Syllabus learning outcomes 1

Define and compute the initial measurement of a non- current asset (including borrowing costs and an
asset that has been self-constructed).

Identify subsequent expenditure that may be capitalised, distinguishing between capital and revenue
items.

• Discuss the requirements of relevant accounting standards

in relation to the revaluation of non-current assets.

Account for revaluation and disposal gains and losses for non-current assets.

Chapter summary diagram

Tangible non-current assets
Borrowing costs (IAS 23)
Property, plant and
equipment (IAS 16)
Definition
Investment property (IAS 40)
Recognition
Measurement
at recognition
Measurement after recognition
Depreciation
Disclosure note
→]
N

Syllabus learning outcomes 2

Compute depreciation based on the cost and revaluation models and on assets that have two or more
significant parts (complex assets).
NK
2
Discuss why the treatment of investment properties should differ from other properties.
Apply the requirements of relevant accounting standards to an investment property.

IAS 16 Property, plant and equipment 1

Definition

Property, plant and equipment are tangible items that:

Are held by an entity for use in the production or supply of goods or services, for rental to others, or for
administrative purposes

Are expected to be used during more than one period

IAS 16 Property, plant and equipment 2

Recognition

Property, plant and equipment should be recognised once the recognition criteria from the Conceptual
Framework have been met:

It is probable that future economic benefits that are attributable to the asset will flow to the entity

The cost of the asset can be reliably measured

IAS 16 Property, plant and equipment 3

Initial measurement at recognition

Initially recognise at cost.

Cost includes:

• Purchase price - including import duties and non- refundable purchase taxes less trade discounts and
rebates

Directly attributable costs:

Cost of site preparation

Initial delivery and handling costs - Installations and assembly costs - Costs of testing

· Professional fees

IAS 16 Property, plant and equipment 4

Initial measurement at recognition (continued) Cost includes (continued):

Estimated cost of dismantling/removing the item (IAS 37)

Finance costs (IAS 23)

IAS 16 Property, plant and equipment 5

Subsequent expenditure
Capitalise as a non-current asset if the asset recognition criteria are met

Consider:

Complex assets – assets which are made up of separate components

- Assets requiring overhauls

IAS 16 Property, plant and equipment 6

Subsequent expenditure (continued)

Examples:

- Furnace

- Aircraft

Treat each component separately for depreciation purposes and capitalise the costs when they are
replaced/overhauled

IAS 16 Property, plant and equipment 7

Eg airframe, depreciate over 20 years Eg seating, depreciate over 8 years

Eg engines, depreciate over 6 years

IAS 16 Property, plant and equipment 8

Subsequent expenditure (continued)

Where subsequent expenditure does not meet the asset recognition criteria the expenditure should be
included as part of the profit or loss for the period. Recognise as an expense

IAS 16 Property, plant and equipment 9

Measurement after recognition

• Choice of accounting treatment, the entity can either maintain the asset at cost or revalue it to fair
value.

-Cost model:

—
Property, plant and equipment is carried in the financial statements at cost less accumulated
depreciation and impairment losses.

IAS 16 Property, plant and equipment 10

Measurement after recognition (continued)

Revaluation model:

Property, plant and equipment is carried in the financial statements at fair value less accumulated
depreciation and impairment losses.

- 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 market date'.

IAS 16 Property, plant and equipment 11

What is the fair value of an asset?

qualified valuer • Plant and equipment ⇒ market value

Land and buildings⇒ market value where the valuation is usually carried out by a professionally

Specialised assets⇒ depreciated replacement cost if the market value is not available.....('that is rarely,
if ever, sold in the market except by way of a sale of the business or entity of which it is part, due to
uniqueness arising from its specialized nature and design, its configuration, size, location, or

otherwise')

IAS 16 Property, plant and equipment 12

Revaluations

• Where an item of property, plant and equipment is revalued the whole class of assets to which it
belongs should be revalued.

Revaluations should be performed sufficiently often so that the carrying amount of the asset is not
materially different from the fair value of the asset.

• Where an asset has increased in value, the revaluation gain is reported in other comprehensive
income and in the revaluation surplus in the statement of financial position unless the gain reverses a
previous revaluation loss which was charged to profit or loss.
TAS 16 Property, plant and equipment 13

Revaluations (continued)

A revaluation loss is charged first to other comprehensive income (and the revaluation surplus) with any
excess reported in profit or loss.

Where an asset is revalued depreciation is charged on the revalued amount.

If the asset has been revalued upwards the depreciation charge will be higher than before the
revaluation.

The excess depreciation can be transferred to retained earnings from the revaluation surplus.

This adjustment will be shown in the statement of changes in equity.

? Question: Xavier

Xavier has a year end of 30 September and purchased a piece of production equipment on 1 July 20X5
incurring the following costs.

List price of machine

Trade discount

Delivery costs

Set-up costs incurred internally

8,550

(855)

105

356

8,156

Notes

Question: Xavier (continued)

1 The machine was expected to have a useful life of 12 years and a residual value of $2,000.

2
3

Xavier's accounting policy is to charge a full year's depreciation in the year of purchase and no
depreciation is the year of retirement or sale. Xavier has a policy of keeping all equipment at revalued
amounts. No revaluations had been necessary until 30 September 20X8 when one of the major suppliers
of such machines went bankrupt causing a rise in prices. A specific market value for Xavier's machine
was not available, but an equivalent machine would now cost $15,200 (including relevant
disbursements). Xavier treats revaluation surpluses as being realised through use of the asset and
transfers them to retained earnings over the life of the asset. The remaining useful life and residual
value of the machine remained the same.

→]

? Question: Xavier (continued)

Required

Show the accounting effect of the above transaction at 30 September 20X5, 20X8 and 20X9.

Answer: Xavier

At 30 September 20X5

Plant and equipment

Cost (8,550-855 + 105 + 356)

Accumulated depreciation (8,156 -2,000)/12 years

At 30 September 20X8

Plant and equipment

Revalued amount (W1)

Accumulated depreciation

Equity

Revaluation surplus (10,800 (W1)-6,104 (W2))

8,156

(513)

7,643
$

10,800

10,800

4,696

Answer: Xavier (continued)

Working 1

Revalued amount (depreciated replacement cost)

Gross replacement cost

Depreciation (15,200 2,000) × 4/12

15,200

(4,400)

10,800

Working 2

Carrying amount before revaluation

Cost

8,156

Accumulated depreciation (8,156 -2,000) × 4/12

(2,052)

6,104

Answer: Xavier (continued)

At 30 September 20X9

Plant and equipment

Revalued amount
Accumulated depreciation (10,800 -2,000)/ 8 years

Equity

Revaluation surplus (4,696 - (4,696 / 8 years))

10,800

(1,100)

9,700

4,109

Depreciation accounting 1

Definition

The systematic allocation of the depreciable amount of an asset over its estimated useful life

Where the depreciable amount of an asset is its historical cost (or other amount) less the estimated
residual value

Where the useful life is the period over which a

depreciable asset is expected to be used by the entity or

the number of production or similar units expected to be obtained from the asset by the entity

Depreciation accounting 2

Definition (continued)

The useful life, residual value and depreciation method must be reviewed at least each financial year
end and adjusted where necessary.

The need for depreciation of non-current assets arises from the accruals assumption. If money is
expended in purchasing an asset then the amount expended must at some time be charged against
profits. If the asset is one which contributes to an entity's revenue over a number of accounting periods,
it would be inappropriate to charge any single period with the whole of the expenditure.

IAS 40 Investment property 1

Definition
Property (land or buildings – or part of a building - or both) held (by the owner or by the lessee as a
right-of- use asset) to earn rentals or for capital appreciation or both, rather than for:

Use in the production or supply of goods or services or for administrative purposes (IAS 2); or

Sale in the ordinary course of business(IAS 2).

IAS 40 Investment property 2

Recognition

An investment property is recognised when and only when:

- It is probable that the future economic benefits

associated with the investment property will flow to the entity

- The cost of the investment property can be measured reliably

IAS 40 Investment property 3

Measurement at recognition

The investment property is initially recognised at cost. Cost comprises:

- Purchase price plus

- Any directly attributable expenditure (for example professional fees)

• For self-constructed investment properties, cost is the cost at the date when the
construction/development is complete.

An investment property held by a lessee as a right-of- use asset must be measured initially in accordance
with IFRS 16 Leases.

IAS 40 Investment property 4

Measurement after recognition

There is a choice of accounting policy which must be applied to all investment properties held by the
entity.

Cost model:

- The investment property is carried in the financial statements at cost less accumulated depreciation
and impairment losses, ie it is treated as a non-current asset under IAS 16.

IAS 40 Investment property 5

Measurement after recognition (continued)

Fair value model:

- The investment property is measured at fair value at the end of each reporting period.

- Any gain or loss on remeasurement is included in profit or loss for the period.

- The investment property is not depreciated.

Question: Propex Co

Propex Co has the following properties but is unsure how to account for them:

(1) Tennant House cost $150,000 five years ago. The property is freehold and is let out to private
individuals for six monthly periods. The current market value of the property is $175,000. (2) Stowe
Place cost $75,000. This is used by Propex Co as its headquarters. The building was acquired ten years
ago.

(3) Crocket Square is a recently started development which is two thirds complete. Propex Co intends to
let this out to a company called Speedex Co in which it has a controlling interest.

Propex Co depreciates its buildings at 2% per annum on cost.

Required

Describe the most appropriate accounting treatment for each of these properties.

Answer: Propex Co

(1) Tennant House

·
Held for its investment potential and not for use by Propex Co Treat as investment property in
accordance with IAS 40 Rental income to profit or loss

If following fair value model - revalue to market value of $175,000. The difference of $25,000 credited to
profit or loss If following cost model - depreciate based on cost and do not revalue. Depreciation for
current period is $3,000 and carrying amount is $135,000 (150,000 - (5 × 3,000))

Need to be consistent and use either fair value or cost model for all investment properties

Answer: Propex Co (continued)

(2) Stowe Place

Held for use by Propex Co therefore cannot be an investment property

Depreciate over useful life $75,000 × 2% = $1,500 per annum - charge as an expense to profit or loss

Carrying amount of $75,000 - ($1,500 × 10) = $60,000 to be shown in statement of financial position

Answer: Propex Co (continued)

(3) Crocket Square

Not yet complete so accounting treatment relates to the cost incurred to date.

Propex Co does not wish to sell the property so no need to treat it as inventories or work in progress.

Costs should be capitalised and disclosed under 'Assets in course of construction' until construction is
complete.

Intention to rent the property out to a group company and so will not be treated as an investment
property in the group financial statements as it is owner-occupied. However, in the separate financial
statements of Propex Co the property can be classified as investment property when construction is
complete.

In the group financial statements, it will be depreciated as soon as it comes into use. This will also apply
in Propex Co's separate financial statements if the cost model of IAS 40 is used.

·
IAS 23 Borrowing costs 1

Definition

Borrowing costs:

Interest and other costs incurred by an entity in connection with the borrowing of funds

Qualifying asset:

An asset that necessarily takes a substantial period of time to get ready for its intended use or sale

Accounting treatment

Borrowing costs that directly relate to the acquisition, construction or production of a qualifying asset
must be capitalised as part of the cost of that asset.

IAS 23 Borrowing costs 2

Types of borrowing costs

Funds borrowed specifically:

- Capitalise actual borrowing costs incurred less investment income on temporary investment of funds
Funds borrowed generally:

– Capitalise borrowing costs calculated as the weighted average cost of borrowings for the period
multiplied by the expenditure on the qualifying asset

Note that the amount capitalised should not exceed total borrowing costs incurred in the period

IAS 23 Borrowing costs 3

Commencement of capitalisation

Capitalisation of borrowing costs should begin when: Expenditures for the asset are being incurred

Borrowing costs are being incurred

Activities that are necessary to prepare the asset for its intended use or sale are in progress

IAS 23 Borrowing costs 4

Suspension and cessation of capitalisation Capitalisation of borrowing costs should be suspended during
extended periods when development is interrupted. For example due to workforce strikes or inclement
weather..(abnormal climatic conditions including, but not limited to, hail, cold, high winds, severe dust
storms, extreme high temperatures or any combination).

Capitalisation of borrowing costs should cease when substantially all of the activities necessary to
prepare the qualifying asset for its intended use or sale are

complete.

This is likely to be when the asset is ready for use (even if it is not being used).

Exam questions

Nature of question

Adjustments relating to property, plant and equipment are frequently examined in the financial
statement preparation question. These may involve: Adjustments for depreciation

Revaluations

Acquisitions and disposals

Under the new format there could also be MCQs/OTQs on PPE - both on knowledge and application.

Exam details

Dec 2013 - revaluation of NCA (as part of SOFP presentation) Jun 2012 revaluation

(as part of SOFP presentation)

IN

Past exam question (March 2017)

An entity has decided to adopt the revaluation model for the first time from 31 December 20X6. At that
date, details relating to two

properties were as follows:

→]

Asset as at 31.12.X6

Head office

Factory

Carrying amount ($'000)

Fair value

($'000)

10,200

10,800

7,875

7,500

What is the total gain to be recorded in the revaluation surplus as at 31

December 20X6?

A $0

B $225,000

C $375,000

D $600,000

Past exam answer (March 2017)

What is the total gain to be recorded in the revaluation surplus as at 31 December 20X6?

A $0

B $225,000

C $375,000

D $600,000

A revaluation deficit should be recognised in the statement of profit or loss, unless the asset has been
revalued upwards before which, in this case, it has not.

IAS 38 Intangible assets 1

Definition

An identifiable non-monetary asset without physical

substance

Examples:
Patents

- Copyrights

- Brands

Goodwill

BPP LEARNING MEDIA

→]

IAS 38 Intangible assets 2

Recognition

An intangible asset should be recognised when the recognition criteria from the Conceptual Framework
are met:

It is probable that future economic benefit from the asset will flow to the entity.

The cost of the asset can be reliably measured.

IAS 38 Intangible assets 3

Measurement at recognition

Depends on how the intangible was acquired:

→]

Acquired as

Internally

Separate acquisition

part of business

combination

Internally

Acquired by

generated

generated
government

goodwill

intangible

assets

grant

Cost

Fair value (IFRS 3)

NOT recognised

BPP LEARNING MEDIA

Only recognised

Asset/grant @ FV

if PIRATE

criteria met

or

Nominal

amount + direct

expenditure

Research and development costs 1

Research definition

Costs incurred to gain new scientific or technical knowledge and understanding

Accounting treatment

No certainty of future economic benefit

Recognise as an expense in profit or loss as incurred

Research and development costs 2

Development costs definition

Application of research findings to a plan/design for the production of new or substantially improved
materials, products or processes prior to commercial production

or use

Accounting treatment

Expenditure incurred now will lead to future revenues/benefits

Capitalise expenditure as an intangible non-current asset if all IAS 38 criteria are met

Research and development costs 3

Capitalisation criteria

• All six criteria must be met:

Probable future economic benefits

Intention to compete and use/sell the asset

Resources adequate and available to complete and use/ sell asset

A bility to use/sell asset

Technical feasibility of completing asset for use/sale

Expenditure can be reliably measured

Should any of the criteria not be met, the expenditure must be treated as an expense.

Research and development costs 4

Expenditure on internally generated brands,

mastheads, publishing titles, customer lists and similar items should be treated as an expense because
they cannot be distinguished from the cost of developing the business as a whole.

Start-up, training, advertising, promotional, relocation and reorganisation costs are all recognised as
expenses as they relate to ongoing business costs.

Research and development costs 5

Measurement after recognition

·

Choice of accounting policy.

Cost model:

The intangible asset is carried at cost less accumulated amortisation and impairment losses. Revaluation
model:

The intangible asset is carried at a revalued amount (fair value) less accumulated amortisation ad
impairment losses.

The fair value must be determined by reference to an active market.

Research and development costs 6

An active market is a 'market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis' (IFRS 13, para. 18).

It is uncommon for an active market to exist for intangible assets because by their very nature they tend
to be unique.

Active markets do exist however for intangibles such as freely transferable taxi licences and quotas.

Research and development costs 7

Revaluations should be carried out sufficiently/Frequently often so that the carrying value of the
intangible is not materially different from its fair value at the end of the reporting period.

• Where intangibles are revalued all intangibles in the same class must be revalued unless there is no
active market for them. In this case they would be recognised according to the cost model.

Research and development costs 8

Amortisation

Intangible assets with a finite useful life should be amortised over their useful life.

• The depreciable amount of an intangible is the cost/revalued amount less residual value, although the
residual value is generally assumed to be zero.

Amortisation should begin when the asset is available for use and the method used should reflect the
pattern in which the asset's future economic benefits are consumed.
The useful life and amortisation method used should be reviewed at least every financial year end and
adjusted where necessary.

Research and development costs 9

Amortisation (continued)

Intangible assets with an indefinite useful life should not be amortised.

• The appropriateness of the indefinite useful life assessment should be reviewed each period to
determine whether the assessment is still appropriate.

Intangible assets with an indefinite useful life should be subject to annual impairment reviews.

? Question: Stauffer

Stauffer is a public listed company reporting under IFRSS. It has asked for your opinion on the accounting
treatment of the following items. (a) The Stauffer brand has become well known and has developed a lot
of customer loyalty since the company was set up eight years ago. Recently, valuation consultants
valued the brand for sale purposes at $14.6m. Stauffer's directors are delighted and plan to recognise
the brand as an intangible asset in the financial

statements. They plan to report the gain in the revaluation surplus as they feel that crediting it to profit
or loss would be imprudent. (b) On 1 October 20X5 the company was awarded one of six licences issued
by the government to operate a production facility for five years. A 'nominal' sum of $1m was paid for
the licence, but its fair value is actually $3m.

? Question: Stauffer (continued)

(c) The company undertook an expensive, but successful advertising campaign during the year to
promote a new product. The campaign cost $1m, but the directors believe that the extra sales
generated by the campaign will be well in excess of that over its four year expected useful life.

(d) Stauffer owns a thirty-year patent which it acquired two years ago for $8m which is being amortised
over its remaining useful life of sixteen years from acquisition. The product sold is performing much
better than expected. Stauffer's valuation consultants have valued its current market price at $14m.

Answer: Stauffer

(a) Stauffer brand

The Stauffer brand is an 'internally generated' intangible asset rather than a purchased one. IAS 38
specifically prohibits the recognition of internally generated brands, on the grounds that they cannot be
reliably measured in the absence of a commercial transaction. Stauffer will not therefore be able to
recognise the brand in its statement of financial position.

Answer: Stauffer (continued)

(b) Licence

The licence is an intangible asset acquired by a government grant. It can be accounted for in one of two
ways:

The asset is recorded at the nominal price (cash paid) of $1m and depreciated at $200,000 per annum of
its five year life; or The asset is recorded at its fair value of $3m and a government grant is shown as
deferred income at $2m. The asset is depreciated over the five years at annual rate of $600,000 per
annum. The grant is amortised as income through profit or loss over the same period at a rate of
$400,000 per annum. This results in the same net cost of $200,000 in profit or loss per annum as the
first method.

Answer: Stauffer (continued)

(c) Advertising campaign

The advertising campaign is treated as an expense. Advertising expenditure cannot be capitalised under
IAS 38, as the economic benefits it generates cannot be clearly identified so no intangible asset is
created.

Answer: Stauffer (continued)

(d) Patent

The patent is amortised to a nil residual value at $500,000 per annum based on its acquisition cost of
$8m and remaining useful life of 16 years.

The patent cannot be revalued under the IAS 38 rules as there is no active market as a patent is unique.
IAS 38 does not permit revaluation without an active market as the value cannot be reliably measured in
the absence of a commercial transaction.

? Question: Stauffer (continued)

(e) On 1 August 20X6, Stauffer acquired a smaller company in the same line of business. Included in the
company's statement of financial position was an in-process research and development project, which
showed promising results (and was the main reason why Stauffer purchased the other company), but
was awaiting government approval. The project was included in the company's own books at $3m at the
acquisition date, while the company's net assets were valued at a fair value of $12m (excluding the
project). Stauffer paid $18m for 100% of the company and the research and development project was
valued at $5m by Stauffer's valuation consultants at that date. Government approval has now been
received, making the project worth $8m at Stauffer's year end. Required

Explain how the directors should treat the above items in the financial statements for the year ended 30
September 20X6.

Answer: Stauffer (continued)

(e) Acquisition

The difference between the price that Stauffer paid and the fair value of the net assets of the acquired
company will represent goodwill.

The research and development project must also be valued at fair value in a business combination to
ensure the goodwill is stated accurately, while in the acquiree's own financial

statements it would not be revalued as there is no active market because it is unique.

Consequently, in a business combination IAS 38 requires

intangible assets that are separable or arise from contractual or other legal rights that do not have an
active market to be valued using fair value measurement techniques (IFRS 13).

Answer: Stauffer (continued)

(e) Acquisition (continued)

The values attributed in the group financial statements on the acquisition date are therefore:

Net assets (excluding R&D project)

R&D project

Purchase price

Goodwill (remainder)

12

18
The fair value of the research and development project is measured at the acquisition date, not at the
year end and so it is not recorded at $8m. The project will be amortised over the expected useful life of
the product developed once the product is available for production.

Goodwill (IFRS 3) 1

Definition

Goodwill is the future economic benefits arising from assets that are not capable of being individually
identified and separately recognised.

• Arises due to factors such as an entity's reputation and branding.

There are two types of goodwill:

- Internally generated goodwill (IAS 38)

- Purchased goodwill (IFRS 3) (Chapter 4)

Goodwill (IFRS 3) 2

Goodwill

Purchased (IFRS 3)

Positive

Capitalise and test annually for impairment

'Negative' or Bargain

purchase (acquired net

assets exceed cost)

Reassess and then credit any remainder to profit or loss attributable to the parent

Internally generated

• Not recognised in the books

Past exam questions

Nature of question

Impairment of goodwill (as part of a groups question)

Calculation of goodwill on acquisition Presentation of intangibles on the SOFP

Exam details

Dec 2012

Jun 2011

Dec 2014

Treatment of research & development costs Patents/licences

Calculation of goodwill

Recognition of different treatments of assets

MCQ/OTQ style questions

→]

IAS 36 Impairment of assets 1

• IAS 36 aims to ensure that the carrying amount of

assets in the financial statements is not more than their

recoverable amount.

Carrying amount:

The value at which the asset is included in the financial statements

Cost/valuation less accumulated depreciation and impairment losses

IAS 36 Impairment of assets 1

IAS 36 aims to ensure that the carrying amount of

assets in the financial statements is not more than their recoverable amount.

Carrying amount:

The value at which the asset is included in the financial statements

Cost/valuation less accumulated depreciation and impairment losses

•
IAS 36 Impairment of assets 3

Fair value less costs to sell:

- The price that would be received to sell the asset in an orderly transaction between market
participants at the measurement date

If there is an active market in the asset, the fair value should be based on the market price, or on the
price of the recent transactions in similar assets

If there is no active market in the asset it might be possible to estimate fair value using best estimates of
what market participants might pay in an orderly transaction

Less the direct incremental costs attributable to the disposal of the asset

Value in use:

The present value of future cash flows expected to be derived from the asset or cash-generating unit

IAS 36 Impairment of assets 5

Impairment indicators – external sources

Indicators that an asset's value has declined during the period

significantly more than would have been expected due to the passage of time or normal use

Significant changes with an adverse effect on the entity in the

technological, market, economic or legal environment in which the entity operates

Increased market interest rates or other market rates of return affecting discount rates and therefore
reducing value in use

The carrying amount of the entity's net assets exceeds market capitalisation

IAS 36 Impairment of assets 4

If the carrying value of an asset in the statement of financial position is higher than the recoverable
amount of the asset then the asset is said to be impaired.

The impairment loss is the amount by which the carrying amount exceeds the recoverable amount.

• An entity should consider whether there are indications that an asset might have been impaired at the
end of each reporting period.

IAS 36 Impairment of assets 6

Impairment indicators – internal sources Evidence of obsolescence or physical damage

Adverse changes to the asset's use

Internal evidence that the asset's performance will be worse than expected

Cash-generating units

Definition

Where it is not possible to estimate the recoverable amount of an individual asset, an entity should
determine the recoverable amount of the cash- generating unit to which the asset belongs.

A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.

Goodwill and the impairment of assets

Goodwill and corporate assets (such as a head office) should be allocated to a cash-generating unit in
order to determine its carrying amount and recoverable amount.

Where an impairment loss is allocated to reduce the carrying amount of the assets in a cash-generating
unit, it will firstly be taken against any goodwill allocated to the cash-generating unit!!!!

Accounting treatment of an impairment loss

It may be possible to identify a specific asset which has suffered an impairment.

Where an individual asset is impaired:

• If the asset is held at historic cost, the impairment loss

is recognised as an expense in profit or loss

If the asset is held at a revalued amount, the

impairment loss is charged:

Firstly to other comprehensive income (to remove any previous revaluation surplus relating to the asset)

- Any remainder is recognised as an expense in profit or loss

Accounting treatment of an impairment loss

Where a cash-generating unit is impaired, the impairment loss is allocated in the following order:

Firstly to an goodwill allocated to the cash-generating unit

Then to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in
the

cash-generating unit

→]

Accounting treatment of an impairment loss

After the recognition of an impairment loss the asset's carrying value should be depreciated/amortised
over its remaining useful life.

? Question: Invest

On 31 December 20X1 Invest purchased all the shares of MH for $2m. The net fair value of the
identifiable assets acquired and liabilities assumed of MH at that date was $1.8m.

MH made a loss in the year ended 31 December 20X2 and at 31 December 20X2 the net assets of MH -
based on fair values at 1 January 20X2 - were as follows:

Property, plant and equipment

Capitalised development expenditure

Net current assets

$'000

1,300

200

250

1,750

? Question: Invest (continued)

An impairment review on 31 December 20X2 indicated that the recoverable amount of MH at that date
was $1.5m.
The capitalised development expenditure has no ascertainable external market value and the current
fair value less costs of disposal of the property, plant and equipment is $1,120,000.

Value in use could not be determined separately for these two items.

→]

? Question: Invest (continued)

Required

Calculate the impairment loss that would arise in the consolidated financial statements of Invest as a
result of the impairment review of MH at 31 December 20X2 and show how the impairment loss would
be allocated.

Answer: Invest

Asset values

at 31.12.X2

Allocation of impairment

loss

(W1)/(W2)

before

impairment

$'000

Goodwill (2,000 - 1,800)

200

PPE

1,300

Development exp.

200

Net current assets

250

1,950
$'000

Carrying amount

after imp. loss

$'000

NK

✔ Answer: Invest (continued)

(W1) Calculation of impairment loss

Carrying value (1,750 + 200 (GW))

Recoverable amount

$'000

1,950

(1,500)

450

Impairment loss to write off goodwill

200

Impairment loss to write off other assets

on a pro-rata basis

250

Answer: Invest (continued)

Asset values

at 31.12.X2

before

impairment $'000

Allocation of impairment loss (W1)/(W2)

$'000

Carrying amount
after imp. loss $'000

Goodwill

PPE

(2,000 - 1,800)

200

(200)

Dev exp

1,300

Net current assets

200

250

1,950

Answer: Invest (continued)

(W2) Allocation of impairment loss to other assets (pro-rata basis)

1,083

$'000

Loss allocated

$'000

PPE (250 × 1,300/1,500)

217

180

37

Dev exp (250 × 200 / 1,500)

33

70

250
250

However, PPE cannot be reduced below FV - CTS of

$1,120,000

→]

Answer: Invest (continued)

Asset values

at 31.12.X2

before

Allocation of Carrying

impairment

amount

loss

after

impairment

(W1)/(W2)

imp. loss

$'000

$'000

$'000

Goodwill (2,000 - 1,800) 200

(200)

PPE

1,300

(180)

1,120

Dev. exp.
200

(70)

130

Net current assets

250

250

1,950

(450)

1,500

Past exam questions

Nature of question

Explain the meaning of an impairment review. Calculate the carrying amount of assets after impairment
losses.

The impairment of goodwill is often examined in consolidated financial statement questions.

Impairment of associate

These topics could now be examined by

MCQ/OTQ, both as knowledge (what drives an impairment review) and application (calculate the
impairment)

Exam details

Dec 2011