Problem 1 You have determined that one asset and one CGU should be tested for im

Question

Problem 1

You have determined that one asset and one CGU should be tested for impairment at December 31, 20x2.

Details on these are as follows:

Asset Carrying value $2,800,000

Fair value 2,200,000

Costs to sell are expected to be equal to 7% of fair value

The asset’s useful life is 10 years and is expected to generate cash flows of $350,000 per year.

CGU

Carrying value

Land $ 800,000

Building 2,500,000

Equipment 1,300,000

Goodwill 950,000

Total $5,550,000

Fair values

Land (costs to sell = 8% of fair value) $1,200,000

Building (costs to sell = 10% of fair value) 2,700,000

Equipment (costs to sell = 25% of fair value) 800,000

The remaining useful life of the building and equipment is 16 years. The cash flows generated by the CGU are expected to be $360,000 per year.

Required –

Calculate the impairment loss, if any, assuming that the entity is subject to:

a. IFRS. If there is an impairment loss for the CGU, allocate the impairment loss to the CGU’s assets.

b. ASPE

A discount rate of 6% should be used.

Explanation / Answer

An asset is impaired when its carrying amount is greater than its recoverable amount.

Standard IAS 36 Impairment of assets gives you the guidelines in case of impairment of asset.

The carrying amount of an asset is the amount shown in the accounting records.

Recoverable amount is the higher of an asset’s fair value less cost to sell and asset’s value in use.

Fair value less cost to sell is the amount which could be obtained from the sale of the asset after deducting expenses in order to sell it.

Value in use is the discounted or present value of future cash flows expected to arise from either continuing use of an asset and its disposal at the end of its useful life.

An impairment charge calculated for a CGU should be allocated to the CGU's individual assets - first of all to goodwill allocated to the CGU, and then to the other assets of the CGU on a pro rata basis according to the carrying amount of each asset in the CGU.

ASSET

carrying amount – 2800000

recoverable amount – Higher of

                              1.   fair value less cost to sell , 2200000-154000 =2046000

                              2. value in use ,

350000*7.360 = 2576030

                        higher = 2576030

Impairment loss of asset = 2800000 – 2576030

                                    = $223,970

CGU

Carrying amount = 5550000

Recoverable amount= Higher of

                              1.   fair value less cost to sell ,

                                    land = 1200000 – 8% of 1200000 = 1104000

                                    building = 2700000 – 10% of 2700000 = 2430000

                                    equipment = 800000 – 25% of 800000 = 600000

                                    goodwill = 950000

                                    Total = 5084000

                        2.         value in use,

                                    360000*10.1059 = 3638122              

            Higher = 5084000

Impairment loss of CGU = 5550000 – 5084000

                                    = $466,000

Impairment loss of 466000 shall be first adusted against goodwill of 950000

Balance goodwill = 950000-466000 = 484000

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