS 36. Therefore,
the total value of the remainder assets to be reduced is R2 593 000 (750 000 + 1 448 000 + 395 000)
Therefore, the remaining impairment loss of R303 000 (R358 000 – R55 000) to be recognised
against each of the remainder assets are:
Land (750 000/2 593 000) x 303 000 R87 640
Buildings (1 448 000/2 593 000) x 303 000 R169 203
Machinery (395 000/2 593 000) x 303 000 R46 157
3
There is a limitation on the allocation of impairment loss
When allocating an impairment loss on the individual assets of a CGU, an entity must test that the
carrying amount of the individual asset is not reduced to below the highest of
 its fair value less costs of disposal;
 its value in use; and
 nil (IAS 36.104).
The only fair value less costs of disposal available for individual assets is that of land, for which there
is an active market. The fair value less costs of disposal amounts to R700 000. Therefore, land must
not be reduced to below the highest of R700 000 and Rnil, therefore R700 000
The carrying amount of land after the above allocation of impairment is R662 360 (750 000 – 87 640)
The impairment loss should be limited to R50 000 (750 000 – 700 000)
Thus, the balance of impairment loss that cannot be allocated to land is R37 640 (87 640 - 50 000)
29
The balance of the impairment loss must be allocated to the buildings and machinery pro rata on the
basis of the carrying amount of each asset.
Total carrying amount of buildings and machinery R1 843 000 (1 448 000 + 395 000)
Therefore, the balance of impairment loss of R37 640to be recognised against each of the remainder
assets are:
Buildings (1 448 000/1 843 000) x 37 640 R29 573
Machinery (395 000/1 843 000) x 37 640 R8 067
EXAMPLE 6
On 1 January 20.05, ABC Ltd acquired a battery patent for R2 800 000. This patent will ensure that
the company manufactures more reliable batteries. On acquisition of the patent, ABC Ltd also
incurred consulting and legal fees amounting to R47 000 and R23 000 respectively. These capital
expenditures were paid in cash on acquisition date of the patent. The patent’s useful life was
determined to be 10 years and no residual value was allocated to the patent. The patent was
available for use, as intended by management, on acquisition date.
However, during the 20.11 financial year, numerous customers complained about defective
batteries. After internal investigations, it was discovered that there is a defect present in some
batches of batteries already sold to customers. As a result, ABC Ltd had to recall the defective
batteries already sold and had to replace them, free of charge, with new ones. Sales of these
batteries started to decrease significantly due to the customer dissatisfaction and management had
to assess the impact thereof on the value of the patent.
On 31 December 20.11, the fair value of the patent was estimated to be only R850 000. Legal and
other administration fees to sell the patent was estimated to amount to R60 000. Expected future net
cash inflows to be derived from the use of the patent was estimated to amount to R320 000 for the
year ended 31 December 20.12. The future net cash inflows will increase with 10% annually until
31 December 20.14. The pre-tax discount rate is 15% per annum.
REQUIRED
Calculate the impairment loss (if any) for the patent in the annual financial
statements of ABC Ltd for the year ended 31 December 20.11, according to the
requirements of IAS 36, Impairment of assets and IAS 38, Intangible assets.

Reporting Standards (IFRS).
Ignore comparative information.
Show all calculations.
SOLUTION 6
Step 1: Identify if there is any indication of impairment.
During the 20.11 financial year, numerous customers complained about defective batteries. After
internal investigations, it was discovered that there is a defect present in some batches of batteries
already sold to customers. As a result, ABC Ltd had to recall the defective batteries already sold and
had to replace them, free of charge, with new ones. Sales of these batteries started to decrease
significantly due to the customer dissatisfaction and management had to assess the impact thereof
on the value of the patent.
30
FAC3761/105
Step 2: Calculate the carrying amount of the asset at 31 December 20.11.
NOTE: This is BEFORE impairment.

R
Cost 1 January 20.05 (2 800 000 + 47 000 + 23 000) 2 870 000
Accumulated amortisation (2 870 000 / 10years x 6years) (1 722 000)
Carrying amount 31 December 20.10 1 148 000
Amortisation (2 870 000 / 10years) (287 000)
Carrying amount at 31 December 20.11 861 000
Step 3: Calculate the recoverable amount of the asset.

R
Recoverable amount (higher of fair value less cost to sell and value in use) 799 014
Fair value less cost to sell (850 000 – 60 000) 790 000
Value in use: (using financial calculator) 799 014
CF0 0
CF1 R320 000
CF2 R352 000 (320 0000 + 10%)
CF3 R387 200 (352 000 + 10%)
i 15%
Comp NPV = R799 014
Step 4: Calculate the impairment loss of the asset (if any).
There is an impairment loss if the CA > RA.

R
Recoverable amount 799 014
Carrying amount 861 000
Impairment loss (861 000 – 799 014) 61 986
EXAMPLE 7
The same information as for example 6 applies.
During the 20.12 financial year, management identified an increase in sales of the battery due to
restored consumer confidence in the battery.
On 31 December 20.12 the fair value less costs to sell the patent amounted to R800 000 whilst the
value in use calculated at a pre-tax discount rate of 15% was determined to be R750 000
REQUIRED
Calculate the impairment loss reversal (if any) for the patent in the annual
financial statements of ABC Ltd for the year ended 31 December 20.12,
according to the requirements of IAS 36, Impairment of assets and IAS 38,
Intangible assets.

31
SOLUTION 7
Step 1: Identify if there has been a change in the estimates used to calculate the asset’s recoverable
amount since the last impairment was recognised.
Possible indication of impairment loss reversal
During the 20.12 financial year, management identified an increase in sales of the battery due to
restored consumer confidence in the battery.
Step 2: Calculate the carrying amount of the asset at 31 December 20.12.

R
Carrying amount at 31 December 20.11 (example 6) 799 014
Accumulated amortisation (799 014 / 3years1) (266 338)
Carrying amount 31 December 20.12 532 676
1
The remaining useful life at 31 December 20.11 is now used (10 years – 7 years) = 3 years
Step 3: Calculate the recoverable amount of the asset.
R
Recoverable amount (higher of fair value less cost to sell and value in use) 800 000
Fair value less cost to sell 800 000
Value in use 750 000
Step 4: Calculate the reversal of the impairment loss of the asset (if any).
R
Possible reversal of impairment loss 267 324
Carrying amount at year-end 532 676
Test for possible limitation:

The increased carrying amount of the asset due to an impairment loss reversal, must not be more
than the amount that would have been recognised as the carrying amount of the asset if no
impairment loss was recognised in the prior years.
Therefore:
Step 4A: Calculate the carrying amount of the asset at 31 December 20.12 AS IF NO IMPAIRMENT
LOSS OCCURRED ON 31 DECEMBER 20.11.
R
Carrying amount 31 December 20.11 if no impairment loss occurred 861 000
Accumulated amortisation (861 000 / 3years) (287 000)
Step 4B: Compare to carrying amount in 4A with the reversal and limit reversal.

Carrying amount before reversal 532 676
Therefore, impairment loss reversal is limited to R574 000 – R532 676 41 324
The possible impairment loss reversal calculated was R267 324. If we recognised the full amount,
then the carrying amount would have increased to R800 000 (R532 676 + R267 324)
This R800 000 would have exceeded the carrying amount of R574 000, which would have been the
carrying amount had no impairment occurred.
32
FAC3761/105
Thus, we limit the impairment loss reversal to R41 324 so that the asset’s carrying amount after
reversal does not exceed R574 000. Therefore, the new carrying amount at 31 December 20.12 is
R574 000 (R532 678 + R41 324).
EXAMPLE 8
LightUp Ltd is an independent energy producing company in the Northern Cape, South Africa.
Lightup Ltd owns a large solar power plant in the Northern Cape, producing around 100 megawatts
of electricity. The company’s financial year-end is 31 December.
Purchased intangible asset – Licence
LightUp Ltd acquired a licence from an American company to manufacture their solar panels. These
panels are able to capture 15% more of the sun’s radiation. The transaction was concluded on
1 July 20.14, at a cost of R5 000 000. The licence will be valid for 10 years and no residual value
was allocated to the licence. The licence was available for use, as intended by management, on
1 July 20.14.
Due to an increased electricity shortage, the government invested in alternative energy sources,
namely wind energy. This resulted in a significant decrease in the demand for solar panels and
therefore a decrease in revenue. On 31 December 20.14 the management of LightUp Ltd determined
the fair value less costs to sell and the value in use of the licence to be R3 500 000 and R3 250 000
respectively. The remaining useful life of the licence remained unchanged.
During the year ended 31 December 20.15, a limited supply of electricity was available due to an
extensive maintenance programme of the government’s power stations. This resulted in an increase
in the demand and sales of LightUp Ltd’s solar panels. On 31 December 20.15, the fair value less
costs to sell and value in use of the licence, amounted to R3 600 000 and R3 800 000 respectively.
The remaining useful life of the licence remained unchanged. A pre-tax discount rate of 16% is
considered appropriate.
Additional information
1. It is company policy to account for intangible assets according to the cost model and to provide
for amortisation in accordance with the straight-line method over the expected useful lives of the
assets.
2. Assume all amounts are material.
Please note:
 Amounts are to be rounded off to the nearest rand.

 VAT implications can be ignored.
REQUIRED
Disclose the impairment loss note to the annual financial statements of LightUp
Ltd for the year ended 31 December 20.15.

33
SOLUTION 8
LIGHTUP LTD
1. Reversal of impairment loss

During the year ended 31 December 20.15, the government embarked on a maintenance
programme of the old power stations, resulting in limited supply of electricity on the national grid.
This low supply resulted in an increase in the demand for LightUp Ltd’s solar-powered panels and
therefor a reversal of a prior year's impairment loss of R668 421 was needed. The recoverable
amount is based on the value in use calculated using a pre-tax discount rate of 16%. The reversal
is included in cost of sales line item on the face of the statement of profit or loss and other
comprehensive income.
Calculations
Purchased intangible asset – Licence

Carrying
amount Carrying
without amount with
impairment impairment
R R
Cost 5 000 000 5 000 000
Accumulated amortisation (5 000 000 / 10years x 6months/12months)) (250 000) (250 000)
4 750 000 4 750 000
Recoverable amount is the higher of:
Value in use: 3 250 000
Fair value less cost to sell: 3 500 000
Impairment loss (3 500 000 - 4 750 000) - (1 250 000)
Carrying amount 31 December 20.14 4 750 000 3 500 000
Amortisation (5 000 000 / 10years); (3 500 000 / 9,5years) (500 000) (368 421)
Carrying amount after current year amortisation 4 250 000 3 131 579
Recoverable amount is the higher of:
Value in use: 3 800 000
Fair value less cost to sell: 3 600 000
Reversal of impairment (3 800 000 – 3 131 579) - 668 421
Carrying amount 31 December 20.15 4 250 000 3 800 000
EXAMPLE 9
Rain Tank Ltd is a wholesale company based in the Western Cape, South Africa. The company has
a 30 June year-end.
During 20.18, the Western Cape experienced a severe water crisis. In an effort to encourage citizens
to save water, the provincial government stated that they would give each household a 10% subsidy
towards the purchasing and installation of a rainwater tank. To maximise on this opportunity Rain
Tank Ltd applied to a foreign supplier to obtain exclusive rights to purchase and sell rain tanks in
South Africa. On 1 June 20.18, the company obtained the rights from the supplier to exclusively
purchase, sell and install rain tanks manufactured by the supplier for the next 7 years. Rain Tank Ltd
purchased the rights at a cost of R500 000.
During the 20.19 financial year, a number of competitors entered the market and there was a
decrease in the number of water tanks sold and installed resulting in a decrease in revenue. At year-
end, you as the senior accountant of Rain Tank Ltd, determined the fair value less costs to sell and
the value in use of the rights to be R175 000 and R180 000 respectively. The remaining useful life
of the rights remained unchanged.
34
FAC3761/105
REQUIRED
Write a report to the chief financial officer of Rain Tank Ltd and explain the impact
(calculations included) of the decrease in revenue on the value of the rights in
the annual financial statements of Rain Tank Ltd for the year ended
30 June 20.19 in accordance with IAS 36, Impairment of assets.
Note:
Assume all amounts are material.
SOLUTION 9
To: The Chief Financial Officer
Rain Tank Ltd
From: Senior accountant
Date: 15 July 20.19
Decrease in the value of rights
In terms of IAS 36, an entity should assess at the end of each reporting period whether or not there
is any indication that an asset may be impaired. During the current financial year, a number of
competitors entered the market and there was a decrease in the number of water tanks sold and
installed resulting in a decrease in revenue. This is a market indicator of a possible impairment of
the rights awarded by the foreign supplier.
The standard further states that if any indication of impairment exists, the entity should estimate the
recoverable amount of the asset. The recoverable amount of the asset is the higher of the asset’s
fair value less costs to sell and the value in use. The recoverable amount is compared to the asset’s
carrying amount and an asset is impaired when the carrying amount of the asset exceeds its
recoverable amount. The fair value less costs to sell and the value in use of the rights has been
determined as R175 000 and R180 000 respectively.
Therefore, the recoverable amount of the rights is R180 000.

R
Cost 500 000
Accumulated amortisation (500 000 / 84months x 13) (77 381)
Carrying amount 30 June 20.19 422 619
Recoverable amount (higher of fair value less cost to sell and value in use) (180 000)
Value in use 180 000
An impairment loss of R242 619 has incurred on the rights.
Kindly contact me should you have any queries.
Kind regards,
M.E.
35
How to approach a discussion question:
1. State the relevant theory / principle from the applicable standard (in
example 9 above it is the initial measurement principles from IAS 36).
2. Apply the theory / principle to the information provided in the question.
3. Provide a conclusion for your argument.
4. Present your solution in the correct format (i.e. report, memorandum, e-
mail if asked in question).
6.11 E-TUTOR ACTIVITY
The following question must be attempted independently, and the solution

may be discussed with and obtained from your e-tutor.
Whitey Ltd is a company that manufactures batteries for motor vehicles. The company has a
31 December year-end.
The following details regarding certain assets of the company are available:
Purchased patent – Waya Waya
On 1 January 20.05, the company acquired a battery patent, called Waya Waya, for R2 800 000.
This patent will ensure that the company manufactures more reliable batteries. On acquisition of the
Waya Waya patent, Whitey Ltd also incurred consulting and legal fees amounting to R47 000 and
R23 000 respectively. These capital expenditures were paid in cash on acquisition date of the patent.
The patent’s useful life was determined to be 10 years and no residual value was allocated to the
patent. The patent was available for use, as intended by management, on acquisition date.
However, during the 20.11 financial year, numerous customers complained about defective
batteries. After internal investigations, it was discovered that there is a defect present in some
batches of batteries already sold to customers. As a result, Whitey Ltd had to recall the defective
batteries already sold and had to replace them, free of charge, with new ones. Sales of these
batteries started to decrease significantly due to the customer dissatisfaction and management had
to assess the impact thereof on the value of the patent.
On 31 December 20.11, the fair value of the patent was estimated to be only R850 000. Legal and
other administration fees to sell the patent was estimated to amount to R60 000. Expected future net
cash inflows to be derived from the use of the patent was estimated to amount to R320 000 for the
year ended 31 December 20.12. The future net cash inflows will increase with 10% annually until
31 December 20.14.
Additional information:
1. It is the accounting policy of the company to account for intangible assets according to the cost
model.
2. It is the accounting policy of the company to provide for amortisation according to the straight-
line method over the assets’ estimated useful lives.
3. A pre-tax discount rate of 15% is considered to be appropriate.
4. Assume all amounts to be material.
36
FAC3761/105
REQUIRED
Prepare all the relevant journal entries in the accounting records of Whitey Ltd
for the year ended 31 December 20.11, to correctly account for all transactions
relating to the Waya Waya patent.
Please note:
No abbreviations for general ledger accounts can be used.
Journal narrations are required.
Indicate the date on which the journal entry is made.
Show all data input into your financial calculator.
Round all amounts to the nearest rand.
Ignore VAT implications.
ASSESSMENT CRITERIA Yes No

After having studied this learning unit you should be able to do
the following:
1. Define the objective and scope of the standard.
3. Apply the prescribed indications to assess whether an asset
may be impaired, as well as the timing of impairment tests,
with specific reference to intangible assets with an indefinite
useful life and intangible assets not yet available for use.
4. Determine the recoverable amount through measurement of
the value in use and the fair value less costs of disposal.
5. Recognise and measure impairment losses for individual
assets other than goodwill.
6. Identify cash-generating units and calculate the carrying
amount and recoverable amount of a cash-generating unit.
7. Recognise and measure impairment losses for cash-
generating units.
8. Recognise and measure the reversal of impairment losses for
individual assets and cash-generating units.
9. Disclose impairment losses and the reversal of impairment
losses in the financial statements.
10. Disclose information for each cash-generating unit to which
goodwill or intangible assets with indefinite useful lives have
been allocated.
Please note that the application of the revaluation model in
relation to depreciable assets of property, plant and equipment
is excluded from the syllabus. Therefore, impairment losses
recognised in other comprehensive income for depreciable
assets is excluded from the syllabus.
If you answered “Yes” to all of the above assessment criteria, you have covered this learning unit
and can now focus on revising it for the exam.
If you answered “No” to any of the above criteria, revise the section concerned before
commencing with the revision of the study material for the exam.
37
LEARNING UNIT 7
IFRS 5
NON-CURRENT ASSETS
HELD FOR SALE AND
DISCONTINUED
OPERATIONS
The objective of IFRS 5, Non-Current Assets Held For Sale And Discontinued Operations is to
specify the accounting for assets held for sale, and the presentation and disclosure of discontinued
operations
38
FAC3761/105
39
LEARNING OUTCOMES
Once you have studied and completed this learning unit, you should be able to do the following:
1. Identify the purpose and scope of IFRS 5.
3. Apply the criteria to identify a non-current asset or disposal group as held for sale.
4. Apply the first measurement rule of IFRS 5 to individual non-current assets and disposal
groups to determine the carrying amounts of individual non-current assets or disposal groups
immediately after being classified as held for sale.
5. Apply the measurement requirements of IFRS 5 to individual non-current assets and disposal
groups to determine the fair value less costs to sell of individual non-current assets or disposal
groups classified as held for sale.
6. Calculate the impairment loss arising on initial classification as held for sale for an individual
non-current asset or disposal group and allocate the impairment loss according to the rules
contained in IFRS 5.
7. Remeasure an individual asset or disposal group subsequently and account for the additional
impairment loss or reversal of impairment loss according to the rules contained in IFRS 5.
8. Present and disclose non-current assets and disposal groups held for sale as well as
associated statement of profit or loss and other comprehensive income items according to
IFRS 5.
9. Disclose discontinued operations on the face of the statement of profit or loss and other
comprehensive income and in the notes to the financial statements according to IFRS 5.
STUDY MATERIAL
PRESCRIBED:
Gripping GAAP (Latest edition)
The chapters relevant to IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.
The following sections are excluded from the Non-Current Assets Held for Sale and
Discontinued Operations chapter:
 Measurement principles specific to the revaluation model
Please note:
 The textbook refers to the ‘C’ symbol to denote currency, but the module study material refers
to the ‘R’ symbol to denote the South African rand currency.
 The textbook uses income tax rate of 30%, but the module study material refers to the currently
enacted income tax rate of 28%.
RECOMMENDED:
IFRS Standards - The Annotated IFRS Standards
IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations
The standard can be accessed online at https://www.ifrs.org/
SAICA’S PRINCIPLES OF EXAMINATION

Knowledge of the concepts and topics in IFRS 5, Non-Current Assets Held for Sale and
Discontinued Operations are included at core level.
Kindly log on to myUnisa and navigate to the lesson tools page for IFRS 5,
Non-Current Assets Held For Sale and Discontinued Operations. The lesson
tool provides an overview of the learning unit to assist you in working through
the learning unit. The lesson tool also contains additional examples and other
aids to help you understand the study material.
40
FAC3761/105
NON-CURRENT ASSETS HELD

FOR SALE AND DISCONTINUED
OPERATIONS - OVERVIEW
Objective
PART I: NON-CURRENT ASSETS HELD FOR SALE

7.1
Introduction
7.2
Definitions
7.3
Classification of a non-current asset (or disposal group) as held for sale
7.3.1
Criteria to qualify as held for sale
7.3.2
Extension of period required to complete a sale
7.3.3
Other matters to consider with regard to classification as held for sale
7.4
The criteria in 7.3.1 are met after the reporting period
7.5
Scope of IFRS 5
7.5.1
Included in the scope
7.5.2
Items excluded from the scope of IFRS 5 regarding measurement requirements
7.5.3
Disposal group containing both items included and excluded from the measurement
requirements of IFRS 5
Measurement Impairment losses & Other

Reversals
7.6 7.7 7.8
Measurement of a non- Recognition of Non-current assets to be
current asset held for impairment losses and abandoned
7.9
sale (or disposal group) reversals Changes to a plan of
7.6.1 7.7.1
Measurement Impairment loss for an sale
7.9.1
immediately before individual non-current General
7.9.2
initial classification as asset Individual assets no
7.7.2
held for sale Impairment loss for a longer classified as held
7.6.2
Application of IFRS 5 to disposal group for sale
7.7.3 7.9.3
an existing individual Reversal of an Individual item part of
asset impairment loss/gain on disposal group, no longer
7.6.3
Application of IFRS 5 to remeasurement of an classified as held for sale
a disposal group at individual asset
7.7.4
initial classification as Recognition of gains
held for sale and losses at date of
7.6.4
Other matters in sale of a non-current
respect of asset
measurement
7.6.5
Subsequent
remeasurement of an
individual asset or
disposal group
Disclosure
7.10
Presentation and disclosure of a non-current asset or disposal group classified as held for
sale
7.10.1
Presentation
7.10.2
Additional disclosures
41
PART II: DISCONTINUED OPERATIONS
7.11
Introduction
7.11.1
Objective
7.11.2
Definition
7.11.3
Classification as discontinued operation
Disclosure
7.12
Presentation and disclosure
7.12.1
Disclosure
7.13
Gains or losses relating to continuing operations
7.14
Model for disclosure

7.15
7.16
E-tutor activity
Objective
IFRS 5 requires:
 assets that meet the criteria to be classified as held for sale to be measured at the lower of
carrying amount and fair value less cost to sell, and depreciation on such assets to cease; and
 assets that meet the criteria to be classified as held for sale to be presented separately on the
face of the statement of financial position and the results of discontinued operations to be
presented separately in the statement of profit or loss and other comprehensive income.
Since discontinuing an operation would by implication comprise, among other things, disposing of
current and non-current assets and associated liabilities, it appears logical to combine this issue with
discontinued operations in IFRS 5. However, for purposes of studying the two issues, they have
been split.
Non-current assets held for sale are dealt with in Part I and discontinued operations
(including associated non-current assets now held for sale) are dealt with in Part II of this
learning unit.
PART I: NON-CURRENT ASSETS HELD FOR SALE

7.1 INTRODUCTION
In terms of IAS 1, assets and liabilities should be classified between current and non-current on the
face of the statement of financial position. IFRS 5 prescribes how non-current non-financial assets
that are to be disposed of in the near future should be treated by stating that such assets and
associated liabilities to be recovered and settled through sale, shall be remeasured to the lower of
carrying amount and fair value less costs to sell and carried as current items on the face of the
statement of financial position.
EXAMPLE 1
Bang Ltd holds an item of property, plant and equipment with a historical cost carrying amount of
R120 000 at 31 December 20.10. On that date, management decides to sell the asset for R130 000
(fair value) by 31 March 20.11 and concludes a valid uncancellable sales contract (using fair prices)
to this effect with a buyer. Costs to sell the asset will amount to R12 000. Assume all amounts
involved are material and that the criteria for classification as held for sale have been met.
In short, applying IFRS 5 will have the following effect:
The carrying amount of the PPE item at 31 December 20.10 should be determined:
42
FAC3761/105
Since the decision to sell was taken at year-end, the carrying amount is R120 000.
Next the fair value less costs to sell of the PPE item should be determined:
Fair value is R130 000 and costs to sell amounts to R12 000. Consequently, the fair value less costs
to sell is R118 000.
The PPE item initially classified to hold for sale should now be transferred from non-current assets
to current assets and should then be measured at the lower of its carrying amount and fair value less
costs to sell.
The PPE item with a carrying amount of R120 000 shall thus be transferred from non-current to
current assets on the face of the statement of financial position and be described as "held for sale".
This "held for sale" asset shall then be written down from R120 000 to R118 000 and an impairment
loss of R2 000 shall be recognised in the statement of profit and loss and other comprehensive
income in 20.10.
7.2 DEFINITIONS (IFRS 5 Appendix A)

The definitions set out below should be studied carefully before the content of the rest of the material
and standard is attempted to ensure that you understand clearly what you are dealing with. Note that
some of the definitions will be familiar to you, as you have encountered them in other learning units.
However, since these definitions are also important in this standard, they have been repeated here.
Cash-generating unit is the smallest identifiable group of assets generating cash inflows that are
largely independent of the cash inflows from other assets or groups of assets. This definition is also
used in IAS 36 and is dealt with in learning unit 6.
Component of an entity is operations and cash flows that can be clearly distinguished, operationally
and for financial reporting purposes, from the rest of the entity.
Costs to sell is the incremental costs directly attributable to the disposal of an asset (or disposal
group), excluding finance costs and the income tax expense.
A current asset is an asset that satisfies any of the following criteria:
a. It is expected to be realised in, or is intended for sale or consumption in, the entity's normal
operating cycle.
b. It is held primarily for the purpose of being traded.
c. It is expected to be realised within 12 months after the reporting period.
d. It is cash or a cash equivalent asset unless it is restricted from being exchanged or used to settle
a liability for at least twelve months after the reporting period.
A discontinued operation is a component of an entity that either has been disposed of or is

classified as held for sale and:
a. represents a separate major line of business or geographical area of operations;

b. is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations; or
c. is a subsidiary acquired exclusively with a view to resale.
A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a group
in a single transaction, and liabilities directly associated with those assets that will be transferred in
the transaction. The group includes goodwill acquired in a business combination if the group is a
cash-generating unit to which goodwill has been allocated in accordance with the requirements of
paragraphs 80 to 87 of IAS 36, Impairment of assets or if it is an operation within such a cash-
generating unit.
Fair value is 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.
43
A firm purchase commitment is an agreement with an unrelated party, binding on both parties and
usually legally enforceable, that:
a. specifies all significant terms, including the price and timing of the transactions, and
b. includes a disincentive for non-performance that is sufficiently large to make performance highly
probable.
Highly probable means significantly more likely than probable.
A non-current asset is an asset that does not meet the definition of a current asset. Note that
current assets were defined earlier under this heading.
Probable means more likely than not.
Recoverable amount is the higher of an asset's fair value less (minus) costs to sell and its value in
use.
Value in use is the present value of estimated future cash flows expected to arise from the continuing
use of an asset and from its disposal at the end of its useful life.
7.3 CLASSIFICATION OF A NON-CURRENT ASSET (OR DISPOSAL

GROUP) AS HELD FOR SALE
An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than through
continuing use. (IFRS 5.06)
7.3.1 Criteria to qualify as held for sale

IFRS 5 requires non-current assets that are to be disposed of to be reclassified from non-current to
current. IFRS 5 makes it clear that items should only be classified as held for sale once they have
met all the criteria as set out in IFRS 5.07 to .11. These criteria are:
 The asset (or disposal group) must be available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such assets (or disposal groups),
and its sale must be highly probable.
 For the sale to be highly probable, the appropriate level of management must be committed to
a plan to sell the asset (or disposal group), and an active programme to locate a buyer and
complete the plan must have been initiated.
 The asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value.
 The sale should be expected to qualify for recognition as a completed sale within one year from
the date of classification, except if there are acceptable grounds for extension of the sales period
beyond one year as permitted by IFRS 5.09. (Refer to 7.3.2.)
 Actions required to complete the plan should indicate that it is unlikely that significant changes
to the plan will be made or that the plan will be withdrawn.
7.3.2 Extension of the period required to complete a sale (IFRS 5

Appendix B (Application supplement))
As noted in 7.3.1 above, an extension of the period required to complete a sale beyond one year
does not preclude an asset (or disposal group) from being classified as held for sale if the delay is
caused by events or circumstances beyond the entity's control and if there is sufficient evidence that
the entity remains committed to its plan to sell the asset (or disposal group).
An exception to the one-year requirement mentioned in 7.3.1 point 4 shall therefore apply in the
following situations in which such events or circumstances arise:
 At the date an entity commits itself to a plan to sell a non-current asset (or disposal group) it
44
FAC3761/105
reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset
(or disposal group) that will extend the period required to complete the sale, and:
 actions necessary to respond to those conditions cannot be initiated until after a firm
purchase commitment is obtained, and
 a firm purchase commitment is highly probable within one year; or
 an entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly
impose conditions on the transfer of a non-current asset (or disposal group) previously classified
as held for sale that will extend the period required to complete the sale, and;
 timely actions necessary to respond to the conditions have been taken, and
 a favourable resolution of the delaying factors is expected; or
 during the initial one-year period, circumstances arise that were previously considered unlikely
and, as a result, a non-current asset (or disposal group) previously classified as held for sale
is not sold by the end of that period, and
 during the initial one-year period the entity took action necessary to respond to the change
in circumstances,
 the non-current asset (or disposal group) is being actively marketed at a price that is
reasonable, given the change in circumstances, and
 the criteria in 7.3.1 above, are met.
7.3.3 Other matters to consider with regard to classification as held for

sale
Sale transactions include exchanges of non-current assets for other non-current assets when the
exchange has commercial substance in accordance with IAS 16, Property, plant and equipment.
(IFRS 5.10)
When an entity acquires a non-current asset (or disposal group) exclusively with a view to its
subsequent disposal, it shall classify the non-current asset (or disposal group) as held for sale at the
acquisition date, only if the one-year or a permitted extended period requirement is met and it is
highly probable that any other criteria in point 7.3.1 above that are not met at acquisition date will be
met within a short period following the acquisition (usually limited to 3 months). (IFRS 5.11)
7.4 THE CRITERIA IN 7.3.1 ARE MET AFTER THE REPORTING PERIOD
(IFRS 5.12)
If the criteria in 7.3.1 are met after the reporting period, an entity shall not classify a non-current
asset (or disposal group) as held for sale in those financial statements when issued.
However, when the criteria in 7.3.1 are met after the reporting period but before the authorisation of
the financial statements for issue, the entity shall disclose the following information by way of a note:
a. a description of the non-current asset (or disposal group);

b. a description of the facts and circumstances of the sale, or leading to the expected disposal, and
the expected manner and timing of that disposal;
c. if applicable, the reporting segment in which the non-current asset (or disposal group) is
presented in accordance with IFRS 8, Operating segments.
7.5 SCOPE OF IFRS 5

7.5.1 Included in the scope
The classification and presentation requirements of IFRS 5 applies to all recognised non-current
assets and disposal groups of an entity.
45
The measurement requirements of IFRS 5 apply to all recognised non-current assets and disposal
groups except for those listed in 7.5.2 below, which shall continue to be measured in accordance
with the standard noted. (IFRS 5.2)
Assets classified as non-current assets in accordance with IAS 1, Presentation of financial

statements shall not be reclassified as current assets until they meet the criteria to be classified as
held for sale in accordance with IFRS 5 (refer 7.3.1). Assets of a class that an entity would normally
regard as non-current that are acquired exclusively with a view to resale shall not be classified as
current assets until they meet the criteria to be classified as held for sale in accordance with IFRS 5
(refer 7.3.1). (IFRS 5.3)
Sometimes an entity disposes of a group of assets, possibly with some directly associated liabilities,
together in a single transaction. Such a disposal group may be a group of cash-generating units, a
single cash-generating unit or part of a cash-generating unit. (IFRS 5.4)
EXAMPLE 2
You may decide to sell any of the following:
 a factory comprising 3 manufacturing plants with carrying amounts of R200 000, R300 000 and
R400 000 respectively, representing a group of 3 cash-generating units, OR
 one of the 3 manufacturing plants representing a single cash-generating unit, for instance the
plant with a carrying amount of R200 000, OR
 two machines with carrying amounts of R80 000, each forming part of one manufacturing plant
and replace it by two more modern machines.
Each of the above alternatives will represent a disposal group as defined in 7.2 above.
If a non-current asset within the scope of the measurement requirements of IFRS 5 is part of a
disposal group, the measurement requirements apply to the group as a whole, so that the group is
measured at the lower of its carrying amount and fair value less costs to sell. (IFRS 5.4)
The requirements for measuring the individual assets and liabilities within the disposal group are
set out below:
 Immediately before the initial classification of the asset (or disposal group) as held for sale,
the carrying amounts of the asset (or all the assets and liabilities within the group) shall be
measured in terms of the Standards (IASs) normally applicable to them. (IFRS 5.18)
For instance, if a company wants to sell a machine (PPE item) carried at historical cost, the carrying
amount of the machine must be determined immediately before the initial classification as held for
sale. Depreciation will have to be written off on the machine right up to the point of reclassification,
to determine its carrying amount in terms of IAS 16, Property, plant and equipment, which is the
applicable standard.
 On subsequent measurement of a disposal group, the carrying amounts of any assets and
liabilities that are not within the scope of the measurement requirements of IFRS 5, but are
included in a disposal group classified as held for sale, shall be remeasured in accordance
with the applicable IFRSs before the fair value less costs to sell of the disposal group is
remeasured. (IFRS 5.19)
In terms of certain standards, some non-current items are already measured at fair value, with fair
value adjustments being included in profit or loss. For other non-current items, it could be difficult to
determine the fair value less costs to sell. IFRS 5 excludes several items from the measurement
requirements contained in IFRS 5.
46
FAC3761/105
7.5.2 Items excluded from the scope of IFRS 5 regarding measurement

requirements
Assets already carried at fair value with changes in fair value recognised in profit or loss. The
assets affected are:
 financial assets within the scope of IFRS 9, Financial instruments;

 non-current assets that have been accounted for using the fair value model in IAS 40,
Investment property; and
 non-current assets that have been measured at fair value less costs to sell in accordance with
IAS 41, Agriculture (not part of your syllabus).
Assets for which there might be difficulties in determining their fair value. The assets affected
are:
 deferred tax assets from IAS 12, Income Taxes;

 assets arising from employee benefits in terms of IAS 19, Employee benefits (not part of your
syllabus); and
 assets arising from insurance contracts as defined in IFRS 4 (not part of your syllabus).
The above-mentioned assets will be carried at the values determined by applying their applicable
standards.
7.5.3 Disposal group containing both items included and excluded from
the measurement requirements of IFRS 5
A disposal group may include any assets and any liabilities of an entity – therefore current and non-
current assets and liabilities as well as some assets that are excluded from the measurement
requirements of IFRS 5 (see 7.5.2) could form part of a disposal group.
EXAMPLE 3
A disposal group could consist of the following items:
R
Land: cost 120 000
Factory building: carrying amount 450 000
Plant: carrying amount 200 000
Inventories: carrying amount 55 000
Payables associated with the plant, inventory and factory building 40 000
Share investments: fair value 120 000
The first 3 items listed above would be non-current assets included in the scope of measurement
requirements of IFRS 5, being the lower of its carrying amount and fair value less costs to sell. The
next item, being inventories, is a current asset being disposed of as part of the disposal group. The
payables represent an associated liability, while the share investment represents a non-current asset
excluded from the scope of measurement requirements of IFRS 5. Irrespective of the diverse nature
of the items in the disposal group, the items involved still comprise a single disposal group.
7.6 MEASUREMENT OF A NON-CURRENT ASSET HELD FOR SALE (OR

DISPOSAL GROUP)
7.6.1 Measurement immediately before initial classification as held for
sale
According to IFRS 5.18 (refer 7.5.1) the carrying amount of a non-current asset (or all the assets
and liabilities in a disposal group) shall, immediately before the initial classification as held for sale,
be measured in accordance with the applicable IFRSs.
47
An entity shall measure a non-current asset (or disposal group) classified as held for sale at
the lower of its carrying amount (at the moment of reclassification) and fair value less costs
to sell – this adjustment is an impairment loss. (IFRS 5.15)
If a non-current asset held for sale (or disposal group) falls outside the scope of IFRS 5 in respect
of measurement requirements, the individual item shall not be restated to the lower of carrying
amount and fair value less costs to sell, but shall instead be carried at the value determined by
applying the relevant standard relating to that asset.
7.6.2 Application of IFRS 5 to an existing individual asset

The following examples illustrate the principles of IFRS 5 applicable on individual assets.
EXAMPLE 4
Individual asset carried at historical cost
Chuck Ltd has a PPE item with a cost of R400 000 and a historical cost carrying amount of R320 000
at 1 January 20.12. PPE is depreciated at 10% per annum on the straight-line basis. Chuck Ltd has
a 31 December year-end.
On 30 June 20.12 management decides to dispose of the asset within the next year and all other
criteria to facilitate the classification of the asset as a non-current asset held for sale, are met. The
fair value of the PPE item amounts to R290 000 and the direct costs to sell amount to R15 000.
SOLUTION 4
Applying the requirement in IFRS 5.18 (refer 7.5.1) that non-current assets to be reclassified as held
for sale need to have their carrying amounts measured in terms of applicable standards immediately
before initial classification as held for sale, would mean that IAS 16 would be applied to determine
the carrying amount on 30 June 20.12 of the PPE item involved. Consequently, the carrying amount
of the PPE item should be calculated as R300 000 (R320 000 – (R400 000 x 10% x 6/12)) raising a
depreciation expense of R20 000 in respect of this asset in 20.12 at point of initial classification as
held for sale.
In terms of IFRS 5.15 (refer 7.6.1), this newly determined carrying amount of R300 000 should be
compared to the fair value less costs to sell of the PPE item involved of R275 000 and be shown at
the lower of the two. In this case it will result in an impairment loss of R25 000 as prescribed by
IFRS 5.20.
Guidelines applying IFRS 5 on an individual asset carried at historical
cost
 The carrying amount of the asset to be disposed of is measured at date

of initial classification in accordance with the applicable standard, for
instance by applying IAS 16 – the Standard applicable – to the type of
item (property, plant and equipment) disposed of.
 Once the item has been classified as held for sale, no further depreciation
is written off on the specific asset.
The comparison of the newly measured carrying amount with the fair value
less costs to sell, will result in the recognition of an impairment loss.
48
FAC3761/105
EXAMPLE 5
Individual asset carried at fair value
On 1 January 20.12 (beginning of the year) Digit Ltd owns a property which is rented out (investment
property) and is carried at fair value of R500 000. The fair value of the investment property is
R510 000 at 30 June 20.12, while costs to sell at that date would amount to R15 000. Assume all
amounts to be material.
On 30 June 20.12 management decides to dispose of the investment property within the next year
and all other criteria to facilitate the classification of the asset as a non-current asset held for sale,
have been met.
SOLUTION 5
Applying the requirement in IFRS 5 that non-current assets to be classified as held for sale need to
have their carrying amounts measured in terms of applicable standards immediately before
classification as held for sale, would mean that IAS 40 would be applied to determine the carrying
amount of the investment property on 30 June 20.12.
However, investment properties fall outside the scope of the measurement requirements of
the standard in terms of IFRS 5.5 and should therefore be carried as a current asset at fair value
only (without deducting costs to sell) once classified as held for sale (see 7.5.1 and 7.5.2).
Consequently, this newly determined carrying amount of R510 000 (fair value) should not be
compared to the fair value less costs to sell of the item involved [being R495 000 (R510 000 –
R15 000)], as the exception to measurement requirements applies. The investment property shall
now be carried as a current asset at its new fair value of R510 000.
Guidelines applying IFRS 5 on an individual asset carried at fair value
 The carrying amount of the asset to be disposed of is measured at date

of initial classification as held for sale in accordance with the applicable
standard, for instance by applying the fair value model in IAS 40 – the
Standard applicable – to the type of item (investment property) disposed
of.
 Since the fair value model is used, no depreciation is written off on the
investment property. However, if the cost model was used, the carrying
amount at initial classification as held for sale would be determined writing
off depreciation to the point of initial classification. Thereafter the carrying
amount is remeasured to the lower of this new carrying amount and fair
value less costs to sell. No further depreciation is written off after
remeasurement.
 No comparison of the newly measured carrying amount of the asset with
the fair value less costs to sell is made, as the item under discussion is
excluded from the measurement requirements of IFRS 5.
 The classification and presentation requirements of IFRS 5 will still apply
and the investment property will be carried as a current asset once
classified as held for sale.
7.6.3 Application of IFRS 5 to a disposal group at initial classification as

held for sale
A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a group in
a single transaction, and liabilities directly associated with those assets that will be transferred in the
transaction.
49
Sometimes an entity disposes of a group of assets possibly with some directly associated liabilities,
together in a single transaction (IFRS 5.4). Immediately before the initial classification of the disposal
group as held for sale, the carrying amounts of the assets (or all the assets and liabilities in the
group), shall be measured in accordance with the applicable IFRSs. (IFRS 5.18)
EXAMPLE 6
Measurement of a disposal group
Candy Ltd (year-end 31 December 20.10) decides on 30 September 20.10 to dispose of a disposal
group within the next year. All the requirements for classification as held for sale have been met and
consequently the disposal group can be classified as held for sale. The carrying amounts of the
items included in the disposal group are the following (please take note of the dates involved):
 Land (at 1 January 20.10): Carrying amount R150 000

 Factory building (at 1 January 20.10): Carrying amount R520 000
(Depreciation according to the reducing balance method at 6,667% per annum)
 Plant (at 1 January 20.10): Carrying amount R200 000
(Depreciation according to the reducing balance method at 13,3333% per annum)
 Inventories:
Carrying amount R50 000 (at 30 September 20.10 with a net realisable value (NRV) of R45 000)
 Payables associated with the plant, inventories and factory building:
R25 000 (at 30 September 20.10)
 Share investment: Fair value R110 000 (30 September 20.10)
The fair value of the disposal group at 30 September 20.10, the date of initial classification as held
for sale, amounted to R980 000 (amount assumed), while costs associated with selling the disposal
group amounted to:
 Commission on sale of all items in disposal group = R50 000

 Capital gains tax (CGT) on disposal of factory = R20 000
SOLUTION 6
In this case, although the share investments fall outside the scope of IFRS 5 regarding measurement
requirements, the disposal group as a whole will be subject to the measurement requirements, since
other non-current assets within the scope of IFRS 5 form part of the group and the whole disposal
group will thus be measured at the lower of carrying amount and fair value less costs to sell.
Step 1:
Determine the carrying amount of all the individual assets in the disposal group at
30 September 20.10
R
Land at cost 150 000
Factory building [520 000 – (520 000 x 6,667% x 9/12)] (IAS 16 applicable) 494 000
Plant [200 000 – (200 000 x 13,3333% x 9/12)] (IAS 16 applicable) 180 000
Inventories – use NRV since lower than cost (IAS 2 applicable) 45 000
Payables – cost (IFRS 9 applicable) (25 000)
Share investments – fair value (IFRS 9 applicable) 110 000
Total carrying amount 954 000
Step 2:
Determine the fair value less costs to sell of the disposal group at 30 September 20.10
R
Fair value less costs to sell (980 000 – 50 000) 930 000
Note: CGT is excluded specifically per the definition of costs to sell (see 7.2)
50
FAC3761/105
Step 3:
Determine the lower of carrying amount and fair value less costs to sell at 30 September 20.10
R
Fair value less costs to sell (980 000 – 50 000) 930 000
Measure the disposal group held for sale at the fair value less costs to sell,
as this is the lower of the two figures calculated 930 000
Step 4:
Calculate the impairment loss at 30 September 20.10

R
Carrying amount less fair value less costs to sell (954 000 – 930 000) 24 000
Guidelines approaching this question:
 All the assets and liabilities in the disposal group initially classified as held
for sale will first be measured to their carrying amounts by applying the
IFRSs applicable to them. Note the applicable Standard in brackets.
 The fair value less costs to sell of the whole disposal group is then
determined. Note the calculation of fair value less costs to sell per
definition.
 The disposal group will then be measured to the lower of its carrying
amount and fair value less costs to sell. This is done by allocating the
impairment loss of R24 000 to non-current assets within the scope of the
measurement requirements of IFRS 5 (a detailed discussion and
examples of the matter appears hereafter).
Note: If none of the assets in a disposal group falls within the scope of measurement requirements
of IFRS 5, then the measurement requirement of IFRS 5 will not be applicable to the disposal group
and the assets in the group will merely be carried at their values determined by applying their
applicable standards.
7.6.4 Other matters in respect of measurement

Non-current assets are sometimes acquired with a view to dispose of them in the short-term.
If a newly acquired non-current asset (or disposal group) meets the criteria to be classified as held
for sale, applying the measurement requirements of IFRS 5 (refer IFRS 5.15) will result in the asset
(or disposal group) being measured on initial recognition at the lower of its carrying amount had it
not been classified as held for sale (for example its cost) and its fair value less costs to sell. If the
asset (or disposal group) is acquired as part of a business combination, it shall be measured at
acquisition at fair value less costs to sell. (IFRS 5.16)
EXAMPLE 7
Titan Ltd buys a non-current asset (PPE item) with a cost price of R105 000 and a fair value of
R110 000 cash. Costs to resell the asset amounts to R10 000. The asset was acquired with a view
to dispose of it within the next 6 months. All other criteria necessary for classification as a non-current
asset held for sale have been met.
51
SOLUTION 7
Following the general principles discussed above, this asset will be measured at the lower of its cost
and fair value less costs to sell at initial recognition. This means that the asset will be recognised at
initial recognition at R100 000 (R110 000 – R10 000). Presumably this will lead to the asset being
recorded at R100 000, the bank being credited by R105 000 and an impairment loss of R5 000 being
recognised immediately.
7.6.5 Subsequent remeasurement of an individual asset or disposal

group
Assets or disposal groups classified as held for sale will have to be remeasured to its fair value less
costs to sell if a year-end occurs between the date of initial classification as held for sale and the
final date of disposal.
Assets that fall outside the scope for measurement requirements for IFRS 5
Individual non-current assets that fall outside the scope of the measurement requirements of
IFRS 5 will subsequently be measured by merely applying the applicable standards.
On subsequent remeasurement of a disposal group, the carrying amounts of any assets and
liabilities that are not within the scope of the measurement requirements of this IFRS, but are
included in a disposal group classified as held for sale (including current assets such as inventories),
shall be remeasured in accordance with applicable Standards before the fair value less costs to sell
of the disposal group is remeasured. (IFRS 5.19)
Assets that fall within the scope for measurement requirements for IFRS 5
On subsequent remeasurement of an individual asset or disposal group, the carrying amounts of
non-current assets that fall within the scope of the measurement requirements of IFRS 5.5 will be
the fair values less costs to sell less any impairment losses that were determined at initial
classification. If the fair value less costs to sell at subsequent remeasurement is different from the
fair value less costs to sell at initial classification it should be remeasured to the "new" fair value less
costs to sell, resulting in a further impairment loss or a reversal of a previous impairment loss (refer
7.7).
7.7 RECOGNITION OF IMPAIRMENT LOSSES AND REVERSALS

7.7.1 Impairment loss for an individual non-current asset
At initial classification and measurement as well as subsequent remeasurement
An entity shall recognise an impairment loss for any initial or subsequent write-down of the non-
current asset to fair value less costs to sell. (IFRS 5.20)
The impairment loss calculated will be treated in terms of IFRS 5. Therefore, regardless of whether
the assets are carried at the cost model or the revaluation model, the impairment loss will be treated
the same. The carrying amount of the asset affected will be credited and the impairment loss
will be debited in P/L in the statement of profit or loss and other comprehensive income (not
revaluation surplus).
7.7.2 Impairment loss for a disposal group

At initial classification and measurement as well as subsequent remeasurement leading to
an impairment loss
The impairment loss recognised for a disposal group shall reduce the carrying amount of the non-
current assets that fall within the scope of the measurement requirements of IFRS 5 (see 7.5.2 for
exclusions) in the order of allocation set out in IAS 36.104(a), (b) and .122 Impairment of assets.
(IFRS 5.23)
52
FAC3761/105
The impairment loss shall be allocated to reduce the carrying amounts of the assets (group of assets)
in the following order: first against goodwill and the remainder against other assets in proportion to
their carrying amounts. (IAS 36.104 (a), (b) and .122). Current assets forming part of the disposal
group will not be reduced by the impairment loss.
EXAMPLE 8
The information in example 6 in 7.6.3 will be used here to illustrate the accounting treatment of an
impairment loss.
SOLUTION 8
The impairment loss calculated in example 6 amounted to R24 000 and the whole amount will appear
in the statement of profit or loss and other comprehensive income (P/L). Since the total non-current
assets subject to impairment amounted to R824 000 (150 000 + 494 000 + 180 000), the allocation
of the impairment loss to the individual assets will be as follows:
Carrying amounts Impairment loss CA after

on classification allocated impairment
loss
R R R
Land 150 000 (4 369) (1) 145 631
Factory building 494 000 (14 388) (2) 479 612
Plant 180 000 (5 243) (3) 174 757
Inventories 45 000 NIL (4) 45 000
Payables (25 000) NIL (5) (25 000)
Share investment 110 000 NIL (6) 110 000
Total carrying amount 954 000 (24 000) 930 000
It is vital that you understand the arguments set out in the calculations and explanations
below:
1. 24 000 x 150 000/824 000

2. 24 000 x 494 000/824 000
3. 24 000 x 180 000/824 000
4. Asset already subjected to a net realisable value test in terms of IAS 2 – the equivalent of
impairment tests for current assets – and IFRS 5.23 specifically refers to only non-current assets
for allocation of impairment loss.
5. Not an asset and not subject to impairment.
6. Since IFRS 5.23 specifically states that only non-current assets that fall within the scope of the
measurement requirements of IFRS 5.5 should be reduced by the impairment loss for the
disposal group and investments fall outside the scope of measurement requirements of IFRS 5.5,
no portion of the impairment loss is allocated to the share investments. This would also have
been the case if the share investments were, say, an investment property carried under the fair
value model; the reasoning presumably being that the fair value of the asset (not less costs to
sell) will reflect any drop in fair value in any case.
7.7.3 Reversal of an impairment loss/gain on remeasurement of an

individual asset
An entity shall recognise a gain for any subsequent increase in fair value less costs to sell of an
asset, but not more than the cumulative impairment loss that has been recognised either in
accordance with IFRS 5 or previously under IAS 36 Impairment of assets. (IFRS 5.21)
53
7.7.4 Recognition of gains and losses at date of sale of a non-current
asset
A gain or loss not previously recognised at either initial classification or subsequent remeasurement
shall be recognised at the date of derecognition.
Requirements of non-current assets falling within the scope of IFRS 5 relating to derecognition are
set out in IAS 16.67 to 72, Property, plant and equipment and IAS 38.112 to 117, Intangible assets.
The derecognition requirements are:
 The gain or loss arising from derecognition of an item of property, plant and equipment/
intangible asset shall be included in profit or loss (the statement of profit or loss and other
comprehensive income) when the item is derecognised. Gains shall not be classified as
revenue. (IAS 16.68)
 In determining the date of disposal of an item, an entity applies the criteria in IFRS 15, Revenue
from contracts with customers for recognising revenue from the sale of goods – all the criteria
must be met. (IAS 16.69)
 The gain or loss arising from the derecognition of an item of property, plant and equipment shall
be determined as the difference between the net disposal proceeds, if any, and the carrying
amount of the item. (IAS 16.71)
 The consideration receivable on disposal of an item of property, plant and equipment is
recognised initially at its fair value. If payment for the item is deferred, the consideration received
is recognised initially at the cash price equivalent. The difference between the nominal amount
of the consideration and the cash price equivalent is recognised as interest revenue under
IFRS 15, Revenue from contracts with customers, reflecting the effective yield on the
receivable. (IAS 16.72)
EXAMPLE 9
Purple Heather Ltd has classified an item as held for sale on 30 June 20.10 after all the criteria for
classification have been met and an impairment loss of R50 000 was recognised in profit or loss.
This resulted in a carrying amount of R850 000. At 31 December 20.10 (year-end) the fair value less
costs to sell of the PPE item was once again lower than its carrying amount at that date and
consequently the item was subsequently remeasured at fair value less costs to sell of R810 000,
recognising an impairment loss of R40 000 in profit or loss. The asset is finally disposed of at
R830 000 at 30 April 20.11, after all the criteria for derecognition have been met.
The effect of the above scenario on the statement of profit or loss and other comprehensive income
in 20.10 and 20.11 is the following:
20.10:
A first impairment loss of R50 000 was recognised at initial classification as held for sale on
30 June 20.10. A second impairment loss of R40 000 (850 000 – 810 000) was recognised at
remeasurement on 31 December 20.10.
20.11:
A final gain of R20 000 (830 000 – 810 000) is recognised at derecognition on final disposal.
7.8 NON-CURRENT ASSETS TO BE ABANDONED

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned. This is because its carrying amount will be recovered principally through continuing use.
This difference in treatment arises since the carrying amount of the abandoned asset (or disposal
group) will be recovered principally through continuing use, while that of an asset (or disposal group)
held for sale will be recovered through sale. Consequently, an entity shall not classify as held for
sale a non-current asset (or disposal group) that is to be abandoned.
54
FAC3761/105
Non-current assets (or disposal groups) to be abandoned include non-current assets (or disposal
groups) that are to be used to the end of their economic life as well as non-current assets (or disposal
groups) that are to be closed down rather than sold. (IFRS 5.13)
An entity shall not account for a non-current asset that has been temporarily taken out of use as if it
had been abandoned. (IFRS 5.14)
7.9 CHANGES TO A PLAN OF SALE

7.9.1 General
If an entity has previously classified an asset (or disposal group) as held for sale, but the criteria for
classification as held for sale are no longer met, the entity shall cease to classify the asset (or
disposal group) as held for sale. (IFRS 5.26)
The entity shall measure a non-current asset that ceases to be classified as held for sale (or ceases
to be included in a disposal group classified as held for sale) at the lower of:
a. its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted
for any depreciation, amortisation or revaluations that would have been recognised had the asset
(or disposal group) not been classified as held for sale, and
b. its recoverable amount at the date of the subsequent decision not to sell. (IFRS 5.27)
7.9.2 Individual assets no longer classified as held for sale

The entity shall include any required adjustment to the carrying amount of a non-current asset that
ceases to be classified as held for sale in income from continuing operations in the period in which
the criteria for classification are no longer met.
The adjustment must be included under the same caption in the statement of profit or loss and other
comprehensive income used to present a gain or loss, if any, that is recognised on measuring an
item that has been classified as held for sale but that is not a discontinued operation. However, if the
asset under consideration is either a PPE item or intangible asset that has been carried under the
revaluation model per IAS 16 or IAS 38, the adjustment shall be treated as a revaluation increase or
decrease. (IFRS 5.28)
EXAMPLE 10
Monty Ltd classified a patent as held for sale on 30 June 20.10 (its year-end), as it had met all the
criteria for classification as held for sale on that date. The patent had a carrying amount and fair
value less costs to sell of R960 000 at year-end, an original cost of R1 600 000, and amortisation on
the item is written off at 20% per annum on the straight-line basis with no residual value anticipated
at any time in the future.
Due to a change in patent rights promulgated on 1 April 20.11, Monty Ltd decided to no longer
dispose of the patent and consequently the asset had to be reclassified. The recoverable amount of
the asset under consideration amounted to R700 000 on 1 April 20.11 and its useful life on that date
was 2,25 years.
REQUIRED
Calculate the carrying amount at which the patent should be reinstated on
1 April 20.11 due to the decision to no longer sell the asset, the adjustment to
the carrying amount, as well as the applicable amortisation for 20.11. Also state
under which caption in the statement of profit or loss and other comprehensive
income the adjustment to the carrying amount should be reflected.
55
SOLUTION 10
The asset no longer classified as held for sale should be reinstated at the lower of what its carrying
amount would have been had it never been classified as held for sale and its recoverable amount.
Step 1:
Calculate what the carrying amount would have been on 1 April 20.11 if the intangible asset
had never been classified as held for sale
R
Carrying amount on 30 June 20.10 960 000
Amortisation from 1 July 20.10 to 31 March 20.11 (1 600 000 x 20% x 9/12) (240 000)
Carrying amount at 1 April 20.11 720 000
Recoverable amount at 1 April 20.11 700 000
The lower of the two is the recoverable amount of R700 000 and therefore the asset should be
remeasured to this amount at 1 April 20.11.
Step 2:
Calculate the adjustment to the existing carrying amount on reclassification

R
Held for sale item carried at 960 000
Carrying amount on 1 April 20.11 once no longer held for sale 700 000
Adjustment to carrying amount – write-off 260 000
Amortisation during 20.11
The new carrying amount at 1 April 20.11 from the previous calculation is R700 000 and the
remaining useful life would be 2,25 years on that date. Since the patent has no residual value, the
amortisation for 20.11 will be R77 778 (R700 000/2,25 x 3/12).
The adjustment of R260 000 should be disclosed as a deduction from other income or as part of
other expenses.
7.9.3 Individual item part of disposal group no longer classified as held

for sale
If an entity removes an individual asset or liability from a disposal group classified as held for sale,
the remaining assets and liabilities of the disposal group still to be sold shall continue to be measured
as a group only if the group still meets the criteria in 7.3.1. Otherwise, the remaining non-current
assets of the group that individually still meet the criteria to be classified as held for sale shall be
measured individually at the lower of their carrying amounts and fair values less costs to sell at that
date. Any non-current assets that no longer meet the criteria shall cease to be classified as held for
sale. (IFRS 5.29)
56
FAC3761/105
EXAMPLE 11
Widget Ltd (year-end 31 December 20.9) classified the following group of assets as a disposal group
held for sale on 2 January 20.10, having met all the criteria for classification as held for sale required
by IFRS 5. The effect of the classification as held for sale and measurement at initial classification
is set out in the table below:
Carrying
amounts on Impairment CA after
classification loss allocated impairment loss
R R R
Land 100 000 5 759 94 241
Factory building 475 000 27 356 447 644
Widget plant1 189 000 10 885 178 115
Inventories 45 000 Nil 45 000
Payables (35 000) Nil (35 000)
Share investments 110 000 Nil 110 000
Total carrying amount 884 000 44 000 840 000
1
Depreciation provided for at 15% per annum straight-line based on a cost of R240 000 (no
residual value). The recoverable amount of the widget plant based on value in use is R180 000
at 31 May 20.10, and the remaining useful life of the widget plant on 31 May 20.10 is 5 years and
3 months. The residual value of the asset has not changed and is still RNil.
On 31 May 20.10 the directors reconsidered and decided to no longer dispose of the widget plant as
they unexpectedly secured a large contract for the production of widgets for the next 5 years –
consequently the widget plant was removed from the disposal group. The inventories retained their
net realisable value determined on 2 January 20.10 and all payables have been repaid since initial
classification as held for sale. The fair value of the share investments has not changed. The group
still meets the criteria for classification as a disposal group after the removal of the widget plant.
REQUIRED
Determine the carrying amount of the widget plant after the decision to no longer
sell it has been made, the adjustment to the statement of profit or loss and other
comprehensive income due to the reclassification, the depreciation charge for
20.10, as well as the carrying amount of the disposal group after the removal of
the widget plant.
SOLUTION 11
Step 1:
Calculate the carrying amount of the widget plant on removal from the disposal group on
31 May 20.10:
R
Carrying amount as it would have been if the disposal group was never
classified as held for sale [R189 000 – (240 000 x 15% x 5/12)] 174 000
Recoverable amount (given) 180 000
The lower of the two alternatives should be taken, thus the carrying amount of R174 000.
57
Step 2:
Calculate the adjustment in the statement of profit or loss and other comprehensive income
of 20.10 due to reclassification:
R
Carrying amount determined on 2 January 20.10 178 115
Carrying amount determined on 31 May 20.10 174 000
Adjustment to statement of profit or loss and other comprehensive income – loss
recognised 4 115
Note that the adjustment in respect of reclassification of the widget plant would
have been different if the recoverable amount was, say, R160 000 (i.e. lower
than the carrying amount at 31 May of R174 000).
Depreciation charge for 20.10 on the widget plant:

R
Carrying amount on 31 May 20.10 174 000
Depreciation charge (174 000/5,25 x 7/12) 19 333
Carrying amount of disposal group after removal of the widget plant on 31 May 20.10:
R
Carrying amount including the widget plant 840 000
Carrying amount excluding the widget plant (840 000 – 178 115 + 35 000
(payables)) 696 885
7.10. PRESENTATION AND DISCLOSURE OF A NON-CURRENT ASSET

OR DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE
7.10.1 Presentation
 An entity shall present a non-current asset classified as held for sale and the assets of the
disposal group classified as held for sale separately from other assets in the statement of
financial position. The liabilities of a disposal group classified as held for sale shall be presented
separately from other liabilities in the statement of financial position. Those assets and liabilities
shall not be offset and presented as a single amount. The major classes of assets and liabilities
classified as held for sale shall be separately disclosed either on the face of the statement of
financial position or in the notes. An entity shall present separately any cumulative income or
expense recognised in other comprehensive income relating to a non-current asset (or disposal
group) classified as held for sale. (IFRS 5.38)
 If the disposal group is a newly acquired subsidiary that meets the criteria to be classified as
held for sale on acquisition, disclosure of the major classes of assets and liabilities is not
required. (IFRS 5.39)
 An entity shall not reclassify or re-present amounts presented for non-current assets or for the
assets and liabilities of disposal groups classified as held for sale in the statement of financial
position for prior periods to reflect the classification in the statement of financial position for the
latest period presented. (IFRS 5.40)
7.10.2 Additional disclosures – IFRS 5.41

 An entity shall disclose the following information in the notes in the period in which a non-
current asset (or disposal group) has been either classified as held for sale or sold:
– a description of the non-current asset (or disposal group);
– a description of the facts and circumstances of the sale, or leading to the expected disposal,
and the expected manner and timing of that disposal;
58
FAC3761/105
– the gain or loss recognised and, if not separately presented on the face of the statement of
profit or loss and other comprehensive income, the caption in the statement of profit or loss
and other comprehensive income that includes that gain or loss; and
– if applicable, the reportable segment in which the non-current asset (or disposal group) is
presented in accordance with IFRS 8 Operating segments.
PART II: DISCONTINUED OPERATIONS

7.11 INTRODUCTION
7.11.1 Objective
The objective of this standard is to specify the accounting for assets held for sale and the
presentation and disclosure of discontinued operations. (IFRS 5.01)
7.11.2 Definition
As per the definitions under 7.2 above, a discontinued operation is a component of an entity that
either has been disposed of or is classified as held for sale and
 represents a major line of business or geographical area of operations;
 is a part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations; or
 is a subsidiary acquired exclusively with a view to resale. (IFRS 5.32)
7.11.3 Classification as discontinued operation

The IFRS classifies an operation as discontinued at the date that the operation meets the criteria to
be classified as held for sale or when the entity has disposed of the operation.
7.12 PRESENTATION AND DISCLOSURE

An entity shall present and disclose information that enables users of the financial
statements to evaluate the financial effects of discontinued operations and disposals of non-
current assets (or disposal groups). (IFRS 5.30)
7.12.1 Disclosure
An entity shall disclose:
 a single amount on the face of the statement of profit or loss and other comprehensive income
comprising the total of:
 the post-tax profit or loss of discontinued operations; and
 the post-tax gain or loss recognised on the measurement to fair value less costs to sell or
on the disposal of the assets or disposal group(s) constituting the discontinued operations.
 an analysis1 of the above-mentioned single amount into:
 the revenue, expenses and pre-tax profit or loss of discontinued operations;
 the related income tax expense as required by paragraph 81(h) of IAS 12; and
 the gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operation.
1. The analysis may be presented in the notes or on the face of the statement of profit or loss
and other comprehensive income. For this module, we will present it on the face of the
statement of profit or loss and other comprehensive income. (IFRS 5.33)
If an entity presents the components of profit or loss in a separate statement of profit or loss
and other comprehensive income as described in IAS 1.81, a section identified as relating to
discontinued operations is presented in that separate statement.
59
 An entity shall re-present the disclosures in IFRS 5.33 (above) for prior periods presented in the
financial statements so that the disclosures relate to all operations that have been discontinued
by the end of the reporting period for the latest period presented. (IFRS 5.34)
 Adjustments in the current period to amounts previously presented in discontinued operations
that are directly related to the disposal of a discontinued operation in a prior period shall be
classified separately in discontinued operations. The nature and amount of such adjustments
shall be disclosed. Examples of circumstances in which these adjustments may arise include
the following:
 the resolution of uncertainties that arise from the terms of the disposal transaction, such as
the resolution of purchase price adjustments and indemnification issues with the purchaser;
 the resolution of uncertainties that arise from and are directly related to the operations of
the component before its disposal, such as environmental and product warranty obligations
retained by the seller; and
 the settlement of employee benefit plan obligations, provided that the settlement is directly
related to the disposal transaction. (IFRS 5.35)
If an entity ceases to classify a component of an entity as held for sale, the results of operations of
the component previously presented in discontinued operations in accordance with IFRS 5.33–35
shall be reclassified and included in income from continuing operations for all periods presented.
The amounts for prior periods shall be described as having been re-presented. (IFRS 5.36)
7.13 GAINS OR LOSSES RELATING TO CONTINUING OPERATIONS

Any gain or loss on remeasurement of a non-current asset (or disposal group) classified as held for
sale that does not meet the definition of a discontinued operation, shall be included in profit or loss
from continuing operations. (IFRS 5.37)
7.14 MODEL FOR DISCLOSURE

XXX LTD
ENDED 31 DECEMBER 20.10
Notes R
CONTINUING OPERATIONS
Revenue XXXX
Cost of sales (XXX)
Gross profit XXXX
Other expenses (XXX)
Finance costs (XX)
Profit before tax XXX
Income tax expense (XX)
Profit for the year from continuing operations XXX
DISCONTINUED OPERATIONS
Revenue XXX
Expenses (XXX)
Loss before tax (XXX)
Income tax benefit XX
Loss after tax (XXX)
Loss after tax on measurement of non-current asset held for (XX)
sale/disposal group
Loss on measurement of non-current asset held for sale to fair value less
costs to sell (XX)
Income tax benefit X
Loss for the year from discontinued operations (XX)
PROFIT FOR THE YEAR XXXXXX
60
FAC3761/105
EXAMPLE 12
Aqua Ltd manufactures and sells water sports equipment and has branches in Cape Town, Port
Elizabeth and East London. The East London branch, whose results were previously reported in the
Eastern Cape geographical segment, had incurred losses over the past two years. On
31 March 20.10 the board of directors approved a detailed formal disposal plan for the
discontinuance of the branch and on the same date made a public announcement. The approved
formal plan regarding the piecemeal sale of the assets was at a stage of completion on
30 September 20.10 where no realistic possibility of withdrawal existed. Binding sale agreements
regarding property and plant were concluded. It is expected that the plan for the discontinuance of
the East London branch will be completed on 28 February 20.11. Aqua Ltd's year-end is
31 December. All the remaining assets and liabilities were taken over by the continuing operation.
The following information is presented to you on 31 December 20.10 (before taking into account any
adjustments due to the discontinuance):
Balances in the statement of financial position:

Cape Town
East and Port
London Elizabeth
R R
Property, plant and equipment 200 000 1 000 000
Current assets 40 000 200 000
Long-term liabilities 90 000 300 000
Current liabilities 60 000 150 000
Actual results – continuing operations:
Cape Town and

Cape Town Port Elizabeth Port Elizabeth
01/01/20.10 to 01/01/20.10 to 01/01/20.9 to
31/12/20.10 31/12/20.10 31/12/20.9
R R R
Revenue 800 000 770 000 1 250 000
Cost of sales 350 000 355 000 500 000
Other expenses 325 000 297 000 515 000
Actual results – discontinued operations:
East East East East

London London London London
01/01/20.10 to 01/04/20.10 to 01/10/20.10 to 01/01/20.9 to
31/03/20.10 30/09/20.10 31/12/20.10 31/12/20.9
R R R R
Revenue 75 000 100 000 60 000 250 000
Cost of sales 60 000 70 000 45 000 200 000
Other expenses 20 000 30 000 20 000 60 000
Discontinuance cost of discontinued operations:

01/01/20.11 to 31/03/20.10 to
28/02/20.11 31/12/20.10
Estimated Actual
R R
Direct costs of discontinuance 3 000 4 500
Severance pay payable to employees 20 000 –
Fines (discontinuance of contracts) 3 000 –
Revenue 30 000 –
Cost of sales 25 000 –
Other expenses 10 000 –
61
Other information:
20.10 20.9
R R
Finance cost (continuing operations) 15 000 15 000
Tax (continuing and discontinued operations) 65 240 63 000
Current tax 65 240 63 000
Dividends paid 50 000 40 000
Tax was calculated before taking into account the finance cost paid and the direct costs to
discontinue the East London branch as well as the estimated gross discontinuance loss in 20.11.
1. The direct cost of discontinuance is tax deductible. Assume that the severance pay and fines are
not deductible for tax purposes.
2. On 30 September 20.10 information regarding the piecemeal sale of property and plant to two
independent parties relating to the discontinued operation was as follows:
Tax base Carrying Contract Contract settlement

amount price date
R R R R
Property 120 000 120 000 105 000 28 February 20.11
Plant 80 000 80 000 80 000 28 February 20.11
200 000 200 000 185 000
3. On 30 September 20.10 the plant was withdrawn from operations.

4. Assume an income tax rate of 28%. 80% of all capital gains are taxable.
5. There is no difference between the carrying amount and the tax base of the property.
6. There are no non-taxable income, non-deductible expenses or temporary differences other than
those evident from the question.
REQUIRED
a. Prepare the statement of profit or loss and other comprehensive income of
Aqua Ltd for the year ended 31 December 20.10; and
b. Prepare the income tax expense note, as well as the note on non-current
assets held for sale for the year ended 31 December 20.10. Accounting
policy notes are not required.

SOLUTION 12
AQUA LTD
Notes 20.10 20.9
R R
Revenue (1) 1 570 000 1 250 000
Cost of sales (2) (705 000) (500 000)
Gross profit 865 000 750 000
Other expenses (3) (622 000) (515 000)
Finance costs (15 000) (15 000)
Profit before tax 228 000 220 000
Income tax expense (6) 2 (63 840) (61 600)
Profit for the year from continuing operations 164 160 158 400
62
FAC3761/105
Notes 20.10 20.9

R R
Revenue (4) 235 000 250 000
Expenses (5) (275 500) (260 000)
Loss before tax (40 500) (10 000)
Income tax benefit (7) 2 4 900 2 800
Loss after tax (35 600) (7 200)
Loss after tax on measurement (10 800) –
Loss on measurement of non-current asset held for sale
to fair value less costs to sell (9) (15 000) –
Income tax benefit (9) 4 200 –
Loss for the year from discontinuing operations (46 400) (7 200)
PROFIT FOR THE YEAR 117 760 151 200
AQUA LTD

20.10 20.9
R R
Current tax expense – current year 59 780 58 800
Continuing operations (calc 6) 63 840 61 600
Discontinued operations (calc 7) (4 060) (2 800)
Deferred tax expense – movement in temporary differences (5 040) –
Continuing operations – –
Discontinued operations (840 (calc 8) + 4 200 (calc 9)) (5 040) –
Tax expense 54 740 58 800
3. Non-current assets held for sale
A decision to dispose of property and plant, due to the fact that the branch had incurred losses for
the past two years, was taken in March 20.10 after approval of a detailed formal disposal plan for
the discontinuance of the East London branch. The plan regarding the piecemeal sale of the assets
was at a stage of completion on 30 September 20.10 where no realistic possibility of withdrawal
existed. It is expected that the assets will be sold for cash and that the disposal will be completed by
28 February 20.11.
The non-current assets held for sale comprise:

20.10
R
Assets:
Property (calc 9) 105 000
Plant 80 000
185 000
An impairment loss of R15 000 (pre-tax) was recognised on initial classification of the property as
held for sale and this amount was included under loss after tax on measurement on the face of the
statement of profit or loss and other comprehensive income.
The assets are part of the Eastern Cape geographical segment.
63
The information regarding the disposal of the property and plant of the East
London branch is disclosed in the note "Non-current assets held for sale"
because the assets were sold independently (piecemeal) to two different
parties and no liabilities directly associated with these assets were
transferred. Therefore, it does not qualify to be classified as a disposal group.
CALCULATIONS
1. 800 000 + 770 000 = 1 570 000
2. 350 000 + 355 000 = 705 000
3. 325 000 + 297 000 = 622 000
4. 75 000 + 100 000 + 60 000 = 235 000
5. (60 000 + 70 000 + 45 000)1 + (20 000 + 30 000 + 20 000)2 + (3 000 + 20 000 + 3 000)3 +
4 5004 = 275 500
1
Cost of sales
2
Other expenses
3
Provision for costs related to discontinuance
4
Actual cost of discontinuance
6. Tax on continuing operations

20.10 20.9
R R
Temporary differences – –
Non-taxable/non-deductible differences – –
Taxable income 228 000 220 000
Tax @ 28% 63 840 61 600
7. Tax on discontinued operations

20.10 20.9
R R
Profit/(loss) before tax (40 500) (10 000)
Exempt differences 23 000 –
Severance pay to employees 20 000
Fines 3 000
Temporary differences
Provision for direct cost of discontinuance 3 000 –
Taxable income/(loss) (14 500) (10 000)
Current tax @ 28% (4 060) (2 800)
8. Deferred tax on discontinued operations

20.10 20.9
R R
Deferred tax balance beginning of year – –
Deferred tax balance end of year (asset) 8401 –
Deferred tax movement (Cr to P/L) 840 –
Deferred tax balance:

Taxable/
deductible Deferred
amount base difference (liability)
R R R R
Provision for direct cost of discontinuance 3 000 – (3 000) 840
64
FAC3761/105
9. Carrying amount of property and plant to be sold

20.10
R
Property – impairment loss
 Original carrying amount 120 000
 Contract price ("new" carrying amount) (105 000)
Deferred tax thereon 4 200
Provisions are made for the following future expenses:
 Severance pay
 Fines on discontinuance of contracts
 Estimated direct future cost of discontinuance
The provisions were made because

(i) there exists a present obligation at year-end as a result of a past event (the
approval and announcement of a formal disposal plan for the discontinued
operation),
(ii) it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation, and
(iii) a reliable estimate of these amounts of obligations can be made.
(IAS 37.14)
There is no tax on the severance pay and fines, but deferred tax must be
provided for on the provision for direct future discontinuance costs. The reason
is that the South African Revenue Service will not allow the provision as a
deduction in the current year but will allow it when the expense is actually paid.
An impairment loss is a temporary difference. Deferred tax is calculated

thereon at 28%.
EXAMPLE 13
Aqua Ltd manufactures and sells water sports equipment and has branches in Cape Town, Port
Elizabeth and East London. The East London branch, whose results were previously reported in the
Eastern Cape geographical segment, had incurred losses over the past two years. On
31 March 20.10 the board of directors approved a detailed formal disposal plan for the
discontinuance of the branch and on the same date made a public announcement. The approved
formal plan regarding the once-off sale of assets and liabilities was at a stage of completion on
30 September 20.10 where no realistic possibility of withdrawal existed. A binding sale agreement
regarding the assets and liabilities were concluded. It is expected that the plan for the discontinuance
of the East London branch will be completed on 28 February 20.11. Aqua Ltd's year-end is
31 December.
The following information is presented to you on 31 December 20.10 (before taking into account any
adjustments due to the discontinuance):
Balances in the statement of financial position Cape Town

East and Port
London Elizabeth
R R
Property, plant and equipment 200 000 1 000 000
Current assets 40 000 200 000
Long-term liabilities 90 000 300 000
Current liabilities 60 000 150 000
65
Actual results – continuing operations:
Cape Town
and Port
Cape Town Port Elizabeth Elizabeth
01/01/20.10 to 01/01/20.10 to 01/01/20.9 to
31/12/20.10 31/12/20.10 31/12/20.9
R R R
Revenue 800 000 770 000 1 250 000
Cost of sales 350 000 355 000 500 000
Other expenses 325 000 297 000 515 000
Actual results – discontinued operations:
East East East East

London London London London
01/01/20.10 to 01/04/20.10 to 01/10/20.10 to 01/01/20.9 to
31/03/20.10 30/09/20.10 31/12/20.10 31/12/20.9
R R R R
Revenue 75 000 100 000 60 000 250 000
Cost of sales 60 000 70 000 45 000 200 000
Other expenses 20 000 30 000 20 000 60 000
Discontinuance cost of discontinued operations:
01/01/20.11 to 31/03/20.10 to
28/02/20.11 31/12/20.10
Estimated Actual
R R
Direct costs of discontinuance 3 000 4 500
Severance pay payable to employees 20 000 –
Fines (discontinuance of contracts) 3 000 –
Revenue 30 000 –
Cost of sales 25 000 –
Other expenses 10 000 –
Other information: 20.10 20.9

R R
Finance cost (continuing operations) 15 000 15 000
Tax (continuing and discontinued operations) 65 240 63 000
Current tax 65 240 63 000
Dividends paid 50 000 40 000
Tax was calculated before taking into account the finance cost paid and the direct costs to
discontinue the East London branch as well as the estimated gross discontinuance loss in 20.11.
1. The direct cost of discontinuance is tax deductible. Assume that the severance pay and fines
are not deductible for tax purposes.
2. The assets and liabilities of the East London branch meet all the criteria to be classified as a
disposal group. On 30 September 20.10 the fair value less costs to sell of the disposal group
was R49 000.
3. On 30 September 20.10 the plant was withdrawn from operations.
4. Assume an income tax rate of 28%. 80% of all capital gains are taxable.
5. There is no difference between the carrying amount and the tax base of the property.
6. There are no non-taxable income, non-deductible expenses or temporary differences other than
those evident from the question.
66
FAC3761/105
REQUIRED
(a) Prepare the statement of profit or loss and other comprehensive income of
Aqua Ltd for the year ended 31 December 20.10.
(b) Prepare the income tax expense note as well as the note on the disposal
group for the year ended 31 December 20.10.

SOLUTION 13
AQUA LTD
Notes 20.10 20.9
R R R
Revenue (1) 1 570 000 1 250 000
Cost of sales (2) (705 000) (500 000)
Gross profit 865 000 750 000
Other expenses (3) (622 000) (515 000)
Finance costs (15 000) (15 000)
Income tax expense (6) 2 (63 840) (61 600)
Profit for the year from continuing operations 164 160 158 400
Revenue (4) 235 000 250 000
Expenses (5) (275 500) (260 000)
Loss before tax (40 500) (10 000)
Income tax benefit (7) 2 4 900 2 800
Loss after tax (35 600) (7 200)
Loss after tax on measurement (10 800) –
Loss on measurement of non-current asset held for
sale to fair value less costs to sell (9) (15 000) –
Income tax benefit (9) 4 200 –
Loss for the year from discontinuing operations (46 400) (7 200)
PROFIT FOR THE YEAR 117 760 151 200

20.10 20.9
R R
Current tax expense – current year 59 780 58 800
Continuing operations (calc 6) 63 840 61 600
Discontinued operations (calc 7) (4 060) (2 800)
Deferred tax expense – movement in temporary differences (5 040) –
Continuing operations – –
Discontinued operations (840 (calc 8) + 4 200 (calc 9)) (5 040) –
Tax expense 54 740 58 800
3. Disposal group
A decision to dispose of assets, due to the fact that the branch had incurred losses for the past two
years, was taken in March 20.10 after approval of a detailed formal disposal plan for the
discontinuance of the East London branch. The plan regarding the once-off sale of assets and
67
liabilities was at a stage of completion on 30 September 20.10 where no realistic possibility of
withdrawal existed. It is expected that the disposal group will be sold for cash and that the disposal
will be completed by 28 February 20.11.
The disposal group under discussion comprise:

R
Assets
Property, plant and equipment (200 000 – 15 000) 185 000
Current assets 40 000
225 000
Liabilities
Long-term liabilities (given) 90 000
Current liabilities 60 000
Provision for discontinuance costs (20 000 + 3 000 + 3 000) 26 000
176 000
An impairment loss of R15 000 (pre-tax) was recognised on initial classification of the disposal group
as held for sale. This amount was included under loss after tax on measurement on the face of the
statement of profit or loss and other comprehensive income. The disposal group is presented as part
of the Eastern Cape geographical segment.
The information regarding the disposal of the assets and liabilities of the East
London branch is disclosed in the note "disposal group" because the whole
group of assets and liabilities associated with those assets are disposed
of in a single transaction. Therefore, it qualifies to be classified as a disposal
group.
CALCULATIONS
1. 800 000 + 770 000 = 1 570 000
2. 350 000 + 355 000 = 705 000
3. 325 000 + 297 000 = 622 000
4. 75 000 + 100 000 + 60 000 = 235 000
5. (60 000 + 70 000 + 45 000)1 + (20 000 + 30 000 + 20 000)2 + (3 000 + 20 000 + 3 000)3 + 4 5004
= 275 500
1
Cost of sales
2
Other expenses
3
Provision for costs related to discontinuance
4
Actual cost of discontinuance
6. Tax on continuing operations

20.10 20.9
R R
Temporary differences – –
Non-taxable/non-deductible differences – –
Taxable income 228 000 220 000
Tax @ 28% 63 840 61 600
68
FAC3761/105
7. Tax on discontinued operations

20.10 20.9
R R
Profit/(loss) before tax (40 500) (10 000)
Exempt differences 23 000 –
 Severance pay to employees 20 000 –
 Fines 3 000 –
Temporary differences –
 Provision for direct cost of discontinuance 3 000 –
Taxable income/(loss) (14 500) (10 000)
Current tax @ 28% (4 060) (2 800)
8. Deferred tax on discontinued operations

20.10 20.9
R R
Deferred tax balance beginning of year – –
Deferred tax balance end of year (asset) 840 –
Deferred tax movement (Cr to P/L) 840 –
Deferred tax balance:

Taxable/
deductible Deferred
amount base difference (liability)
R R R R
Provision for direct cost of discontinuance 3 000 – (3 000) 840
9. Carrying amount of disposal group

20.10
R
Carrying amount of disposal group on classification
Property, plant and equipment 200 000
Current assets 40 000
Long-term liabilities (90 000)
Current liabilities (60 000)
Provision for discontinuance costs (20 000 + 3 000 + 3 000) (26 000)
64 000
Fair value less costs to sell 49 000
Impairment loss (64 000 – 49 000) 15 000

Allocated as follows:
Property, plant and equipment 15 000
Deferred tax thereon (cr to P/L) (4 200)
69
EXAMPLE 14
JD Steel Ltd is a manufacturing company situated in Witbank, Mpumalanga. The company has a
30 June financial year-end.
Property in Witbank
The Witbank property is situated in the hub of the city centre and was acquired principally to earn
rental income. Initially, JD Steel Ltd used 20% of the available floor space of this building, which is
regarded as an insignificant portion, as its administrative head office. On 30 June 20.17 management
decided to sell this property within the next year because they consider the rental income yield of
the Witbank property to be too low. In future, JD Steel Ltd will rent office space for its administrative
head office. The residual value and the expected useful life of the Witbank property remained
unchanged throughout the period.
On 30 June 20.17, all criteria to classify the Witbank property as held for sale as stipulated in IFRS 5,
Non-current Assets Held for Sale and Discontinued Operation, were met. The sale of the property is
expected to be completed by 1 October 20.17 for cash. On 30 June 20.17 the costs to sell the
Witbank property were estimated to amount to R300 000.
The fair values of the Witbank property on the respective dates were as follows:
30 June 20.16 30 June 20.17
R R
Land 2 100 000 2 250 000
Building 3 750 000 3 875 000
1. All the fair values were determined by an independent sworn appraiser who holds a recognised
and relevant professional qualification and has recent experience in the location and category of
the property being valued.
2. Investment property is accounted for in accordance with the fair value model.
3. Assume that all amounts are material.
REQUIRED
a) Prepare all the relevant general journal entries in the accounting records of
JD Steel Ltd for the year ended 30 June 20.17, to correctly account for the
reclassification of the Witbank property
b) Disclose the non-current asset held for sale note to the annual financial
statements of JD Steel Ltd for the year ended 30 June 20.17
Note:
Show the date of each journal entry.
Ignore all tax implications.
No abbreviations for general ledger accounts may be used.
Journal narrations are not required.
Ignore any VAT and tax implications.
70
FAC3761/105
SOLUTION 14
JOURNAL ENTRIES
DR CR
R R
30 June 20.17
J1 Investment property (SFP) 275 000
Fair value adjustment (P/L) 275 000
(2 250 000 – 2 100 000) + (3 875 000 – 3 750 000)
J2 Non-current asset held for sale – investment property (SFP) 6 125 000
Investment property (SFP) (2 250 000 + 3 875 000) 6 125 000
JD STEEL LTD
NOTES FOR THE YEAR-ENDED 30 JUNE 20.17
1. Non-current asset held for sale
A decision to dispose of the Witbank property was taken because management consider the rental
income yield of the property to be too low. On 30 June 20.17, all the requirements for classification
as held for sale were met. It is expected that the sale will be completed by 1 October 20.17 for cash.
Non-current assets held for sale comprise:
R
Investment property 6 125 000
EXAMPLE 15
Zippy Racer Ltd is an automobile manufacturing company situated in East London. The company
has a 31 March financial year-end.
Machinery
Zippy Racer Ltd purchased a specialised machine on 1 September 20.15 for R4 350 000. The
machine was available for use, as intended by management, on 1 October 20.15. The machine has
an estimated useful life of 800 000 units, with a residual value of R435 000.
However, due to the fact that the machine did not meet its expected production capacity,
management made a strategic decision on 15 January 20.17 to dispose of it. On 28 February 20.17,
all the requirements for classification as held for sale were met. A binding sales agreement for the
machine was concluded and management expects the sale to be completed on 20 May 20.17. The
machine will be sold for cash.
From 1 October 20.15 until 31 March 20.16, the machine had produced a total of 225 000 units.
During the current financial year until 28 February 20.17, the machine had produced 85 000 units.
On 31 March 20.17 the machine’s fair value less costs to sell, was determined to be R2 650 000.
1. The following is an extract from the accounting policies of Zippy Racer Ltd:
 Machinery is accounted for using the cost model.
 Depreciation on machinery is provided for according to the units of production method.
2. Assume that all amounts are material.
71
REQUIRED
Disclose the non-current asset held for sale note to the annual financial
statements of Zippy Racer Ltd for the year ended 31 March 20.17.
Please note:

SOLUTION 15
ZIPPY RACER LTD
1) Non-current assets held for sale
A decision to dispose of a specialised machine was taken on 15 January 20.17. The decision to
dispose of the machine was due to the machine not meeting its expected production capacity. It is
expected that the sale will be completed by 20 May 20.17. The machine will be sold for cash.
R
Machinery 2 650 000
An impairment loss of R182 937 was recognised on initial classification of the machine as held for
sale and this amount was included in other expenses in the statement of profit and loss and other
CALCULATIONS:
Machinery
R
Cost price 1 September 20.15 4 350 000
Accumulated depreciation (calc 1.1) (1 101 094)
Carrying amount 31 March 20.16 3 248 906
Depreciation (calc 1.2) (415 969)
Carrying amount on 28 February 20.17 2 832 937
Impairment loss (calc 1.3) (182 937)
Carrying amount 31 March 20.17 2 650 000
1.1
(4 350 000 – 435 000) / 800 000 x 225 000 = 1 101 094
1.2
(4 350 000 – 435 000) / 800 000 x 85 000 = 415 969
1.3
2 832 937 – 2 650 000 = 182 937
72
FAC3761/105
EXAMPLE 16
Makoya Supply Chain Ltd is a company that manufactures and distributes fast-moving consumer
goods in South Africa. The company has a 31 December year-end.
The following details regarding the assets of the company are available:
Distribution division
On 30 July 20.17, the directors of Makoya Supply Chain Ltd decided to sell the distribution division
as they wanted to focus on the core business of the company, being the manufacturing of fast-
moving consumer goods. On 30 September 20.17, all the requirements for classification as held for
sale were met. The sale is expected to be completed by 28 February 20.18, for cash.
The carrying amounts of the items included in the disposal group are as follows:
R
Delivery truck at carrying amount on 1 January 20.17 750 000
(Cost R1 450 000, residual value R150 000, useful life 5 years)
Inventories at cost 30 September 20.17 285 000
(Net realisable value on 30 September 20.17 R240 000)
Trade receivables associated with the disposal group at fair value 30 September 20.17 275 000
Trade payables associated with the disposal group at fair value 30 September 20.17 120 500
On 30 September 20.17, the fair value of the disposal group was determined to be R940 000, while
the costs associated with selling the disposal group amounted to R65 000.
The fair value less costs to sell of the disposal group remained unchanged on 31 December 20.17.
1. The following is an extract from the accounting policies of Makoya Supply Chain Ltd:
 Vehicles are accounted for in accordance with the cost model.
 Depreciation on vehicles are written off using the straight-line method over the estimated
useful lives of the assets.
2. All amounts are material.
REQUIRED
Prepare the non-current assets held for sale note, including information of an
impairment loss (if any), to the annual financial statements of Makoya Supply
Chain Ltd for the year ended 31 December 20.17.
Please note:
73
SOLUTION 16
MAKOYA SUPPLY CHAIN LTD
1) Non-current assets held for sale
A decision to dispose of the distribution division was taken on 30 June 20.17 in order to focus on the
main business of the company, which is the manufacturing of fast-moving consumer goods. On
30 September 20.17, all the requirements for classification as held for sale were met. It is expected
that the sale will be completed by 28 February 20.18 for cash.

R
Delivery truck 480 500
Inventory 240 000
Accounts receivable 275 000
Accounts payable 120 500
An impairment loss of R74 500 was recognised on initial classification of the disposal group as held
for sale and this amount was included in other expenses in the statement of profit and loss and other
CALCULATIONS:
Step 1:
Determine the carrying amount of all the individual assets in the disposal group at
30 September 20.17.
Delivery truck
R
Carrying amount on 1 January 20.17 750 000
Depreciation for the year [(1 450 000 – 150 000) / 5 x 9 / 12] (195 000)
Carrying amount on 30 September 20.17 555 000
Inventory
Carrying amount on 30 September 20.17 285 000

Write down to net realisable value (45 000)
Net realisable value 30 September 20.17 240 000
Trade receivables 275 000

Trade payables (120 500)
Carrying amount of disposal group on 30 September 20.17 949 500
Step 2:
Determine the fair value less cost to sell the disposal group at 30 September 20.17.
R
Fair value 940 000
Less costs to sell (65 000)
Fair value less costs to sell 875 000
74
FAC3761/105
Step 3:
Determine the lower of carrying amount and fair value less cost to sell at 30 September 20.17.
R
Measure the disposal group at fair value less cost to sell
Step 4:
Calculate impairment loss at 30 September 20.17.

R
Carrying amount less fair value less cost to sell (949 500 – 875 000) 74 500
Step 5:
Allocate the impairment loss to the assets.
Carrying amount Impairment Carrying amount

on initial loss after impairment
classification allocated allocated
R R R
Delivery truck 555 000 (74 500) 480 500
Inventory 240 000 - 240 000
Accounts receivable 275 000 - 275 000
Accounts payable (120 500) - (120 500)
949 500 (74 500) 875 000
The impairment loss will only be allocated to the delivery truck as it is the only asset within the scope
of the measurement requirements of IFRS 5.
EXAMPLE 17
ABC Ltd is a manufacturing company in South Africa. The company has a 30 June year-end.
Property: Pretoria West
The company owns land and a building in the Pretoria West industrial area. The property is currently
used for administrative purposes. Management of ABC Ltd decided to move their administrative
functions to an office block in Menlyn to increase the company’s exposure and attract new clientele.
On 1 February 20.19, ABC Ltd vacated the Pretoria West premises and moved into the new building
in the office park. The relocation was completed by the end of February 20.19. ABC Ltd’s board of
directors held a meeting on 1 February 20.19 and approved the sale of the existing land and
administrative building and formulated a process to be followed for their sale. ABC Ltd advertised its
existing premises in Pretoria West for immediate sale. The sale was advertised in the local town and
city newspapers at a cost of R3 500 000 (land: R1 000 000, building: R2 500 000). Similar types of
premises are currently being sold for around the same amount and the terms of sale are usual and
customary for this type of property.
At year-end, ABC Ltd and a buyer were in the advanced stages of negotiation of the sale of the
premises and it is unlikely that any significant changes would be made to the agreement or that the
buyer would withdraw from the sale transaction. On 8 July 20.19, ABC Ltd and the purchaser signed
the sale agreement in terms of which the buyer agreed to purchase these premises in its present
condition at the advertised amount of R3 500 000. The premises in Pretoria West is included in the
“Property, plant and equipment” note referenced to the line item “Property, plant and equipment”
under the “Non-current assets” section in the provisional statement of financial position as at
30 June 20.19.
75
REQUIRED
Discuss, with reasons, whether or not you agree with the current classification of
the Pretoria West property in the financial statements of ABC Ltd as at
30 June 20.19 in accordance with IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations.
Note:
Assume all amounts are material.
SOLUTION 17
If the land and administrative building meet the criteria for classification as a non-current asset held
for sale, the asset must be treated as a current asset and not as a non-current asset as at year-end.
An entity shall classify a non-current asset as held for sale (i.e. as a current asset) if its carrying
amount will be recovered principally through a sale transaction rather than from its continuing use.
For this to be so, the asset:
 must be available for immediate sale (this criterion is met since there the buildings are currently
unoccupied/vacant and the advertisement indicated that the buildings are available “for
immediate occupation”);
 in its present condition (this criterion is met since the advertisement indicated that the premises
are for sale “as is” and the buyer agreed to this when signing the sale agreement);
 subject only to terms that are usual and customary for sales of such assets (this criterion is met
since the terms of sale are usual and customary for this type of property); and
 its sale is highly probable.
For a sale to be highly probable:
 the appropriate level of management must be committed to a plan to sell the asset (this criterion
is met since the board of directors approved the sale of the asset);
 an active programme to locate a buyer and complete the plan must have been initiated (this
criterion is met since a process to be followed for the sale of the assets has been formulated)
 the asset must be actively marketed for sale (this criterion is met since the property has been
advertised for sale in the newspapers);
 at a price that is reasonable in relation to its current fair value (this criterion is met since the
property is marketed at a price similar to those other premises currently being sold);
 the sale should qualify for recognition as a completed sale within one year from the date of
classification (this criterion is met since on 30 June 20.9, ABC Ltd and the buyer were in the
advanced stages of negotiation and the sale agreement was concluded on 8 July 20.19 when
the authorisation for the sale of the asset was given on 1 February 20.19, thus the sale will be
recognised within one year from classification); and
 actions to complete the plan should indicate that it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn (this criterion is met since on 30 June 20.19, ABC
Ltd and the buyer were in the advanced stages of negotiation and it was unlikely that significant
changes would be made to the sales agreement or that the buyer would withdraw).
Conclusion:
Since all of the criteria have been met, the land and administrative building must be classified as a
non-current asset held for sale and not as Property, plant and equipment on 30 June 20.19.
76
FAC3761/105
How to approach a discussion question:
1. State the relevant theory / principle from the applicable standard (in
example 17 above it is the initial measurement principles from IFRS 5).
2. Apply the theory / principle to the information provided in the question.
3. Provide a conclusion for your argument.
4. Present your solution in the correct format (i.e. report, memorandum, e-
mail if asked in question).
The following question must be attempted independently, and the solution may
be discussed with and obtained from your e-tutor.
BT Batteries Ltd is a company that manufactures batteries for motor vehicles. The company has a
31 December year-end.
The following is an extract from the notes to the financial statements of BT Batteries Ltd:
BT BATTERIES LTD
1. Intangible asset
Internally
generated:
Patent
R
Carrying amount at the beginning of the year -
Cost -
Accumulated amortisation -
Additions through internal development 639 658
Amortisation (included in cost of sales) (17 768)
Transferred to Non-current asset held for sale (621 890)
Carrying amount at the end of the year -
Cost -
Accumulated amortisation -
On 31 December 20.11, management decided to sell the Innovation patent as it was not generating
income as initially anticipated. The sale is expected to be completed by 28 February 20.12 for cash.
All of the criteria as set out in IFRS 5 for classifying an asset as held for sale was met on
31 December 20.11. The fair value less cost to sell of the patent on 31 December 20.11 was
determined to be R400 000.
Additional information:
1. It is the accounting policy of the company to account for intangible assets according to the cost
model.
2. It is the accounting policy of the company to provide for amortisation according to the straight-
line method over the assets’ estimated useful lives.
3. Assume all amounts to be material.
77
REQUIRED
Prepare all the relevant journal entries in the accounting records of BT
Batteries Ltd for the year ended 31 December 20.11, to correctly account for all
transactions relating to the intended sale of the patent.
Please note:

No abbreviations for general ledger accounts can be used.
Journal narrations are required.
Indicate the date on which the journal entry is made.
Ignore VAT implications.

After having studied this learning unit you should be able to do
the following:
1. Identify the purpose and scope of IFRS 5.
3. Apply the criteria to identify a non-current asset or disposal
group as held for sale.
4. Apply the first measurement rule of IFRS 5 to individual non-
current assets and disposal groups to determine the carrying
amounts of individual non-current assets or disposal groups
immediately after being classified as held for sale.
5. Apply the measurement requirements of IFRS 5 to individual
non-current assets and disposal groups to determine the fair
value less costs to sell of individual non-current assets or
disposal groups classified as held for sale.
6. Calculate the impairment loss arising on initial classification
as held for sale for an individual non-current asset or
disposal group and allocate the impairment loss according to
the rules contained in IFRS 5.
7. Remeasure an individual asset or disposal group
subsequently and account for the additional impairment loss
or reversal of impairment loss according to the rules
contained in IFRS 5.
8. Present and disclose non-current assets and disposal
groups held for sale as well as associated statement of profit
or loss and other comprehensive income items according to
IFRS 5.
9. Disclose discontinued operations on the face of the
statement of profit or loss and other comprehensive income
and in the notes to the financial statements according to
IFRS 5.
and can now focus on revising it for the exam.
If you answered “No” to any of the above criteria, revise the section concerned before commencing
with the revision of the study material for the exam.
78
FAC3761/105
LEARNING UNIT 8
IAS 37
PROVISIONS,
CONTINGENT LIABILITIES
AND CONTINGENT
ASSETS
The objective of IAS 37 is to ensure
 proper recognition and measurement of provisions, contingent liabilities, and contingent assets;
and
 sufficient disclosure of information about the nature, timing and amount of provisions and the
nature, amount and uncertainties of contingent liabilities and assets.
79
80
FAC3761/105
LEARNING OUTCOMES
After you have studied this learning unit, you should be able to do the following:
1. Identify the purpose of IAS 37.
2. Define the definitions.
3. Differentiate between provisions and contingent liabilities.
4. Recognise and measure provisions.
5. Identify contingent liabilities and contingent assets.
6. Disclose provisions, contingent liabilities, and contingent assets in the financial statements of
an entity.
STUDY MATERIAL
PRESCRIBED
GRIPPING GAAP (latest edition)
The chapter relevant to IAS 37, Provisions, Contingent liabilities, and Contingent assets.
Study Part A: Provisions, Contingent Liabilities and Contingent Assets chapter and work
through the examples:
The following sections are excluded from the chapter as it does not form part of the scope of this
tutorial letter:
 Changes in provisions and the cost model (IFRIC 1.5)
 Changes in provisions and the revaluation model (IFRIC 1.6)
 Levies (IFRIC 21)
Please note:
 The textbook refers to the “C” symbol to denote currency, but the module study material refers
to the “R” symbol to denote the South African rand currency.
 The textbook uses an income tax rate of 30%, but the module study material refers to the
currently enacted income tax rate of 28%.
RECOMMENDED: IFRS Standards – The Annotated IFRS Standards

IAS 37, Provisions, Contingent liabilities and Contingent assets
The standard can be accessed online at: https://www.ifrs.org/
SAICA’s PRINCIPLES OF EXAMINATION

The principle of examination of IAS 37 is at core level.
ONLINE SUPPORT
Kindly log on to myUnisa and navigate to the lesson tools page for IAS 37,
Provisions, contingent liabilities and contingent assets. The lesson tool
provides an overview of the learning unit to assist you in working through the
learning unit. The lesson tool also contains additional examples and other aids
to help you understand the tutorial matter.
81
PROVISIONS, CONTINGENT
LIABILITIES & CONTINGENT
ASSETS - OVERVIEW
8.1
Scope
8.2
Definitions
Liabilities Assets
8.3 8.4.4
Provisions and other liabilities Contingent assets
8.4
Recognition
8.4.1
Provisions
8.4.2
Contingent liabilities
8.4.3
Distinction between provisions and contingent
liabilities
Measurement Application
8.5 8.6
Measurement Application of the recognition and
8.5.1
Best estimate measurement rules
8.5.2 8.6.1
Risks and uncertainties Future operating losses
8.5.3 8.6.2
Present value Onerous contracts
8.5.4 8.6.3
Future events Staff retraining
8.5.5 8.6.4
Expected disposal of assets Warranties
8.5.6 8.6.5
Reimbursements Constructive obligation
8.5.7 8.6.6
Changes in and uses of Leave pay provision
8.6.7
provisions Possible legal liability
Disclosure Summary & tax implications

8.7 8.8
Disclosure Summary – IAS 37
8.7.1 8.9
Provisions Tax implications
8.7.2
Contingent liability
8.7.3
Contingent asset

8.10
8.11
E-tutor activity
8.1 SCOPE OF IAS 37

The statement should be applied by all entities in accounting for provisions, contingent liabilities and
contingent assets, except
 those resulting from executory contracts, except where the contract is onerous; and
 those covered by another International Accounting Standard. (IAS 37.01).
This standard does not apply to financial instruments (including guarantees) that are within the scope
of IFRS 9, Financial instruments.
Executory contracts are contracts under which neither party has performed any of its obligations or
both parties have partially performed their obligations to an equal extent. The statement does not
apply to executory contracts unless they are onerous (IAS 37.03).
When another Standard of International Financial Reporting Standards deals with a specific type of
provision, contingent liability or contingent asset, an entity applies that Standard instead of this
Standard.
82
FAC3761/105
For example, certain types of provisions are also addressed in statements on
(a) income taxes; and

(b) leases; and
(c) employee benefits
(d) revenue from contracts with customers (IAS 37.05).
Some amounts treated as provisions may relate to the recognition of revenue, for example where
an entity gives guarantees in exchange for a fee. The statement does not address the recognition of
revenue which is covered in IFRS 15.
8.2 DEFINITIONS
Provision
A provision is a liability of uncertain timing or amount.
Liability
A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
Obligating event
An event that creates a legal or constructive obligation that results in an entity having no realistic
alternative to settling that obligation.
Legal obligation
It is an obligation that derives from
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law
Constructive obligation
It is an obligation that derives from an entity's actions where
(a) by an established pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.
Contingent liability
A contingent liability is
(a) a possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because
(i) it is not probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
In a general sense, all provisions are contingent because they are uncertain in timing or amount.
The difference between a provision and contingent liability is that there is more uncertainty about a
contingent liability with regard to the possibility of an outflow of economic resources or the estimate
of the amount of the outflow of the economic resources (IAS 37.12).
Contingent asset
A possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the entity.
83
Onerous contract
A contract that causes the unavoidable costs of meeting the obligations under the contract exceed
the economic benefits to be received under it.
8.3 PROVISIONS AND OTHER LIABILITIES

Provisions can be distinguished from other liabilities such as trade payables and accruals because
there is uncertainty about the timing or amount of the future expenditure required in settlement. By
contrast
(a) trade payables are liabilities to pay for goods or services that have been received or supplied
and have been invoiced or formally agreed with the supplier; and
(b) accruals are liabilities to pay for goods or services that have been received or supplied but have
not been paid, invoiced or formally agreed with the supplier, including amounts due to
employees or electricity bills. (Although it is sometimes necessary to estimate the amount or
timing of accruals, the uncertainty is generally much less than for provisions.)
Accruals are often reported as part of trade and other payables, whereas provisions are reported
separately (IAS 37.11).
8.4 RECOGNITION
8.4.1 Provisions
A provision must be recognised when
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If all these conditions are not met, no provision should be recognised (IAS 37.14).
(a) Present obligation
In rare cases it is not clear whether or not there is a present obligation. In these cases, a past event
is deemed to give rise to a present obligation if, taking account of all available evidence, it is more
likely than not that a present obligation exists at the end of the reporting date (IAS 37.15).
In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare
cases, for example in a lawsuit, it may be disputed either whether or not certain events have occurred
or whether or not those events result in a present obligation. In such a case, an entity determines
whether or not a present obligation exists at the reporting date by taking account of all available
evidence including, for example the opinion of experts. The evidence considered includes any
additional evidence provided by events after the reporting period. On the basis of such evidence
(a) where it is more likely than not that a present obligation exists at the reporting date, the entity
recognises a provision (if the recognition criteria are met); and
(b) where it is more likely that no present obligation exists at the reporting date, the entity discloses
a contingent liability, unless the possibility of an outflow of resources embodying economic
benefits is remote (IAS 37.16).
An obligation always involves another party to whom the obligation is owed. However, it is not
necessary to know the identity of the party to whom the obligation is owed – indeed the obligation
may be to the public at large. Because an obligation always involves a commitment to another party,
it follows that a management or board decision does not give rise to a constructive obligation at the
reporting date unless the decision has been communicated before the reporting date to those
affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will
discharge its responsibilities (IAS 37.20).
84
FAC3761/105
(b) Past event
A past event that leads to a present obligation is called an obligating event. For an event to be an
obligating event, it is necessary that the entity has no realistic alternative to settling the obligation
created by the event. This is the case only
(a) where the settlement of the obligation can be enforced by law; or

(b) in the case of a constructive obligation, where the event (which may be an action of the entity)
creates valid expectations in other parties that the entity will discharge the obligation (IAS 37.17).
Provisions are divided into two categories, namely
 legal obligations; and

 constructive obligations.
 Legal obligations
This category of obligations means that another party has the right to summons the entity to perform.
Such obligations are applicable, for example when warranties are given to customers, as a result of
litigation and self-insurance, and in the case of onerous contracts. The essential element in such
cases is therefore an obligation that can be enforced by law.
 Constructive obligations
Constructive obligations are those obligations that are not legally enforceable but are inescapable
as a result of external factors or management policy and decisions. This means that the entity is left
no other realistic alternative than to incur the obligation; constructive obligations therefore emanate
from circumstances, in contrast to legal obligations that arise from the operation of the law. If it is the
policy of a trader to exchange products within three days of the sale thereof if the customer is not
completely satisfied, this policy brings about a constructive obligation for the entity, because its name
can be brought into disrepute by the non-fulfilment of the undertaking. Although the customer cannot
necessarily institute a legal action for the enforcement of the policy, and in this sense no legal
obligation can therefore arise, the obligation is nevertheless such that the entity will want to fulfil it: it
is therefore a constructive obligation. Another example of a constructive obligation is that of
contaminated ground around a factory plant. Public opposition to such contamination may be such
that it is obligatory for the entity to incur costs to remove the contamination, even if it does not
necessarily have a legal obligation to do so. The mere presence of environmental pollution does not,
however, give rise to an obligation, even if it is caused by the entity's activities. Only when there is
no realistic alternative to rehabilitation does the obligation arise. This can be on the date that the
board makes a public announcement that cleaning up will take place, or when production is inhibited
by the pollution to such an extent that cleaning up can no longer be postponed.
Financial statements deal with the financial position of an entity at the end of its reporting period and
not its possible position in the future. Therefore, no provision is recognised for costs that need to be
incurred to operate in the future. The only liabilities recognised in an entity's statement of financial
position are those that exist at the end of the reporting period (IAS 37.18).
For example: A machine used by a company in its production process needs to be overhauled every
5 years for technical reasons. At the reporting date, the machine has been in use for three years. No
provision must be made for the cost of the overhaul since there is no present obligation as a result
of a past obligating event. The future cost of overhauling the machine can be avoided by the future
actions of the company, for example by selling the machine. Even if the company has the intention
to incur the expenditure, it still depends on what happens in the future.
It is only those obligations arising from past events existing independently of an entity's future actions
(i.e. the future conduct of its business) that are recognised as provisions. An example of such an
obligation is penalties or clean-up costs for unlawful environmental damage, both of which would
lead to an outflow of resources embodying economic benefits in settlement regardless of the future
actions of the entity (IAS 37.19).
85
In contrast, because of commercial pressures or legal requirements, an entity may intend or need to
carry out expenditure to operate in a particular way in the future, for example by fitting smoke filters
in a certain type of factory. The entity can avoid the future expenditure by its future actions, for
example by changing its method of operation; it has no present obligations for that future expenditure
and no provision is recognised (IAS 37.19).
An event that does not give rise to an obligation immediately may do so at a later date because of
changes in the law or because an act (for example a sufficiently specific public statement) by the
entity gives rise to a constructive obligation. For example when environmental damage is caused
there may be no obligation to remedy the consequences. However, the causing of the damage will
become an obligating event when a new law requires the existing damage to be rectified or when
the entity publicly accepts responsibility for rectification in a way that creates a constructive obligation
(IAS 37.21).
Where details of a proposed new law have yet to be finalised, an obligation arises only when the
legislation is virtually certain to be enacted as drafted (IAS 37.22).
(c) Probable outflow of resources embodying economic benefits
For the purpose of the statement, an outflow of resources or other event is regarded as probable if
the event is more likely than not to occur, that is the probability that the event will occur is greater
than the probability that it will not. Where it is not probable that a present obligation exists, an entity
discloses a contingent liability, unless the possibility of an outflow of resources embodying economic
benefits is remote (IAS 37.23).
Where there are a number of similar obligations, for example product warranties or similar contracts
the probability that an outflow will be required in settlement is determined by considering the class
of obligation as a whole. Although the likelihood of outflow for any one item may be small, it may well
be probable that some outflow of resources will be needed to settle the class of obligations as a
whole. If that is the case, a provision is recognised (if the other recognition criteria are met)
(IAS 37.24).
(d) Reliable estimate of the obligation
The use of estimates is an essential part of the preparation of financial statements and does not
undermine their reliability. This is especially true in the case of provisions, which by their nature are
more uncertain than most other statement of financial position items. Except in extremely rare cases,
an entity will be able to determine a range of possible outcomes and can therefore make an estimate
of the obligation that is sufficiently reliable to use in recognising a provision (IAS 37.25).
In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be
recognised. That liability is disclosed as a contingent liability (IAS 37.26).
8.4.2 Contingent liabilities

An entity must not recognise a contingent liability in the accounting records (IAS 37.27). However, a
contingent liability should only be disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote (IAS 37.28).
Where an entity is jointly and severally liable for an obligation, the part of the obligation, which is
expected to be met by other parties, is treated as a contingent liability (IAS 37.29).
Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed
continually to determine whether or not an outflow of resources embodying economic benefits has
become probable. If it becomes probable that an outflow of future economic benefits will be required
for an item previously dealt with as a contingent liability, a provision is recognised in the financial
statements of the period in which the change in probability occurs (except in the extremely rare
circumstances where no reliable estimate can be made) (IAS 37.30).
86
FAC3761/105
Past event
Present Possible
obligation obligation
Outflow of
economic
resources
Probable Not probable Remote
No provision is
No provision is recognised.
A provision is recognised and
Disclosure for contingent liability is
recognised no disclosure is
required
required
8.4.3 Distinction between provisions and contingent liabilities

Refer to the decision tree in IAS 37, Appendix B. The purpose of this decision tree is to summarise
the main recognition requirements of the statement on provisions and contingent liabilities.
Work through the relevant examples dealing with Provisions and Contingent
liabilities in GRIPPING GAAP.
EXAMPLE 1
Fun-in-the Sun Ltd is an exclusive holiday resort situated on the KwaZulu-Natal North Coast.
During the 20.11 financial year, the board of directors decided to reduce the maintenance personnel
of the company significantly. On 28 February 20.11 the balance of the provision raised for the
severance packages for these redundant employees amounted to R45 000. During the current
financial year severance packages amounting to R76 000 have been paid to these redundant
employees according to their service contracts.
On 15 January 20.12 a holidaymaker instituted a claim of R250 000 against Fun-in-the-Sun Ltd after
she was injured by a volleyball while strolling on the beach. There are various billboards on the
premises warning holidaymakers to be aware of flying volleyballs. The legal advisors of Fun-in-the-
Sun Ltd are of the opinion that the claim will be unsuccessful. The legal costs to defend the claim
are estimated at R25 000.
During January 20.11 various chalets in the resort were damaged as a result of heavy rainstorms.
The holidaymakers had to evacuate the damaged chalets. At the time management estimated that
R80 000 would have to be paid to these holidaymakers to compensate them for the inconvenience
and accounted for it in the financial statements for the year ended 28 February 20.11. During the
financial years ended 28 February 20.11 and 29 February 20.12 amounts of R5 000 and R60 000
respectively, were paid to these holidaymakers. On 29 February 20.12 the financial director
established that no further payments were due to these holidaymakers.
87
REQUIRED
Disclose the above-mentioned in the notes to the annual financial statements of
Fun-in-the-Sun Ltd for the year ended 29 February 20.12 according to the
requirements of only IAS 37, Provisions, contingent liabilities and contingent
assets.
SOLUTION 1
FUN-IN-THE-SUN LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20.12
2. Contingent liability
On 15 January 20.12 a holidaymaker instituted a claim of R250 000 against Fun-in-the-Sun Ltd after
she was injured by a volleyball. The legal advisors of Fun-in-the-Sun Ltd are of the opinion that the
claim will be unsuccessful. The legal costs to defend the claim are estimated at R25 000.
3. Provisions
3.1 Provision for holidaymakers – inconvenience
20.12 20.11
R R
Carrying amount at beginning of the year (80 000 – 5 000) 75 000 –
Provision created for the year – 80 000
Amount used during the year (60 000) (5 000)
Unused amounts transferred to the statement of profit or loss and other –
comprehensive income during the year (15 000)
Carrying amount at end of year – 75 000
During January 20.11 various chalets of the resort were damaged as a result of heavy rainstorms
which resulted in the evacuation and relocation of holidaymakers. The financial director established
that no further payments are due to these holidaymakers at 29 February 20.12.
3.2 Provision for severance packages – redundant employees

20.12 20.11
R R
Carrying amount at beginning of the year 45 000 –
Provision created for the year – 45 000
Amount used during the year (45 000) –
Carrying amount at end of year – 45 000
During the 20.11 financial year the board of directors decided to reduce the maintenance personnel
of the company significantly and paid severance packages to these redundant employees according
to their service contracts.
To summarise, a provision is defined in IAS 37.10 as a liability of which the
amount or timing are uncertain. A contingent liability is
 a possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or
 a present obligation that arises from past events but is not recognised
because
 it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
 the amount of the obligation cannot be measured with sufficient
reliability.
88
FAC3761/105
8.4.4 Contingent assets

An entity must not recognise a contingent asset in the accounting records (IAS 37.31). A contingent
asset is only disclosed where an inflow of economic benefits is probable (IAS 37.34). However, when
the realisation of income is virtually certain, the related asset is not a contingent asset and its
recognition is appropriate (IAS 37.33).
Contingent assets usually arise from unplanned or other unexpected events that give rise to the
possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is
pursuing through legal processes, where the outcome is uncertain (IAS 37.32).
Contingent assets are assessed continually to ensure that developments are appropriately reflected
in the financial statements. If it has become virtually certain that an inflow of economic benefits will
arise, the asset and the related income are recognised in the financial statements of the period in
which the change occurs (IAS 37.35).
Where, as a result of past events, there is a contingent asset whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the enterprise
The inflow of economic The inflow of economic The inflow is not

benefits is virtually benefits is probable, but not probable.
certain. virtually certain.
The asset is not No asset is recognised No asset is recognised

contingent and is (par .31). Disclosure is (par .31). No disclosure
recognised as an asset required as a contingent is required (par .89).
(par .33). asset (par .89).
Work through the relevant example dealing with Contingent assets in GRIPPING
GAAP.
EXAMPLE 2
Fun-in-the-Sun Ltd is an exclusive holiday resort situated on the KwaZulu-Natal North Coast. On
17 January 20.12 Fun-in-the-Sun Ltd instituted a claim of R100 000 against Holidays Galore Ltd.
They gained unauthorised access to Fun-in-the-Sun Ltd's database of holidaymakers to promote
their own resorts. At year-end on 29 February 20.12 the court case is in progress and the lawyers of
Fun-in-the-Sun Ltd are of the opinion that the claim will probably succeed, but they are not virtually
certain.
REQUIRED
Disclose the above-mentioned in the notes to the annual financial statements of
Fun-in-the-Sun Ltd for the year ended 29 February 20.12 according to the
requirements of IAS 37, Provisions, contingent liabilities and contingent assets.
89
SOLUTION 2
FUN-IN-THE-SUN LTD
1. Contingent asset
A claim was instituted against Holidays Galore Ltd for gaining unauthorised access to Fun-in-the-
Sun Ltd's database of holidaymakers for promoting their own resorts. According to the company's
legal advisors it is probable that the claim will be successful, but the realisation of income is not
virtually certain. If the claim were to succeed, Fun-in-the-Sun Ltd would receive R100 000 before
tax.
8.5 Measurement
8.5.1 Best estimate
The amount recognised as a provision must be the best estimate of the expenditure required to settle
the present obligation at the end of the reporting date (IAS 37.36).
It will often be impossible or prohibitively expensive to settle or transfer an obligation at the reporting
date. However, the estimate of the amount that an entity would rationally pay to settle or transfer the
obligation gives the best estimate of the expenditure required to settle the present obligation at the
reporting date (IAS 37.37).
The estimate of outcome and financial effect are determined by the judgement of the management
of the entity, supplemented by experience of similar transactions and, in some cases, reports from
independent experts. The evidence considered includes any additional evidence provided by events
after the reporting period (IAS 37.38).
Risks and uncertainties surrounding the amount to be recognised as a provision must be taken into
account and are dealt with by various means according to the circumstances. For example:
(a) Where the provision being measured involves a large population of items, the obligation is
estimated by weighting all possible outcomes by their associated probabilities. The name for
this statistical method of estimation is "expected value" (IAS 37.39).
(b) Where a single obligation is being measured, the individual most likely outcome may be the
best estimate of the liability. However, even in such a case, the entity considers other possible
outcomes. For example, if an entity has to rectify a serious fault in a major plant that it has
constructed for a customer, the individual most likely outcome may be for the repair to succeed
at the first attempt at a cost of R1 000, but a provision for a larger amount is made if there is a
significant chance that further attempts will be necessary (IAS 37.40).
8.5.2 Risks and uncertainties

The risks and uncertainties that inevitably surround many events and circumstances must be taken
into account in reaching the best estimate of a provision (IAS 37.42).
Risk therefore describes variability of outcome. A risk adjustment may increase the amount at which
the liability is measured. Caution is needed in making judgements under conditions of uncertainty,
so that income or assets are not overstated, and expenses or liabilities are not understated.
However, uncertainty does not justify the creation of excessive provisions or a deliberate
overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are
estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is
realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty, with
the consequent overstatement of a provision (IAS 37.43).
The provision is measured before tax, as the tax consequences of the provision, and changes in it
are dealt with in the Statement on Income Taxes (IAS 37.41). The deductibility of the provision for
90
FAC3761/105
income tax purposes is determined by the requirements of section 11(a) of the Income Tax Act, No.
58 of 1962, namely that it should constitute a cost/expense actually incurred during the year.
8.5.3 Present value

Where the effect of the time value of money is material, the amount of a provision must be the
present value of the expenditure expected to be required to settle the obligation (IAS 37.45). The
effect of time value of money is greater where cash outflows of the same amount arise later.
Provisions are therefore discounted, where the effect is material (IAS 37.46).
The discount rate or rates should be a pre-tax rate or rates that reflects or reflect current market
assessments of the time value of money and the risks specific to the liability. The discount rate or
rates must not reflect risks for which future cash flow estimates have been adjusted (IAS 37.47).
EXAMPLE 3
Acid MineWater Ltd is a large mining company that operates in South Africa and other parts of Africa.
The increased importance of nature conservation in South Africa has made the company conscious
of costs to be incurred to preserve the areas in which the company operates.
Legislation stipulates that a mining company must repair all damage caused by their operations to
the environment at their own cost as soon as mining activities have ceased.
It was determined that damage has been caused evenly over the period of the mines activity.
Acid MineWater Ltd is currently in the process of commissioning a new mine close to the Benoni
Lake. The total damage to the surrounding area was reliably estimated during commencement of
activities at a future amount of R100 000. The mining activities commenced on 1 January 20.11 and
the estimated date when activities will cease is 31 December 20.14.
The market-related interest rate for calculation purposes is 12%.
The effect of the time value of money is seen as material for the financial statements of the company.
REQUIRED
Disclose the above information in the relevant note to the financial statements
of Acid MineWater Ltd for the year ended 31 December 20.12 according to the
requirements of IAS 37.
Ignore accounting policy notes.
SOLUTION 3
ACID MINEWATER LTD
1. Provision for environmental repair costs

20.12 20.11
R R
Carrying amount at beginning of year 71 1781 –
–
Initial recognition 63 552¹
Increase in provision due to time value of money 8 5414 7 6262
Carrying amount at end of the year 79 7193 71 1781
The provision is related to future environmental repair costs payable with the ceasing of mining
activities at the Benoni Lake Mine. The mining activities will in all probability cease on
31 December 20.14. The future expense is estimated on the best available information at the end of
the financial year.
91
There are certain uncertainties regarding the estimation of the rehabilitation costs as certain
information only becomes available when mining operations start. (These uncertainties mainly
comprise of assumptions.)
1.
(100 000 x 1/(1.12)3) = R71 178; (100 000 x 1/(1.12)4) = R63 552 (refer to lecturer’s comment)
2.
(100 000 x 1/(1.12)3) – (100 000 x 1/(1.12)4) or 71 178 – 63 552
3.
(100 000 x 1/(1.12)2) = R79 719 (refer to lecturer’s comment)
4.
(100 000 x 1/(1.12)2) – (100 000 x 1/(1.12)3) or 79 719 – 71 178
IAS 37.45 states that if the effect of discounting is significant, the provision
must be measured at the present value of the expected future outflow of
resources. This applies to the liabilities that have an effect over the long term,
as often occurs in the case of environmental costs, for example rehabilitation
of disturbed land in the mining industry. The discount rate and the cash flows
must both be expressed in either nominal terms (including the effect of inflation)
or in real terms (excluding the effect of inflation) and on a before-tax basis.
When discounting is used in the measurement of a provision, the carrying
amount will increase on an annual basis over time. The debit entry as a result
of the increase in provision is recognised as finance costs in the profit or loss
section of the statement of profit or loss and other comprehensive income. The
following formulas are used for calculations:
Formulas for the calculation of time value of money
1. Future value
= Original amount x (1 + interest rate per period)Number of periods
OR
= PV x (1 + i)n
2. Present value
= FV x (1 + i)–n
Formulas for the calculation of time value of money (continued)
3. When using a financial calculator (a Hewlett Packard 10BII financial

calculator was used for the following calculations)
Calculation 1 20.11 20.11
Future value (FV) R100 000 R100 000

Periods (N) 3 4
P/YR 1 payment per year 1 payment per year
Interest rate (I) 12% 12%
Payment (PMT) R0 R0
Comp present value (PV) R71 178 R63 552
Calculation 3 20.12
Future Value (FV) R100 000

Periods (N) 2
P/YR 1 payment per year
Interest rate (I) 12%
Payment (PMT) R0
Comp present value (PV) R79 719
92
FAC3761/105
Work through the relevant examples dealing with Provisions and the time value
of money and Measurement of a provision using expected values in GRIPPING
GAAP.
8.5.4 Future events

Future events that may affect the amount required to settle an obligation must be reflected in the
amount of a provision where there is sufficient objective evidence that they will occur (IAS 37.48).
For example, an entity may believe that the cost of cleaning up a site at the end of its life will be
reduced by future changes in technology. Thus, it is appropriate to include, for example expected
cost reductions associated with increased experience in applying existing technology or the expected
cost of applying existing technology to a larger or more complex clean-up operation that has been
carried out previously. However, an entity does not anticipate the development of a completely new
technology for cleaning up unless it is supported by sufficient objective evidence (IAS 37.49).
The effect of possible new legislation is taken into consideration in measuring an existing obligation
when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The
variety of circumstances that arise in practice makes it impossible to specify a single event that will
provide sufficient objective evidence in every case. In many cases, sufficient objective evidence will
not exist until the new legislation is enacted (IAS 37.50).
8.5.5 Expected disposal of assets

Gains from the expected disposal of assets are not taken into account in measuring a provision
(IAS 37.51).
Gains on the expected disposal of assets are not taken into account in measuring a provision, even
if the expected disposal is linked closely to the event giving rise to the provision. Instead, an entity
recognises gains on expected disposals of assets at the time specified by the statement of
International Financial Reporting Standards dealing with the assets concerned (IAS 37.52).
8.5.6 Reimbursements
Where some or all of the expenditure required to settle a provision is expected to be reimbursed by
another party, the reimbursement is recognised when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the obligation. The reimbursement is treated as a
separate asset. The amount recognised for the reimbursement may not exceed the amount of the
provision (IAS 37.53).
In the statement of profit or loss and other comprehensive income, the expense relating to a provision
may be presented net of the amount recognised for a reimbursement (IAS 37.54).
An entity may be able to look to another party to pay part or all of the expenditure required in
settlement of the provision, for example insurance contracts and suppliers' warranties. The other
party may either reimburse amounts paid by the entity or pay the amounts directly (IAS 37.55).
In most cases, the entity will be liable for full amount in question so that the entity would have to
settle the full amount if the third party failed to pay for any reason. In this situation, a provision is
recognised for the full amount of the liability, and a separate asset for the expected reimbursement
is recognised when it is virtually certain that reimbursement will be received if the entity settles the
liability (IAS 37.56).
An obligation for which an entity is jointly and severally liable is a contingent liability to the extent that
it is expected that the obligation will be settled by the other parties (IAS 37.58).
93
Some or all of the expenditure required to settle a provision is expected to be reimbursed by
another party.
The entity has no The obligation for the amount The obligation for the
obligation for part of the expected to be reimbursed amount expected to be
expenditure to be remains with the entity and it reimbursed remains with
reimbursed by the other is virtually certain that the entity and the
party. reimbursement will be reimbursement is not
received if the entity settles virtually certain if the
the provision. entity settles the
provision.
The entity has no liability The reimbursement is The expected

for the amount to be recognised as a separate reimbursement is not
reimbursed (par .57). asset in the statement of recognised as an asset
financial position and may be (par .53).
offset against the expense in
the statement of profit or loss
and other comprehensive
income. The amount
recognised for the expected
reimbursement does not
exceed the liability (par .53
and .54).
No disclosure is The reimbursement is The expected

required. disclosed together with the reimbursement is
amount recognised for the disclosed (par .85(c)).
reimbursement (par .85(c)).
8.5.7 Changes in and uses of provisions

Provisions must be reviewed at each reporting date and must be adjusted to reflect the current best
estimate. If it is no longer probable that an outflow of resources embodying economic benefits will
be required to settle the obligation, the provision should be reversed (IAS 37.59). The reason for the
reversal being that a provision must be used only for expenditures for which the provision was
originally recognised (IAS 37.61).
Where discounting is used, the carrying amount of a provision increases in each period to reflect the
passage of time. This increase is recognised as a borrowing cost (IAS 37.60).
8.6 APPLICATION OF THE RECOGNITION AND MEASUREMENT

RULES
8.6.1 Future operating losses
Provisions must not be recognised for future operating losses (IAS 37.63).
Future operating losses do not meet the definition of a liability and the general recognition criteria
set out for provisions therefore are not a present obligation (IAS 37.65).
8.6.2 Onerous contracts

If an entity has a contract that is onerous, the present obligation under the contract must be
recognised and measured as a provision (IAS 37.66).
94
FAC3761/105
Some contracts establish both the rights and obligations for each of the contracting parties. Where
events make such a contract onerous, the contract falls within the scope of the statement and a
liability exists which is recognised (IAS 37.67).
The statement defines an onerous contract as a contract in which the unavoidable costs of meeting
the obligations under the contract exceed the economic benefits expected to be received under it.
The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which
is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it
(IAS 37.68).
Before a separate provision for an onerous contract is established, an entity recognises any
impairment loss that has occurred on assets dedicated to that contract (refer to IAS 36, Impairment
of assets) (IAS 37.69).
Work through the relevant example dealing with onerous lease contracts in
GRIPPING GAAP.
8.6.3 Staff retraining

A company has to incur training cost for its financial personnel after government has announced
changes to the Income Tax Act. These changes were significant and led to the necessity of training
the personnel in these new requirements to ensure continued compliance with the Income Tax Act.
At the reporting date, no staff training had taken place.
There are two reasons why provisions will not be provided:

(a) There is not a present obligation because of a past event. The changes to the Income Tax Act
represent the past event but the company has no fixed obligation to retrain the staff.
(b) The retraining will lead to an outflow of economic resources in the future but at the reporting
date, the obligating event has not taken place.
8.6.4 Warranties
A company sells its products with a warranty attached to it. The warranty undertakes to make good,
by repair or replacement, manufacturing defects that become apparent within years from the date of
sale. The warranty is an assurance type warranty. From previous years’ experience, it is probable
that approximately 7% of the sales will be returned with a claim against the warranty.
The company provides a provision for the following reasons:
(a) There is a present obligation because of a past event. The obligation is as a result of the sale of
the products with a warranty. A defect product leads to a legal obligation.
(b) The claims under the warranty will result in an outflow of resources embodying economic
benefits in settlement.
(c) A reasonable estimate of the expenditure required to settle the present obligation at the reporting
date could be made. Previous experience will be used as a guideline for the estimate.
8.6.5 Constructive obligation

A company mines coal in an opencast mine. There is no environmental policy on the rehabilitation
of a matured opencast mine. However, the entity has a widely published environmental policy in
which it undertakes to clean up and rehabilitate the mine. The company has a history of honouring
this published policy.
A provision will be provided because of the following:

(a) There is a constructive obligation to rehabilitate the land on which the company has mined. The
past event is the mining of coal on the land. The constructive obligation has been created by the
95
expectation created with the public with the widely published environmental policy of the
company to rehabilitate land.
(b) It is probable that an outflow of resources embodying economic benefits will result from
rehabilitating the land.
(c) The company would be able to estimate the costs involved in rehabilitating the land.
8.6.6 Leave pay provision

The employees of a company are entitled to twenty working days leave per annum. The policy is
that an employee must take at least ten days leave per annum. The unused leave will be
accumulated and paid out on retirement or resignation.
A provision will be provided because of the following:

(a) There is a present obligation as a result of a past event. The past event is the fact that the
employee's leave is accumulating while working for a company. The present obligation exists
because the employee is entitled to the accumulated leave being paid out upon resignation or
retirement.
(b) There is an outflow of resources embodying economic benefits when paying the accumulated
leave to the employee.
(c) It is possible to reliably estimate the amount of unpaid leave pay that the company will be liable
for by referring to the accumulated leave days per employee and the rate of pay of an employee.
8.6.7 Possible legal liability

A hotel-owning company has had legal proceeding instituted against it. A guest has slipped on a wet
floor in one of its hotels and injured his back. The guest is seeking compensation from the hotel for
his hospital bills and discomfort to the amount of R500 000. Up to the date of approval of the financial
statements for the year ended 31 December 20.11, the company's lawyer advised that it is probable
that the entity would not be found liable. However, when the company prepared the financial
statements for the year ended 31 December 20.12, the lawyers advised that due to new evidence in
the case, it is probable that the company would be found liable.
At 31 December 20.11
No provision will be provided because on the basis of the evidence available it appears that there is
no present obligation as a result of a past event. The past event is the guest falling and injuring his
back.
These are the reasons why a contingent liability will be disclosed:
(a) A possible obligation arose from a past event and whose existence will be confirmed by the
outcome of future events not wholly within the control of the entity.
(b) The amount of the possible obligation can be measured sufficiently.
(c) The probability of an outflow is not remote.
At 31 December 20.12
These are the reasons why a provision is provided:
(a) There is a present obligation because of a past event.

(b) It is possible that an outflow of resources embodying economic benefits in settlement exists.
(c) A reliable estimate of the amount to settle the obligation is available.
Work through IAS 37’s appendix for additional examples.
96
FAC3761/105
8.7 DISCLOSURE
8.7.1 Provisions
Provisions are disclosed as a separate line item on the face of the statement of financial position.
The following must be disclosed for each category of provisions in the notes to the financial
statements:
 A brief description of the nature of the obligation and the expected timing of any resulting outflows
of economic benefits (IAS 37.85).
 An indication of the uncertainties about the amount or timing of these outflows. Where necessary
to provide adequate information, an entity must disclose the major assumptions made concerning
future events, as addressed in par .48 (IAS 37.85).
 The amount of any expected reimbursement, stating the amount of any asset that has been
recognised for that expected reimbursement (IAS 37.85).
 The carrying amount at the beginning and the end of the period (IAS 37.84).
 Movements in each category of provisions must be reflected separately, with an indication of
 additional provisions made in the period and increases to existing provisions;
 amounts incurred (utilised) during the period;
 unused amounts reversed during the period; and
 the increase during the period in the discounted amount arising from the passage of time and
the effect of any change in the discount rate (IAS 37.84).
8.7.2 Contingent liability

The following disclosure requirements apply in the case of contingent liabilities:
For each class of contingent liability, a brief description of its nature is given, as well as, where
practicable
 an estimate of its financial effect;
 an indication of the uncertainties relating to the amount or timing of any outflow; and
 the possibility of any reimbursement (IAS 37.86).
 Where a provision and a contingent liability arise from the same set of circumstances, the
disclosure for the contingent liability is cross-referenced to the disclosure for the provision to
illustrate the relationship clearly (IAS 37.88).
 Where the disclosure of the above information does not take place as it would be impracticable
and is not disclosed for this reason, the fact must be stated (IAS 37.91).
 The above disclosure requirements do not apply when the possibility of any outflow of resources
is remote – then no disclosure is required.
 No specific disclosure is required in cases where the disclosure of information, as set out above,
can prejudice the position of the entity in negotiations with other parties in respect of the matter
to which the contingency relates; however, IAS 37.92 does indicate that these circumstances are
extremely rare. The general nature of the circumstances and the fact that the information is not
disclosed, as well as the reason why it is not disclosed, should be stated. See IAS 37,
Appendix D, example 3, for an illustration.
EXAMPLE 4
1. On 31 January 20.12, the marketing director of Orange Ltd informed management of the
possibility that the company’s new logo which appears on all its aircraft would have to be
changed after complaints had been received from its main competitor, Mango Ltd. The
competitor claimed that the new logo was similar to its own logo and it started legal proceedings
against Orange Ltd. However, on 29 February 20.12, the legal advisors of Orange Ltd are of
the opinion that it is not probable that Mango Ltd will be successful with their legal claim against
the company.
97
2. After a review of the company's insurance policy covering possible claims from passengers for
damaged or lost baggage and flight delays, the financial director of Orange Ltd recommended
that the company cancel their current insurance policy with Quicksure Ltd on 1 March 20.10
and self-insure in future. Based on previous years' records, the financial director estimated that
these claims from passengers amounted to approximately R240 000 a year. For the year ended
28 February 20.11, 25 claims amounting to R185 000 in total were submitted by passengers.
On 28 February 20.11, it was probable that these claims of R185 000 would be successful. On
15 April 20.11, the court ruled that an amount of R178 000 should be paid for all the claims
submitted during the previous financial year, which was subsequently paid out. Claims
amounting to R260 000 in total were submitted by passengers during the year ended
29 February 20.12. The final outcome of these claims will be determined during the court
hearings scheduled for April 20.12. On 29 February 20.12, Orange Ltd’s legal advisors advised
the company that the possibility is remote that the company will be found liable for R65 000 of
the claims submitted during the current financial year due to incomplete records.
REQUIRED
1. Prepare the journal entries for the above-mentioned transactions in the
books of Orange Ltd for the year ended 29 February 20.12.
2. Disclose the above transactions in the notes to the annual financial
statements of Orange Ltd for the year ended 29 February 20.12 according
to the requirements of IAS 37, Provisions, contingent liabilities and
contingent assets.
SOLUTION 4
1. Journals
Debit Credit
R R
Provision for claims (SFP) 178 000
Bank (SFP) 178 000
Payment of claims i.r.o. 20.11
Provision for claims (SFP) (185 000 – 178 000) 7 000
Claims (P/L) 7 000
Reversal of unused provision of claims i.r.o. 20.11
Claims (P/L) (260 000 – 65 000) 195 000
Provisions for claims (SFP) 195 000
Recording of provisions for claims i.r.o. 20.12
2. Disclosure
ORANGE LTD
On 31 January 20.12, the marketing director informed management that the new logo of the
company appearing on all its aircraft would have to change after complaints had been received from
its main competitor, Mango Ltd and they had started legal proceedings against the company. It
claimed that the new logo was very similar to its own logo. On 29 February 20.12, the legal advisors
of Orange Ltd are of the opinion that it is not probable that Mango Ltd will win their legal action.
98
FAC3761/105
2. Provision for claims

20.12 20.11
R R
Carrying amount at beginning of year 185 000 –
Provision used during the year (178 000) –
Unused provision reversed during the year (185 000 – 178 000) (7 000) –
Provision created for the year (260 000 – 65 000) 195 000 185 000
Carrying amount at the end of the year 195 000 185 000
After a review of the company's insurance policy covering possible claims from passengers for
damaged or lost baggage and flight delays, the financial director of Orange Ltd recommended that
the company cancel their current insurance policy with Quicksure Ltd on 1 March 20.10 and self-
insure in future. The final outcome of claims submitted by passengers during the year ended
29 February 20.12 will be determined during the court hearings scheduled for April 20.12.
8.7.3 Contingent asset

Should an inflow of economic benefits be probable, the following disclosure requirements apply to
contingent assets:
 A brief description of the nature of the contingent asset at the end of the reporting period
(IAS 37.89).
 An estimate of the financial effect of the contingent asset, measured according to the same
principles that apply to provisions and contingent liabilities, provided it is practicable to obtain
this information (IAS 37.89).
 Where the disclosure of the above information does not take place, as it would be impracticable,
and is not disclosed for this reason, the fact must be disclosed (IAS 37.91).
 No specific disclosure is required in cases where the disclosure of information, as set out above,
can prejudice the position of the entity in negotiations with other parties in respect of the matter
to which the contingency relates. However, IAS 37.92 does indicate that these circumstances
are extremely rare. The general nature of the circumstances and the fact that the information is
not disclosed, as well as the reason why it is not disclosed, must be stated.
EXAMPLE 5
Herselman Ltd is a building contractor of shopping centres in Gauteng. During May 20.12, the roof
of a shopping centre in Sandton, erected by Herselman Ltd, collapsed and five people were injured.
After numerous investigations it was determined that the cause of the accident was the inferior
building materials used by Herselman Ltd. The injured started legal proceedings against Herselman
Ltd seeking damages of R120 000, but the company disputed the claim. At year end, on
31 December 20.12 the company's lawyers advised the directors of Herselman Ltd that it was
probable that the company would be found liable. As a result of this, Herselman Ltd instituted a claim
of R100 000 against Cemento Ltd, the supplier of the inferior building materials used for the shopping
centre. On 31 December 20.12, Herselman Ltd's legal advisors are of the opinion that the claim
against Cemento Ltd will probably succeed but they are not virtually certain.
As a result of the negative publicity after the accident at the shopping centre in Sandton, the directors
of Herselman Ltd estimated that the operating loss for the next financial year would probably amount
to R240 000. At a board meeting held on 30 November 20.12, the board of directors decided to take
precautions and reduce its workforce by twenty-five employees. Employees were notified and
severance packages amounting to a total of R225 000 would be paid to these redundant employees
according to their service contracts.
On 30 September 20.12, Herselman Ltd decided to replace the old computer it currently leases in
terms of an operating lease agreement from Machines Galore with the latest model. However, the
current lease agreement expires on 31 March 20.13 only and cannot be cancelled or subleased to
another user. The monthly lease instalment of this old computer amounts to R12 250. The operating
lease instalments of this old computer were up to date until 31 December 20.12.
99
During 20.11, Herselman Ltd reviewed its insurance arrangements for its liability for accidents
sustained by its construction workers on site and decided to cancel its policy with an insurance broker
and self-insure from 1 July 20.11. Based on experience, the directors estimated that the costs of
these accidents amount to approximately R120 000 per annum. Four claims amounting to R65 000
in total were submitted during 20.11 by construction workers being injured on site. On
31 December 20.11, it was probable that these claims of R65 000 would be successful. On
14 January 20.12 the court ruled that an amount of R54 000 should be paid for these claims
submitted during 20.11.
Three claims amounting to R25 000 in total were submitted during 20.12 by construction workers
being injured on site. The outcome of these claims would be decided during the court hearing in
January 20.13. At year-end on 31 December 20.12, Herselman Ltd’s legal advisors advised the
company that it is probable that the company will not be found liable for the claims submitted during
the current financial year.
On 1 June 20.12 Herselman Ltd purchased an imported bulldozer from Germany. Owing to the
nature of the recent construction contracts it is being used for, the company expects to replace
component parts of the bulldozer at regular intervals. The directors estimated that a provision of
R5 000 per month to cover the costs of replacing the component parts of the bulldozer would be
adequate. No replacements of the component parts for the bulldozer were required for the current
financial year.
On 1 November 20.12 Herselman Ltd gave a guarantee to Loanshark Bank for a personal overdraft
facility of R500 000 for the managing director, Mr Liberace. On 31 December 20.12 the financial
position of the managing director is considered doubtful as he has filed for protection from his
creditors.
REQUIRED
Disclose the above-mentioned information relating to provisions, contingent
liabilities and contingent assets only in the notes to the annual financial
statements of Herselman Ltd for the year ended 31 December 20.12. Your
answer must comply with the requirements of International Financial
Ignore any tax implications.
SOLUTION 5
HERSELMAN LTD
1. Contingent asset
A claim for R100 000 has been instituted against a supplier, Cemento Ltd, for inferior building
material it delivered. This was the cause of a roof of a shopping centre in Sandton, erected by
Herselman Ltd, collapsing during May 20.12, injuring five people. The claim receivable by Herselman
Ltd will be taxable. On 31 December 20.12 Herselman Ltd’s legal advisors are of the opinion that
the claim against Cemento Ltd will probably succeed, but they are not virtually certain.
2. Provisions
2.1 Provision for legal claims
R
Carrying amount at 1 January 20.12 –
Provision created during the year 120 000
100
FAC3761/105
During May 20.12 the roof of a shopping centre in Sandton, erected by Herselman Ltd, collapsed
because Herselman Ltd used building materials of an inferior quality and five people were injured.
The injured started legal proceedings against Herselman Ltd seeking damages, but the company
disputes the claim. The company's lawyers advised the directors of Herselman Ltd that it is probable
that the company will be found liable.
2.2 Provision for severance packages

R
At a board meeting held on 30 November 20.12, the board of directors decided to take precautions
and to reduce its workforce by 25 employees. Severance packages will be paid to the redundant
employees according to their service contracts.
2.3 Provision for onerous contract

R
Provision created during the year (3 x R12 250) 36 750
Herselman Ltd decided to replace the old computer it currently leases from Machines Galore in terms
of an operating lease agreement with the latest model. However, the current lease agreement only
expires on 31 March 20.13 and cannot be cancelled or subleased to another user.
2.4 Provision for claims of employees injured on site

R
Carrying amount at 1 January 20.12 65 000
Amount used during the year (54 000)
Unused amounts reversed during the year (11 000)
Carrying amount at 31 December 20.12 –
During 20.11, Herselman Ltd decided to cancel its insurance policy for its possible liability in the case
of accidents sustained by its employees on site and to self-insure from 1 July 20.11.
2.5 Provision for guarantee given

R
Herselman Ltd gave a guarantee to Loanshark Bank for a personal loan of R500 000 of the managing
director, Mr Liberace, on 1 November 20.12. At year end, the financial position of the managing
director is considered doubtful as he has filed for protection from his creditors.
3 Contingent liability
Three claims amounting to R25 000 in total were submitted during the year by construction workers
being injured on site. The outcome would be decided during the court hearing in January 20.13. The
legal advisors of Herselman Ltd advised the company that it was probable that the company would
not be found liable.
No provision should be made for the future operating loss of R240 000 and
future replacement costs of component parts of R5 000 per month, as a present
obligation does not exist at year end.
101
8.8 SUMMARY – IAS 37
Liabilities under different levels of uncertainty may be summarised as follows:
Liabilities
Provisions Contingent Contingent

liabilities liabilities
 Present obligation  Present obligation  Possible obligation

 as a result of past  as a result of past events  As a result of past
events events
 the settlement of which is
 the settlement of which expected to result in an  the existence of which
is expected to result in outflow from the entity of is to be confirmed by
an outflow from the resources embodying the occurrence or non-
entity of resources economic benefits occurrence of uncertain
embodying economic future event/s that are
benefits  the liability may not be
not wholly within the
recognised where the
control of the entity
 where the amount or following recognition are
timing of payments is not met:
uncertain
o the amount is not
measured reliably or
o it is not probable that the
future outflow of
economic benefits is
needed to settle the
obligation
8.9 TAX IMPLICATIONS

This only gives an overview of the most important aspects of tax related to provisions, contingent
liabilities and contingent assets.
It is only provisions that will have any tax implications, as it will result in an expense in the statement
of profit or loss and other comprehensive income and a credit balance in the statement of financial
position.
Contingent liabilities and contingent assets will only be disclosed in a note to the annual financial
statements and will not result in any accounting entries; therefore, it will not have any tax
implications.
For tax purposes, an expense is not deductible until the expense is actually paid or incurred. In terms
of section 23(e) of the Income Tax Act a taxpayer may not claim a deduction when determining
taxable income if this deduction originates from a reserve transfer or any other capitalisation of
income (raising a provision). This section is in line with the general deduction formula in section
11(a), which determines that expenses can only be deducted for tax purposes when actually
incurred, unless the Income Tax Act provides otherwise.
102
FAC3761/105
EXAMPLE 6
Dot Ltd has raised a provision of R100 000 for warranty claims during the current financial year. The
warranty is an assurance type of warranty. For accounting purposes, the following journal entry is
processed:
Debit Credit
R R
Warranty claims (P/L) 100 000
Provision for warranty claims (SFP) 100 000
Calculation of deferred tax

Carrying Tax Taxable/ Deferred
amount base (deductible) tax asset /
temporary (liability)
difference @ 28%
R R R R
Provision for warranty claims 100 000 –* (100 000) 28 000
* The tax base of the provision is the carrying amount less the amount that will be deductible for tax
purposes in future. Owing to the deductibility of actual expenses incurred, the tax base will be nil
because the claim will only be deductible for tax purposes when it is settled.
EXAMPLE 7
Cow Ltd is a manufacturer and distributor of milk powder. During the year the company’s competitor
introduced a new formula of milk powder with an enhanced nutritional value to the market. In an
attempt to retain its market share the company decided to also improve and change its milk powder
formula. This change resulted in major restructuring of the company’s operations. The company’s
business operations were relocated to Gauteng and the different distribution outlets were closed in
order to centralise the distribution. The proposed restructuring plan was announced in the media
during the current year.
At year-end on 30 September 20.1, the directors of Cow Ltd estimated that the future operating
losses to be incurred during the relocation of the business operations will amount to R250 000. The
dismantling costs of the equipment at the different distribution outlets are estimated to be R75 000.
The dismantling will be done in October 20.1.
The financial director of Cow Ltd estimated that an amount of R50 000 will be spent in the following
year for the continuous repair and maintenance of the manufacturing machines due to the fact that
the machines are currently operating at their full capacity.
On 25 September 20.1 Moo Ltd, a competitor, instituted a claim of R300 000 against Cow Ltd for a
possible infringement of patent rights on the new formula of milk powder. The legal advisors of
Cow Ltd are of the opinion that the claim will probably be unsuccessful. The directors of Cow Ltd
estimated that the legal costs to defend the claim will amount to R35 000.
Cow Ltd has a policy to refund purchases to dissatisfied customers within two months from the date
of the sale, even though it is under no legal obligation to do so. Its refund policy is generally known
and advertised on the packaging of the milk powder. Based on past experience a provision for
refunds amounting to R3 000 was made in the annual financial statements of Cow Ltd for the year
ended 30 September 20.0. During the current year R13 000 was refunded to dissatisfied customers
of which R1 000 related to sales until 30 September 20.0. The financial director estimated, based on
the sales figures and past experience, that R1 800 will most probably be refunded to customers in
the first two months of the next financial year relating to sales for the year ended 30 September 20.1.
103
On 1 September 20.1 the shareholders of Cow Ltd decided to terminate the service contract of the
managing director due to a conflict of interest. The severance package of the managing director
according to his service contract amounted to R450 000. The managing director disputes this amount
and considers to take legal action to claim an amount of R600 000. On 30 September 20.1, no cash
payment has been made to the managing director yet.
REQUIRED
Disclose the above information in the statement of financial position and notes
to the statement of financial position of Cow Ltd for the year ended
30 September 20.1. Your answer must comply with the requirements of only
IAS 37, Provisions, contingent liabilities and contingent assets.
SOLUTION 7
COW LTD
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.1
20.1
Note R
EQUITY AND LIABILITIES
Current liabilities
Provisions (75 000 + 1 800 + 450 000) 1 526 800
COW LTD
NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.1
1. Provisions
1.1 Provision for the dismantling of the equipment due to the closure of the different
distribution outlets.
R
Carrying amount 30 September 20.0 –
Provisions made during the year 75 000
Carrying amount 30 September 20.1 75 000
Provision has been made for the dismantling of the equipment due to the closure of the different
distribution outlets which are expected to be incurred during the first month of the new financial year.
1.2 Provision for refunds

R
Unused amounts reversed during the year/(transferred to income) (2 000)
Additional provision made during the year 1 800
Provision has been made for the refund of purchases to dissatisfied customers within 2 months of
the date of sale. It is expected to be incurred within the first two months of the financial year.
1.3 Provision for severance package

R
Carrying amount 30 September 20.0 -
Provision made during the year 450 000
104
FAC3761/105
Provision has been made for the severance package payable to the managing director whose
service contract was terminated on 1 September 20.1 due to a conflict of interest.
A claim of R300 000 for the infringement of patent rights on the new formula of milk powder was
instituted against the company during the year. The company’s legal advisors are of the opinion that
the claim will probably be unsuccessful.
COMMENT:
1. Future operating losses: IAS 37 clearly states that provisions should not
be raised for future operating losses. The recognition criteria of a provision
require a legal or constructive obligation as a result of a past event leaving
the company with no realistic alternative. In this case, future operating
losses, which are outflows of economic benefits, should not be raised, as
the event creating the obligation has not occurred.
2. Continuous repair and maintenance costs: There is no legal obligation
to incur future repairs and maintenance costs on manufacturing machines.
In terms of IAS 37, a provision should only be raised for a liability arising
from a past event. A provision in this case should not be raised, as these
costs relate to repairs and maintenance that will be incurred in the future.
In some circumstances an enterprise may be under a constructive or legal
obligation to maintain its assets to a specified level of performance to be
able to operate them. Even in these circumstances the accounting
treatment is not to recognise a provision. Any commitments to make good
the asset will be capitalised when the expenditure has been incurred and
depreciated over the useful life of the asset.
The provisions in the question will be journalised as follows for the year ended 30 September 20.1
(for explanation purposes only, but you should be able to prepare them):
Debit Credit
R R
(1) Dismantling costs (P/L)* 75 000
Provision for dismantling of equipment (SFP)* 75 000
Being provision made for dismantling of equipment due to closure of
distribution outlets.
(2) Severance package costs (P/L)* 450 000
Provision for severance package (SFP)* 450 000
Being provision made for severance package costs payable to the
managing director whose contract terminated on 1 September 20.1
(3) Refunds (13 000 – 1 000) (P/L)* 12 000
Provision for refunds (SFP)* 1 000
Bank 13 000
Being refunds paid in respect of sales during the year ended
30 September 20.0 and 30 September 20.1
(4) Provision for refunds (SFP)* 2 000
Refunds (P/L)* 2 000
Being provision for refunds not used (reversed) transferred to income in
respect of sales made during the year ended 30 September 20.0
(5) Refunds (P/L)* 1 800
Provision for refunds (SFP)* 1 800
Being provision raised for possible refunds of sales during the year
ended 30 September 20.1
* SFP = Statement of financial position
P/L = Statement of profit or loss and other comprehensive income
105
EXAMPLE 8
INU Ltd is a retailer, supplier and manufacturer of various generic products and health machines.
These generic products and health machines are supplied mainly to the Gauteng Health Department
and various retail pharmacies in Gauteng. INU Ltd has experienced considerable growth over the
past few years and profits have increased considerably. INU Ltd’s financial statements for the year
ended 31 December 20.2 will be presented to the board of directors for authorization for issue on
20 March 20.3. The current year’s profit before tax before considering the following transactions (1)
to (3) amounted to R3 750 000.
The following transactions have not yet been recorded in the books of INU Ltd:
1. “Concentra”, a new product, which improves students' concentration by 50%, will be introduced
in March 20.3. The future production costs and marketing costs when introduced are estimated
at R450 000 and R750 000 respectively.
2. On 30 November 20.2 a client instituted a claim of R50 000 against INU Ltd after becoming
violent and seriously ill while using a calming herbal product. One of the ingredients of the product
is sage containing tujoon which is medically harmful for certain individuals. On 31 December 20.2
the legal advisors of the company indicated that the claim will probably be unsuccessful.
3. INU Ltd has a policy of selling all its health machines with a 30-day refund policy for dissatisfied
customers. Although it has no legal obligation to do so, its refund policy is generally known to
customers who buy the health machines. Based on past experiences, the financial director
estimated that R45 000 will most probably be refunded to customers in the first 30 days of the
20.3 financial year relating to sales for the year ended 31 December 20.2. During the financial
year ended 31 December 20.1 a refund provision of R40 000 was made. Actual refunds paid
during 20.2 relating to sales until 31 December 20.1 amounted to R35 000.
REQUIRED
PART A
For each item in information (1) to (3):
1. Prepare the general journal entry (if any) in the accounting records of INU
Ltd for the year ended 31 December 20.2. Your answer must comply with
the requirements of IAS 37, Provisions, contingent liabilities and contingent
assets.
2. Indicate next to each item the reason why the item has been recognised or
not recognised.
PART B
Disclose (1) to (3) in the notes to the annual financial statements of INU Ltd for
the year ended 31 December 20.2 according to the requirements of only
IAS 37, Provisions, contingent liabilities and contingent assets.

All amounts must be considered material.
SOLUTION 8
PART A
1. New product introduced – Concentra

1.1. No journal entry.
1.2. Provision for future costs should not be recognised as the general recognition criteria as set
out in terms of IAS 37.14 are not met, viz a present obligation at reporting date does not
exist. A contingent liability will also not be recognised as there is no past event.
106
FAC3761/105
2. Claim from customer

2.1. No journal entry.
2.2. A provision cannot be raised since the legal advisors have indicated that the claim will not
succeed. However, a contingent liability should be disclosed. A contingent liability is a
possible obligation that arises from past events and whose existence will be confirmed by
the occurrences or non-occurrence of one or more uncertain future events not wholly within
the control of the enterprise (IAS 37.10).
3. Refund policy
3.1. Journal entries:
Debit Credit
R R
Refund warranty costs (P/L) 45 000
Provision for refund warranty (SFP) 45 000
Recognise provision for refund.
Provision for refund warranty (SFP) 40 000
Refund warranty costs (P/L) 5 000
Bank (SFP) 35 000
Recognise refunds paid and reverse unused refund warranty
provision.
3.2. Since a constructive obligation exists, a provision can be made. A constructive obligation is
an obligation that is derived by an established pattern of past practices, published policies
or a sufficiently specific current statement; the enterprise has indicated to other parties that
it will accept certain responsibilities and as a result, the enterprise has created a valid
expectation on the part of those other parties that it will discharge those responsibilities.
(IAS 37.10)
PART B
DISCLOSURE
INU LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.2.
A claim of R50 000 was instituted against the company for selling a calming herbal product to a
customer which is medically harmful. The company’s legal advisors are of the opinion that the claim
will probably be unsuccessful.
2. Provision for refunds for health machines

R
Unused amounts reversed during the year/(transferred to income) (5 000)
Provision made during the year 45 000
Provision has been made for the refund of purchases to dissatisfied customers within 30 days of the
date of sale. It is expected to be incurred within 30 days of the next financial year.
No provision should be made for the future production costs and marketing
costs of R450 000 and R750 000 respectively, as a present obligation does not
exist at year end.
107
EXAMPLE 9
Maxmor Ltd is a television manufacturing company. At the beginning of the financial year ended
28 February 20.19 Maxmor Ltd started selling all its televisions with a refund policy. If the customer
is not satisfied, the television may be returned for a full refund. Sales for the year ended
28 February 20.19 amounted to R1 500 000.
REQUIRED
a) At year-end on 28 February 20.19 the company’s directors reliably estimated
that based on the current year’s returns and industry patterns 5% of the
television sets sold will be returned for a refund and raised a provision for
refunds amounting to R75 000 in the accounting records of Maxmor Ltd for
the year ended 28 February 20.19. Discuss, according to the requirements of
IAS 37, Provisions, contingent liabilities and contingent assets whether the
provision raised for refunds by the directors is correct.
b) At year-end on 28 February 20.19 assume that the company’s directors
cannot reliably estimate the possible returns and related refunds for television
sets with certainty. Discuss the accounting treatment in terms of IAS 37,
Provisions, contingent liabilities and contingent assets under these
circumstances.
SOLUTION 9
a) In order for a provision to be recognised, the definition and recognition criteria should be met.
Definition:
A provision is a liability of uncertain timing and amount.
Recognition criteria:
A provision must be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
The following issues will therefore be considered:

 Is there a present obligation?
Yes, Maxmor Ltd has a refund policy attached to the sales whereby the company is obligated
to refund customers who are unhappy with their purchases of television sets. This obligation
may either be:
 A legal obligation (i.e. written into the contract of sale); or
 A constructive obligation (i.e. through an established pattern of past practice of refunds).
 Does the obligation come from a past event?
Yes, since the sale of television sets is the event and it occurred from the beginning of the
year, the event is a past event.
 Is there expected to be an outflow of future economic benefits?
Yes, the refund policy means that if a customer is unhappy with his purchase of a television
set he may return it for a cash refund, which represents an outflow of future economic
benefits.
 Is the outflow of future economic benefits probable and reliably estimated?
Yes, the outflow of benefits is probable as it is based on the current years returns and industry
patterns. Five per cent (5%) of television sets will be returned and therefore the obligation
can be measured reliably as R75 000.
108
FAC3761/105
b) The same issues as above will be considered again for this part of the answer:
Since the outflow of future economic benefits cannot be measured reliably, all the recognition
criteria for a provision are not met and a provision cannot be raised. A contingent liability note
must, however, be disclosed in the notes to the annual financial statements for the year ended
28 February 20.19. For each class of contingent liability a brief description of its nature should
be given as well as where practicable:
 An estimate of its financial effect;

 An indication of the uncertainties relating to the amount or timing of any outflow and
 The possibility of any reimbursement.
The following question must be attempted independently and the solution may
be discussed with and obtained from your e-tutor.
Stones Ltd is a manufacturer and retailer of tyres.
1. After recent unrest amongst employees at the premises of Stones Ltd three employees of Stones
Ltd were dismissed. Subsequently, the trade union to which these employees belonged instituted
a claim of R1 000 000 against Stones Ltd for the unfair dismissal of these employees. At year-
end on 28 February 20.11 the lawyers of Stones Ltd indicated that the claim against them will
probably not succeed.
2. On 1 November 20.10 Stones Ltd cancelled the security services arrangement with Bond Ltd
and instituted a claim of R50 000 against Bond Ltd for failing to protect the premises and
warehouse of Stones Ltd (refer to 1 above). The court case is scheduled for 5 April 20.11.
According to the legal advisors of Stones Ltd there is sufficient evidence against Bond Ltd to
prove that they were negligent when they rendered their services and it is probable that Stones
Ltd will be successful with their claim.
3. Stones Ltd sells its tyres with a six-month warranty against all material defects, excluding normal
wear and tear. The six-month warranty cannot be purchased separately. The tyres returned will
then either be repaired or replaced free of charge for the customer. The provision for warranty
costs for the current year, which has already been recorded in the accounting records of Stones
Ltd, amounted to R220 000 and is based on the following assumptions:
 80% of the tyres sold will have no defects,
 15% of the tyres sold will have minor defects, and
 5% of the tyres sold will have major defects.
However, the recent quality control surveys conducted by Stones Ltd during the financial year
ended 28 February 20.11 showed that the tyres sold are actually returned as follows:
 90% of the tyres sold will have no defects,
 6% of the tyres sold will have minor defects, and
 4% of the tyres sold will have major defects.
Subsequently the directors decided at a recent board meeting that the warranty provision does
not give an appropriate presentation of the actual warranty costs incurred and that it should rather
be based on the results of the recent quality control surveys. According to recent quality control
surveys, if minor defects are detected in all tyres sold in the six months preceding year end,
repair costs will amount to R750 000 and if major defects are detected in all tyres sold in the six
months preceding year end, repair costs will amount to R1 500 000.
Actual warranty costs paid in respect of tyres sold with a material defect for the year ended
28 February 20.11 amounted to R140 000 (20.10: R105 000). Actual warranty costs and
reversals for warranty costs are debited against the provision for warranty costs and have already
109
been recorded in the accounting records of Stones Ltd. The balance of the provision for warranty
costs for the years ended 28 February 20.10 and 28 February 20.9 amounted to R160 000 and
R120 000 respectively.
REQUIRED
a) Prepare the necessary correcting journal entry for (3) above in the
accounting records of Stones Ltd for the year ended 28 February 20.11.
Journal narrations are not required.
All calculations must be done to the nearest rand.
b) Disclose (1), (2) and (3) above in the notes to the annual financial
statements of Stones Ltd for the year ended 28 February 20.11, according
to the requirements of only IAS 37, Provisions, contingent liabilities and
contingent assets.
Comparative figures are required.
No accounting policy notes are required.

After having worked through this learning unit, are you now able
to do the following?
1. Identify the purpose of IAS 37.
2. Define the definitions.
3. Differentiate between provisions and contingent liabilities.
4. Recognise and measure provisions.
5. Identify contingent liabilities and contingent assets.
6. Disclose provisions, contingent liabilities, and contingent
assets in the financial statements.
and can now focus on revising it for the test and exam.
If you answered “No” to any of the above criteria, revise the section concerned before commencing
with the revision of the study material.
©
Unisa
Ref: FAC3761_2022_TL_105_0_B.pdf
110

Fac3761 105 2022 240129 234357

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fac3761 105 2022 240129 234357

Uploaded by

Copyright:

Available Formats

FAC3761/105/0/2022

Tutorial Letter 105/0/2022

International Financial Accounting

Department of Financial Accounting

 Learning unit 6 – Impairment of assets (IAS 36)

LECTURERS AND CONTACT DETAILS

SAICA’S PRINCIPLES OF EXAMINATION LEVELS

1. Issues at core level

2. Issues at awareness level

SAICA’S PRINCIPLES OF EXAMINATION

Impairment Reversal of impairments

Tax implications Disclosure

Questions and Activities

6.1 WHAT IS IMPAIRMENT?

6.2 WHEN DOES IMPAIRMENT TAKE PLACE?

Irrespective of whether there is any indication of impairment, an entity shall also:

6.2.1 External sources of information – (IAS 36.12)

6.2.2 Internal sources of information – (IAS 36.12)

6.2.3 Evidence from internal reporting indicating that an asset may be

The list is not exhaustive.

6.3 WHEN SHOULD IMPAIRMENT BE APPLIED?

This standard applies to financial assets classified as:

 subsidiaries, associates, and joint ventures; (IAS 36.04)

A cash-generating unit (Refer to section 6.7)

Corporate assets (Refer to section 6.7)

6.4 HOW TO CALCULATE AN IMPAIRMENT LOSS

Carrying amount Recoverable amount

Step 2: Calculate the asset's carrying amount

Step 3: Calculate the asset's recoverable amount

Estimating the value in use of an asset involves the following steps:

Estimates of future cash flows shall include:

 projections of cash inflows from the continuing use of the asset;

To avoid double counting, estimates of future cash flows do not include:

 a future restructuring to which an entity is not yet committed; or

Estimates of future cash flows shall not include:

 cash inflows or outflows from financing activities; or

 the time value of money; and

These rates are adjusted:

6.5 WHAT HAPPENS IF THE ASSET WAS IMPAIRED IN PRIOR YEARS,

6.5.1 External sources of information

6.5.2 Internal sources of information

6.6 REVERSAL OF AN IMPAIRMENT LOSS – INDIVIDUAL ASSETS

6.7 IMPAIRMENT LOSSES – CASH-GENERATING UNITS

The recoverable amount of an individual asset cannot be estimated if:

Step 1: Identification of cash-generating units

Identification of an asset’s CGU is dependent on management’s judgement. (IAS 36.68)

CGUs affected by internal pricing

Step 2: Calculate the CGU’s carrying amount

The carrying amount of a CGU:

Step 3: Calculate the CGU's recoverable amount

TESTING OF CGUs FOR IMPAIRMENT

Step 4: Recognise the impairment loss in the financial statements

Limitation on allocation of impairment loss

 its fair value less costs of disposal;

6.8 WHAT ARE THE TAX IMPLICATIONS?

(Note: Segment reporting does not form part of this module.)

3. Profit before tax

Year Net cash

A pre-tax discount rate of 15% is considered to be appropriate.

Cost price R4 250 000

Calculate the asset's recoverable amount

Fair value less costs to sell