IAS 36 Impairments 1 / 2

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MC Question 17

IAS 36 Impairment of Assets contains a number of examples of internal and external events which may indicate the impairment of an asset.

In accordance with IAS 36, which of the following would definitely NOT be an indicator of the potential
impairment of an asset (or group of assets)?

A

An unexpected fall in the market value of one or more assets

B

Adverse changes in the economic performance of one or more assets

C

A significant change in the technological environment in which an asset is employed making its software
effectively obsolete

D

The carrying amount of an entity’s net assets being below the entity’s market capitalisation

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MC Question 18

Aphrodite Co has a year end of 31 December and operates a factory which makes computer chips for mobile phones.

It purchased a machine on 1 July 20X3 for $80,000 which had a useful life of ten years and is depreciated on the
straight-line basis, time apportioned in the years of acquisition and disposal.

The machine was revalued to $81,000 on 1 July 20X4.

There was no change to its useful life at that date.

A fire at the factory on 1 October 20X6 damaged the machine leaving it with a lower operating capacity.

The accountant considers that Aphrodite Co will need to recognise an impairment loss in relation to this damage.

The accountant has ascertained the following information at 1 October 20X6:

(1)

The carrying amount of the machine is $60,750.

(2)

An equivalent new machine would cost $90,000.

(3)

The machine could be sold in its current condition for a gross amount of $45,000. Dismantling costs would amount
to $2,000.

(4)

In its current condition, the machine could operate for three more years which gives it a value in use figure of
$38,685.

What is the total impairment loss associated with Aphrodite Co’s machine at 1 October 20X6?

A     $nil
B     $17,750
C     $22,065
D     $15,750

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Specimen
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MC Question 16

In accordance with IAS 36 Impairment of Assets, which of the following explains the impairment of an asset and how to calculate its recoverable amount?

A

An asset is impaired when the carrying amount exceeds its recoverable amount and the recoverable amount is the higher of its fair value less costs of disposal and its value in use

B

An asset is impaired when the recoverable amount exceeds its carrying amount and the recoverable amount is the lower of its fair value less costs of disposal and its value in use

C

An asset is impaired when the recoverable amount exceeds its carrying amount and the recoverable amount is the higher of its fair value less costs of disposal and its value in use

D

An asset is impaired when the carrying amount exceeds its recoverable amount and the recoverable amount is the lower of its fair value less costs of disposal and its value in use

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Specimen
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MC Question 18

The following scenario relates to questions 16–20.

Telepath Co has a year end of 30 September and owns an item of plant which it uses to produce and package
pharmaceuticals.

The plant cost $750,000 on 1 October 20X0 and, at that date, had an estimated useful life of five years.

A review of the plant on 1 April 20X3 concluded that the plant would last for a further three and a half years and that its fair value was $560,000.

Telepath Co adopts the policy of revaluing its non-current assets to their fair value but does not make an annual transfer
from the revaluation surplus to retained earnings to represent the additional depreciation charged due to the revaluation.

On 30 September 20X3, Telepath Co was informed by a major customer that it would no longer be placing orders with
Telepath Co. As a result, Telepath revised its estimates that net cash inflows earned from the plant for the next three years would be:

Year ended 30 September:                                          $
20X4                                                                      220,000
20X5                                                                       180,000
20X6                                                                      200,000

Telepath Co’s cost of capital is 10% which results in the following discount factors:

Value of $1 at 30 September:
20X4                                                                            0·91
20X5                                                                            0·83
20X6                                                                            0·75

Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit.

On 30 September 20X3, there was an impairment to Rilda’s assets of $3,500,000.

The carrying amount of the assets of Rilda Co immediately before the impairment were:

$
Goodwill                                                               2,000,000
Factory building                                                   4,000,000
Plant                                                                    3,500,000
Receivables and cash (at recoverable amount)     2,500,000
                                                                      –––––––––––
                                                                          12,000,000

What is the value in use of Telepath Co’s plant as at 30 September 20X3?

A     $600,000
B     $450,000
C     $499,600
D     $0

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Specimen
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MC Question 19

Which of the following are TRUE in accordance with IAS 36 Impairment of Assets?

(1)

A cash generating unit is the smallest identifiable group of assets for which individual cash flows can be identified and measured

(2)

When considering the impairment of a cash generating unit, the calculation of the carrying amount and the recoverable amount does not need to be based on exactly the same group of net assets

(3)

When it is not possible to calculate the recoverable amount of a single asset, then that of its cash generating unit should be measured instead

A      1 only
B      2 and 3
C      3 only
D      1 and 3

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Specimen
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MC Question 20

The following scenario relates to questions 16–20.

Telepath Co has a year end of 30 September and owns an item of plant which it uses to produce and package
pharmaceuticals.

The plant cost $750,000 on 1 October 20X0 and, at that date, had an estimated useful life of five years.

A review of the plant on 1 April 20X3 concluded that the plant would last for a further three and a half years and that its fair value was $560,000.

Telepath Co adopts the policy of revaluing its non-current assets to their fair value but does not make an annual transfer
from the revaluation surplus to retained earnings to represent the additional depreciation charged due to the revaluation.

On 30 September 20X3, Telepath Co was informed by a major customer that it would no longer be placing orders with
Telepath Co. As a result, Telepath revised its estimates that net cash inflows earned from the plant for the next three years would be:

Year ended 30 September:                                          $
20X4                                                                      220,000
20X5                                                                       180,000
20X6                                                                      200,000

Telepath Co’s cost of capital is 10% which results in the following discount factors:

Value of $1 at 30 September:
20X4                                                                            0·91
20X5                                                                            0·83
20X6                                                                            0·75

Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit.

On 30 September 20X3, there was an impairment to Rilda’s assets of $3,500,000.

The carrying amount of the assets of Rilda Co immediately before the impairment were:

$
Goodwill                                                               2,000,000
Factory building                                                   4,000,000
Plant                                                                    3,500,000
Receivables and cash (at recoverable amount)     2,500,000
                                                                      –––––––––––
                                                                          12,000,000

What is the carrying amount of Rilda Co’s plant at 30 September 20X3 after the impairment loss has been correctly allocated to its assets?

A     $2,479,000
B     $2,800,000
C     $2,211,000
D     $3,500,000

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MC Question 4

Metric owns an item of plant which has a carrying amount of $248,000 as at 1 April 2014.

It is being depreciated at 12½% per annum on a reducing balance basis.

The plant is used to manufacture a specific product which has been suffering a slow decline in sales.

Metric has estimated that the plant will be retired from use on 31 March 2017.

The estimated net cash flows from the use of the plant and their present values are:

Net cash flowsPresent values
$$
Year to 31 March 2015120,000109,200
Year to 31 March 2016 80,00066,400
Year to 31 March 201752,00039,000
252,000
214,600

On 1 April 2015, Metric had an alternative offer from a rival to purchase the plant for $200,000.

At what value should the plant appear in Metric’s statement of financial position as at 31 March 2015?

A     $248,000
B     $217,000
C     $214,600
D     $200,000

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MC Question 14

As at 30 September 2013 Dune’s property in its statement of financial position was:

Property at cost (useful life 15 years)$45 million
Accumulated depreciation$6 million

On 1 April 2014, Dune decided to sell the property.

The property is being marketed by a property agent at a price of $42 million, which was considered a reasonably achievable price at that date.

The expected costs to sell have been agreed at $1 million.

Recent market transactions suggest that actual selling prices achieved for this type of property in the current market conditions are 10% less than the price at which they are marketed.

At 30 September 2014 the property has not been sold.

At what amount should the property be reported in Dune’s statement of financial position as at 30 September 2014?

A     $36 million
B     $37·5 million
C     $36·8 million
D     $42 million

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MC Question 18

Which of the following is NOT an indicator of impairment?

A

Advances in the technological environment in which an asset is employed have an adverse impact on its future use

B

An increase in interest rates which increases the discount rate an entity uses

C

The carrying amount of an entity’s net assets is higher than the entity’s number of shares in issue multiplied by its share price

D

The estimated net realisable value of inventory has been reduced due to fire damage although this value is greater than its carrying amount

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Specimen
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MC Question 16

Riley acquired a non-current asset on 1 October 2009 at a cost of $100,000 which had a useful economic life of ten years and a nil residual value.

The asset had been correctly depreciated up to 30 September 2014.

At that date the asset was damaged and an impairment review was performed.

On 30 September 2014, the fair value of the asset less costs to sell was $30,000 and the expected future cash flows were $8,500 per annum for the next five years.

The current cost of capital is 10% and a five year annuity of $1 per annum at 10% would have a present value of $3·79

What amount would be charged to profit or loss for the impairment of this asset for the year ended 30 September 2014?

A     $17,785
B     $20,000
C     $30,000
D     $32,215

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