Advanced Accounting and Reporting

Topic=IAS 36 “Impairment of Assets”

Ahmed Raza Mir, FCA

Question 1 [Basic Impairment calculation]

Balance sheet of ABC limited was showing a plant at a balance of Rs 16 million on 1 Jan 2015. Remaining
life of the plant is expected to be 8 years. Residual Value of the asset at the end of its useful life is estimated
to be Rs 2.5 million.
At 31 December 2016 I was known to the company that the asset is physically damaged and will not be able
to produce at 100% capacity. The company evaluated the asset for impairment and found out the following
values:

 Value in Use Rs 9 million

 Fair Value Rs 8.75 Million
 Cost to Sell Rs 570,000
Required
Calculate the impairment loss (if any) and prepare profit and loss extracts.
Question 2
ABC Limited owns an asset having the following details:
1. Carrying Amount Rs 6,000,000

2. Fair Value measures

 Offer price by company Rs 5,000,000
 Average of bid and offer Rs 4,250,000
 Replacement Value Rs 8,000,000

3. Cost to sell includes the following:

 Transportation cost Rs 150,000
 Brokerage to external brokers (today) Rs 200,000
 Brokerage to external brokers (1 Yr Time) Rs 110,000
 Apportionment of staff salary working on disposal Rs 15,000
 Incremental staff cost for disposal execution Rs 16,000
 Stamp Duty Rs 10,000
 Capital Value Tax Rs 40,000
 Registration of ownership charges Rs 16,000
 Retraining Cost of staff Rs 15,000

4. Value in use of the asset is determined to be Rs 4,000,000

Required
Calculate impairment loss (if any) assuming a discount rate of 10% is appropriate in the above scenario.
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Question 3 [detailed calculation of value in use]

Shumael Limited is about to test one of its major plants for impairment on account of different indicators.
Following are the details:
Carrying amount at 31 December 2011 Rs 6,450,000
Remaining life on 31 December 2012 5 Years

The plant could be sold for Rs 3.2 Million after incurring the following costs:
1. Brokerage Rs 150,000
2. Transfer Taxes
a. On signing of contract Rs 40,000
b. In 12 months’ time Rs 70,000

If the asset is put to use for the remainder of its life the following cash flows would result:
1. Sales for the next year (2013) shall be 9,000 units which will be reduced by 5% for the remainder
of the useful life of the plant
2. Selling price for the 2013 shall be Rs 500 per unit and will increase by 4% per annum to a
maximum of Rs 550 per unit.
3. Cost per unit includes:
Particulars Cost / Unit Details
Direct Material N Rs 70 Generally purchased from market
Direct Material P Rs 50 Purchased from a subsidiary. Its fair
market value is Rs 65 per unit
Direct Labour Rs 60 Skilled labour hired on casual basis
Variable Overheads Rs 40 Mainly power and allied costs

4. Fixed production costs for 2013 would be Rs 1,750,000. This amount includes depreciation of this
plant
5. Operating and all other costs per annum are as under. The following costs include finance cost that
will be paid on the loan obtained for the acquisition of this asset which is still outstanding to some
extent. The cash Flows also contain Income Taxes worked out as a share reasonably allocated to the
asset considering its income generated by it and other factors:

Year Amount (Rs) Finance cost Income Tax

share
1 680,000 238,000 170,000
2 780,000 210,000 190,000
3 760,000 194,000 195,000
4 845,000 166,175 211,250
5 800,000 125,825 200,000
6. All costs other than operating costs shall increase by 6% p.a.
7. Discount rate applicable to the company and in specific to the equipment under consideration is
10% (pre-tax)
Required
Calculate impairment at 31 December 2012 (if any)
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Question 4
ARM Limited is evaluating an Asset for impairment at 31 December 2001. The following information is
extracted from the company budgets and other sources:

Annual net inflows

Year Inflows
1 458,000
2 370,000
3 890,000
4 940,000
5 740,000

These net inflows include the following:

1. Year 3 includes an outflow for overhauling Rs 100,000 which would have a positive impact on cash
flow forecasts from year 3 and onwards.

2. Inflows expected (net) from overhauling:

Year Net Inflows

3 490,000
4 540,000
5 389,000

3. Net inflows include interest paid in the following years:

Year Interest paid

1 23,000
2 24,500
5 30,000

4. Inflows include receipts from a receivable and payments for a payable which are already
recognised in the last year. Receivable amounts to Rs 10,870 and payable Rs 6,720.

Required
Calculate the value in use for the above asset

Question 5 – future restructuring

At the end of 2000, entity K tests a plant for impairment. The plant is a cash-generating unit. The plant’s
assets are carried at depreciated historical cost. The plant has a carrying amount of Rs 3,000 and a
remaining useful life of 10 years.
The plant’s recoverable amount (i.e. higher of value in use and fair value less costs of disposal) is
determined on the basis of a value in use calculation. Value in use is calculated using a pre-ta0 discount rate
of 14 per cent.

Management approved budgets reflect that:

 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

1. at the end of 2003, the plant will be restructured at an estimated cost of Rs 100. Since K is not yet
committed to the restructuring, a provision has not been recognized for the future restructuring costs.
2. there will be future benefits from this restructuring in the form of reduced future cash outflows.
3. At the end of 2002, K becomes committed to the restructuring. The costs are still estimated to be Rs
100 and a provision is recognized accordingly. The plant’s estimated future cash flows reflected in the
most recent management approved budgets and a current discount rate is the same as at the end of
2000.
4. Future cash flows:

Year Cash Flows 1 Cash Flows 2

2001 300
2002 280
2003 420 420
2004 520 570
2005 350 380
2006 420 450
2007 480 510
2008 480 510
2009 460 480
2010 400 410

 Cash Flows set 1 represents estimates at 31 December 2000; These Cash flows do not include
restructuring outflows and inflows as a result
 Cash Flows set 2 represents estimates at 31 December 2002

Required
Carrying amount at the end of 2000, 2001, 2002 and 2003

Question 6 – future overhauling

At the end of 2000, entity F tests a machine for impairment. The machine is a cash-generating unit. It is
carried at depreciated historical cost and its carrying amount is Rs 150,000. It has an estimated remaining
useful life of 10 years.

The machine’s recoverable amount (i.e. higher of value in use and fair value less costs of disposal) is
determined on the basis of a value in use calculation. Value in use is calculated using a pre-ta0 discount rate
of 14 per cent.

Management approved budgets reflect:

1. estimated costs necessary to maintain the level of economic benefit expected to arise from the
machine in its current condition; and that in 2004, costs of Rs 25,000 will be incurred to enhance
the machine’s performance by increasing its productive capacity.

2. At the end of 2004, costs to enhance the machine’s performance are incurred. The machine’s
estimated future cash flows reflected in the most recent management approved budgets are given
below and a current discount rate is the same as at the end of 2000.

3. Future cash Flows

Year Cash Flows 1 Cash Flows 2
2001 22,165 -
2002 21,450 -
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

2003 20,550 -
2004 24,725 -
2005 25,325 30,321
2006 24,825 32,750
2007 24,123 31,721
2008 25,533 31,950
2009 24,234 33,100
2010 22,850 27,999

 Cash Flows set 1 represents estimates at 31 December 2000 and do not include future overhauling
outflows and inflows as a result
 Cash Flows set 2 represents estimates at 31 December 2004

Required
Carrying amount at the end of 2000, 2001, 2002, 2003 and 2004

Question 7
A CGU has the following assets:

Particulars Carrying Amount

Plant 3,500
Vehicles 1,500
Goodwill 1,000
Trade Receivables 1,250
Inventory 750
Factory Building 5,000
Recoverable amount of the CGU is assessed to be Rs 10,000.

Required
Calculate Impairment (if any) and allocate it to the components of CGU

Question 8
Mushtaq Limited has two cash generating units producing cash independently of each other. One of theses
units has shown indications of impairment. The constituents of the CGU are as under:

Particulars Carrying FV-CTS

Amount
Building Rs 125,000 Rs 100,000
Furniture and Fixtures Rs 45,000 Not identifiable
Vehicles Rs 60,000 Rs 30,000
Apportioned Goodwill Rs 40,000 Not Applicable
Stock in trade Rs 20,000 NRV of 60% stock is Rs 14,000. Remaining 40%
stock has an NRV of Rs 2,000
Account Receivables Rs 42,000 Provision for bad debts at reporting date Rs 4,000

The recoverable amount of the whole cash generating unit is Rs 215,000.

Required
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Allocate impairment (if any) to the eligible assets of the unit

Question 9
A Company produces a product which passes through 3 machines. The output of machine A passes through
Machine B and then Machine C to become the only saleable product of the company. Intermediate output of
any machine is not saleable in the market.

Carrying amounts of the entire cash generating unit is as under:

Machine A Rs 13,000
Machine B Rs 29,250
Machine C Rs 22,750
Goodwill Rs 7,220

The recoverable amount of the CGU is assessed to be Rs 62,250. However, at the reporting date the fair
value less cost to sell of the Machine A is assessed to be Rs 12,500. The management could neither
determine the fair value less cost to sell or value in use of any other individual asset of the CGU.

Required
Calculate the impairment (if any) and allocate it to the components of cash generating unit.

Question 10 (Goodwill allocable)

On 31 December 2001, Entity T acquires 100% of voting rights in Entity M for Rs 10,000. Entity M has
manufacturing plants in three countries. The data below relates to the end of 2001:

CGUs Allocation of purchase Fair Value of identified Allocated Goodwill

price Assets
Activities in Country A Rs 3,000 Rs 2,000 Rs 1,000
Activities in Country B Rs 2,000 Rs 1,500 Rs 500
Activities in Country C Rs 5,000 Rs 3,500 Rs 1,500
Total Rs 10,000 Rs 7,000 Rs 3,000

Goodwill on acquisition is allocated to the three cash generating units.

Just after acquisition a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (ie Group T). As a result,
and for the foreseeable future, Group T’s production in Country A will be cut by 40 per cent. The significant
export restriction and the resulting production decrease require Group T to estimate the recoverable
amount of Country A’s cash-generating unit. Management estimates cash flow forecasts for Country A
operations and determines the cash-generating unit’s recoverable amount to be Rs 1,360.

Required
Calculate the impairment loss (if any) and allocate it to relevant assts of the CGU

Question 11
On 31 December 2001, Entity T acquires 100% of voting rights in Entity M for Rs 10,000. Entity M has
manufacturing plants in three countries. The data below relates to the end of 2001:
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

CGUs FV of identified assets

Activities in Country A Rs 2,000
Activities in Country B Rs 1,500
Activities in Country C Rs 3,500
Total Rs 7,000

Goodwill on acquisition can not be allocated to the three cash generating units on a reasonable basis.

Just after acquisition a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (ie Group T). As a result,
and for the foreseeable future, Group T’s production in Country A will be cut by 40 per cent. The significant
export restriction and the resulting production decrease require Group T to estimate the recoverable
amount of Country A’s cash-generating unit. Management estimates cash flow forecasts for Country A
operations and determines the cash-generating unit’s recoverable amount to be Rs 1,360.
Moreover, the recoverable amount of all CGUs (including goodwill) is estimated to be Rs 8,500.

Required
Calculate the impairment loss (if any) and allocate it to relevant assts of the CGU

Question 12
At 31 December 2012, the carrying amount of 3 manufacturing plants of the Entity T located in three
different countries and a head office is as under:

CGUs Carrying Amount

Activities in Country A Rs 3,000
Activities in Country B Rs 2,000
Activities in Country C Rs 5,000
Head Office Rs 4,000
Total Rs 14,000

Each manufacturing plant is producing a different product which are sold in different countries. All the
units are separately considered as cash generating units. Whereas, the head office is used for the
administration purpose for all CGUs. All CGUS are considered to take equal benefits from the head office.

Just before the year end a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (i.e. Group T). As a result,
and for the foreseeable future, Group T’s production in Country A will be cut by 40 per cent. The significant
export restriction and the resulting production decrease require Group T to estimate the recoverable
amount of Country A’s cash-generating unit. Management estimates cash flow forecasts for Country A
operations and determines the cash-generating unit’s recoverable amount (including Corporate asset) to
be Rs 2,500.

Required
Calculate the impairment loss (if any) and allocate it to relevant assets of the CGU

Question 13
At 31 December 2012, the carrying amount of 3 manufacturing plants of the Entity T located in three
different countries and a head office is as under:
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

CGUs Carrying Amount

Activities in Country A Rs 3,000
Activities in Country B Rs 2,000
Activities in Country C Rs 5,000
Head Office Rs 4,000
Total Rs 14,000

Each manufacturing plant is producing a different product which are sold in different countries. All the
units are separately considered as cash generating units. Whereas, the head office is used for the
administration purpose for all CGUs. The company is unable to allocate the carrying amount of corporate
asset on a systematic basis.

Just before the year end a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (ie Group T). As a result,
and for the foreseeable future, Group T’s production in Country A will be cut by 40 per cent. The significant
export restriction and the resulting production decrease require Group T to estimate the recoverable
amount of Country A’s cash-generating unit. Management estimates cash flow forecasts for Country A
operations and determines the cash-generating unit’s recoverable amount (excluding Corporate asset) to
be Rs 2,000.

The recoverable amount of all CGUs including corporate asset is Rs 11,000.

Required
Calculate the impairment loss (if any) and allocate it to relevant assts of the CGU

Question 14
Entity M has three cash-generating units: A, B and C. The carrying amounts of those units do not include
goodwill. There are adverse changes in the technological environment in which M operates. Therefore, M
conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of
A, B and C are Rs 100, Rs 150 and Rs 200 respectively.

The operations are conducted from a headquarters. The carrying amount of the headquarters is Rs 200: a
headquarters building of Rs 150 and a research center of Rs 50. The relative carrying amounts of the cash-
generating units are a reasonable indication of the proportion of the headquarters building devoted to each
cash-generating unit. The carrying amount of the research center cannot be allocated on a reasonable basis
to the individual cash-generating units.

The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C
and the headquarters are 20 years. The headquarters is depreciated on a straight-line basis.

The recoverable amount (i.e. higher of value in use and fair value less costs of disposal) of each cash-
generating unit is based on its value in use. Value in use is calculated using a pre-tax discount rate of 15 per
cent.
Value in use:
Particulars Value in use
CGU A 199
CGU B 164
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

CGU C 271
Company M 720
Required
Calculate and allocate impairment (if any)

Question 15
Ghalib Limited manufactures three products X, Y and Z. The management of the company considers plants
relating to each product as a separate Cash-Generating Unit (CGU). The company has three Corporate
Assets viz. a building, PABX system and a computer network. On June 30, 2007, the assets were valued as
under:

Particulars (CGU excl Corp Carrying Amount Recoverable Amount

Assets)
Plant 1 for product X Rs 2,500,000 Rs 1,200,000
Plant 2 for product Y Rs 5,000,000 Rs 7,000,000
Plant 3 for product Z Rs 10,000,000 Rs 6,400,000

Details of corporate Assets:

Corporate Assets Carrying Amount

Building Rs 2,800,000
PABX System Rs 1,400,000
Computer Network Rs 2,100,000

Based on a study carried out by the company which involved consideration of various factors, the
management was able to determine that the building and the PABX system can be allocated to plants 1,2
and 3 in the ratio of 2 : 3 : 5. However, the management was unable to determine a reasonable and
consistent basis for allocating the cost of computer network.

Required:
Calculate the carrying amount of each CGU and Corporate Asset for reporting on the balance sheet as at
June 30, 2007 in accordance with IAS-36 ‘Impairment of Assets’. (18 Marks)

Question 16
The reporting entity has 3 cash-generating units (toothpaste, wire brushes and rubber tyre production
lines) and 3 corporate assets (a building, phone system and a computer platform). The building and phone
system support all cash-generating units while the computer platform supports the toothpaste and wire-
brush units only. The following are measurements as at 31 December 20X5:

Particulars (CGU excl Corp Carrying Amount Recoverable Amount

Assets)
Toothpaste unit Rs 1,000,000 Rs 600,000
Wire-brush unit Rs 2,000,000 Rs 1,500,000
Rubber tyre unit Rs 4,000,000 Rs 3,200,000

Details of corporate Assets:

 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Corporate Assets Carrying Amount

Building Rs 700,000
Phone System Rs 350,000
Computer platform Rs 1,050,000

Required
Calculate the amount of impairment to be allocated to the entity’s assets, assuming that:
a. The corporate assets can be allocated to the relevant cash-generating units. The appropriate
method of allocation is based on the carrying amount of the cash-generating unit’s individual assets
as a percentage of cash-generating unit’s total assets excluding corporate assets to be allocated
b. The corporate assets cannot be allocated to the relevant cash generating units.

Question 17 (past paper Winter 2019 Q1)

Krona Limited (KL) produces various nutrition products through its three production facilities located at
Karachi, Lahore and Peshawar. Each facility is considered as a separate cash-generating unit (CGU).

In May 2019, several contamination cases of KL's products were reported on social media as well as on TV
channels. The adverse publicity badly affected all the products and consequently their sales were reduced
significantly. Therefore, KL conducted impairment test of all CGUs as on 30 June 2019, though KL does not
have any intention to sell any CGU in near future.

Following information was made available on 30 June 2019: Assets of CGUs:

Particulars Karachi Lahore Peshawar

------------Rs In Millions------
Carrying Amount b4 impairment 160 100 125
Value in Use 155 115 164
Fair Value less CTS 152 110 169

Remaining useful life

Average in years 10 8 6

Corporate Assets:

Particulars Carrying amount Remaining average

before impairment useful life
Head office Assets 84 15
Product Development Centre 26 5

The operations are conducted from the head office. Product development centre supports Karachi and
Lahore facilities only.

Required:
Compute carrying amounts of each CGU and corporate asset after incorporating impairment losses under
the following independent situations:
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

1. The relative carrying amounts of CGUs are reasonable indication of the proportion of the corporate
assets devoted to each CGU.
2. The carrying amounts of the corporate assets cannot be allocated on a reasonable basis to the
individual CGUs.

Question 18
Peter acquired 60% of Stewart on 1.1.20X1 for £450m recognizing net assets of £600m, a noncontrolling
interest (valued as a proportion of total net assets) of £240m and goodwill of £90m. Stewart consists of a
single cash-generating unit.

Due to adverse publicity, the recoverable amount of Stewart had fallen by 31.12.20X1. The depreciated
value of the net assets at that date was £550m (excluding goodwill). No impairment losses have yet been
recognised relating to the goodwill.

Requirement
Show the allocation of the impairment losses:
1. If the recoverable amount was £510m at 31.12.20X1
2. If the recoverable amount was £570m at 31.12.20X1
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Question 19
Parent acquires an 80 per cent ownership interest in Subsidiary for Rs 2,100 on 1 January 20X3. At that
date, Subsidiary’s net identifiable assets have a fair value of Rs 1,500. Parent chooses to measure the non-
controlling interests as the proportionate interest of Subsidiary’s net identifiable assets.

The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are
largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a
cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the
synergies of the combination, the goodwill of Rs 500 related to those synergies has been allocated to other
cash-generating units within Parent. Because the cash-generating unit comprising Subsidiary includes
goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there
is an indication that it may be impaired

At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Subsidiary is Rs
1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs 1,350

Required
Journalize the impairment loss (if any)

Question 20
Parent acquires an 80 per cent ownership interest in Subsidiary for Rs 2,100 on 1 January 20X3. At that
date, Subsidiary’s net identifiable assets have a fair value of Rs 1,500. Parent chooses to measure the non-
controlling interests at fair value, which is Rs 350.
The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are
largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a
cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the
synergies of the combination, the goodwill of Rs 500 related to those synergies has been allocated to other
cash-generating units within Parent.
At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Subsidiary is Rs
1,650. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs 1,350
Required
Journalize the impairment loss (if any)

Question 21 (Summer 2009 Q4)

On January 1, 2008, Misbah Holding Limited, dealing in textile goods, acquired 90% ownership interest in
Salman Limited (SL), a ginning company, against cash payment of Rs. 450 million. At that date, SL’s net
identifiable assets had a book value of Rs. 350 million and fair value of Rs. 400 million.

It is the policy of the company to measure the non-controlling interest at their proportionate share of SL’s
net identifiable assets. During the year ended December 31, 2008, SL incurred a net loss of Rs. 150 million.
The impairment testing exercise carried out at the end of the year, by a firm of consultants, showed that the
recoverable amount of SL’s business is Rs. 200 million. However, the Board of Directors is inclined to take a
second opinion as they estimate that the recoverable amount is Rs. 390 million.

Required:
Based on each of the two valuations, compute the amounts to be reported in the consolidated statement of
financial position as of December 31, 2008 in respect of:
1. Goodwill;
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

2. Net identifiable assets, and

3. Non-controlling interest

Question 22
Following are the three cash generating units and two corporate assets held by Shaheen Limited:

Particulars A B C
------------Rs In Millions------
Carrying Amount b4 impairment 200 125 160
Recoverable amount 190 145 215

Remaining useful life

Average in years 8 10 6
Corporate Assets:

Particulars Carrying amount Remaining average

before impairment useful life
Head office Building 105 12
Research Centre 32.5 5.5

The operations are conducted from the head office. Research Centre supports A and B only.
Required:
Compute carrying amounts of each CGU and corporate asset after incorporating impairment losses under
the following independent situations:
1. The relative carrying amounts of CGUs are reasonable indication of the proportion of the corporate
assets devoted to each CGU.
2. The carrying amounts of the corporate assets cannot be allocated on a reasonable basis to the
individual CGUs.

Question 23
X Ltd owns a machine with a remaining useful life of three years. The carrying amount of the machine is
R90 000 on 31 December 20X2. On this date there is an indication that the machine may be impaired. It is
expected that the machine will generate net cash inflows of R30 000 per annum over its remaining useful
life. The fair value less costs of disposal cannot be determined. A fair discount rate is 10% per annum.
Cash flows estimate and discount rate estimate did not change over the year.
Required

Calculate impairment and its reversal if any in next year

 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Question24 – [AAFR Past Paper, Summer 2011, Q2(iv), 5 marks]

On April 1, 2006 Kahkashan Limited had acquired a plant at a cost of Rs. 30 million. The useful life of the
plant was estimated at 15 years and it is being depreciated under the straight-line method. On October 1,
2010 the plant suffered physical damage but is still working. A valuation was carried out to determine the
impairment loss. The following information is available from the valuer’s report received on April 5, 2011:

Value in use Rs. 16 million

Selling price, net of costs to sell Rs. 12 million
Estimated remaining useful life as of October 1, 2010 5 years

Depreciation for the year ended March 31, 2011 has been accounted for without considering the impact of
the valuer’s report.

Required:
Prepare a relevant extract of statement of comprehensive income for the year ended March 31, 2011 in
accordance with International Financial Reporting Standards.

Question25 [Reversal of Impairment]

The Cowbird Company operates in the television industry. It acquired a licence to operate in a particular
region for 20 years at a cost of £10 million on 31 December 20X3. Cowbird’s policy was to amortise the fee
paid for the licence on a straight-line basis.
By 31 December 20X5 it had become apparent that Cowbird had overpaid for the licence and, measuring
recoverable amount by reference to value in use, it recognised an impairment charge of £4.05 million,
leaving a carrying amount of £4.95 million.

At 31 December 20X7 the market place had improved, such that the conditions giving rise to the original
impairment no longer existed. The recoverable amount of the licence by reference to value in use was now
£11 million.

Requirement
What should be the carrying amount of the licence in the statement of financial position of Cowbird at 31
December 20X7, according to IAS 36 Impairment of Assets?

Question 26 [December 2012, Q3(a)]:

On 1 July 2011, PL acquired 20% shares of Goose Limited (GL), a listed company, when GL’s retained earnings
stood at Rs. 250 million and the fair value of its net assets was Rs. 350 million. The purchase consideration
was two million ordinary shares of PL whose market value on the date of purchase was Rs. 33 per share. PL
is in a position to exercise significant influence in finalizing the financial and operational policies of GL.

The summarized statement of financial position of GL at 30 June 2012 was as follows:

Rs. in million
Share capital (Rs. 10 each) 100
Retained earnings 280
380

Net assets 380

 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Recoverable amount of GL’s net assets at 30 June 2012 was Rs. 370 million.

Question 27 [December 2015, Q2]

Beta Foods Limited (BFL) is in process of finalizing its consolidated financial statements for the year ended
30 June 2015. Following information pertains to BFL’s intangible assets.

(i) Value of intangible assets as at 30 June 2013:

Goodwill Patents
Rs. in million
Cost 1,500 400
Accumulated amortization / impairment 300 160

(ii) On 1 July 2013, BFL acquired the entire shareholdings of Gamma Enterprises (GE) for Rs. 5,400
million. The value of patents, development expenditure and other net assets of GE on the date of
acquisition was Rs. 2,100 million, Rs. 48 million and Rs. 1,430 million respectively.

The break-up of development expenditure was as follows:

Products Rs. in million

A – 214 25
B – 917 23
Total 48

(iii) Research and development expenditure during the year ended 30 June 2014 and 2015 was as
follows:

Research Development
Year Product Name
Rs. in million
A – 214* --- 08
2014
B – 917 10 45
2015 B – 917 --- 50
*because of certain reasons the management had decided to abandon this project in May 2014.

(iv) Trial production of B-917 commenced in March 2015. Net cost of trial production up to 30 June 2015
amounted to Rs. 22 million.
(v) Patents are amortized over their remaining useful life of 10 years on straight line method.
(vi) Recoverable amounts of assets having indefinite life, determined as a result of impairment testing,
were as follows:

2015 2014
Rs. in million
Goodwill 2,800 2,550
Product B – 917 160 65

Required:
Prepare a note on intangible assets, for inclusion in BFL’s consolidated financial statements for the year
ended 30 June 2015 in accordance with the requirements of International Financial Reporting Standards.
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Question 28 [December 2016, Q2]

On 1 July 2013, GYO Movers Limited (GML) acquired a business engaged in providing transportation service
and recognized goodwill of Rs. 10 million. The business operates three different bus routes namely Green,
Yellow and Orange. The business had been running exceptionally well. However, during the year ended 30
June 2016 entrance of new competitors has affected its performance.

GML considers each route as a separate Cash-Generating Unit (CGU). As on 30 June 2016, following
information is available in respect of each CGU:

Green Yellow Orange

Number of buses* 80 50 40
Expected remaining useful life (in years) 20 15 10
-------------------- Rs. in million --------------------
Carrying amount of buses 225 150 95
Other assets - carrying value 400 350 100
- fair value Not Available
Fair values less cost to sell of the CGU 500 450 250
Expected net cash flows per annum 70 60 50
*Assume that all buses are of same make and model.

Carrying amount of corporate assets used interchangeably by all segments are as follows:

Carrying amount Fair value

Particulars
---------- Rs. in million ----------
Head office building 100 Not available
Computer network 55 46
Equipment 45 60

For impairment testing of each CGU, following quotations were obtained from three different showrooms
located in different cities.

Showroom-1 Showroom-2 Showroom-3

Particulars
---------- Rs. in million ----------
Average sale price for each bus 2.52 2.62 2.50
Estimated transaction cost for disposal of each bus 0.05 0.20 0.10

Pre-tax discount rate of GML is 12%.

Required:
Prepare relevant extracts from the statement of financial position as at 30 June 2016 in accordance with
International Financial Reporting Standards.
 Advanced Accounting and Reporting
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA

Question 29 [December 2017, Q1(a)(i)]

The following details relate to a cash generating unit (CGU) of Khyber Ltd. (KL) as at 30 June 2017:

Carrying value Fair value less cost to

sell
---------- Rs. in million ----------
Building (revaluation model)* 22 21.7
Machinery (cost model) 15 16
Equipment (cost model) 19 No measureable
License (cost model) 20 18
Investment property (fair value model) 22 22
Investment property (cost model) 8 Not measureable
Goodwill 3 Not measureable
Inventory at NRV 8 8
*Balance of surplus on revaluation of building as on 30 June 2017 amounted to Rs. 3 million.

Value in use and fair value less cost to sell of the CGU at 30 June 2017 were Rs. 100 million and Rs. 95 million
respectively.

Required:
Compute the amount of impairment and allocate it to individual assets. Also calculate the amount to be
charged to profit or loss account for the year ended 30 June 2017. There has been a significant decline in
budgeted net cash flows of the CGU.