Inpairment of asset

Barry
Barry Registered Posts: 101 ? ? ?
Been given this question and have struggled with the answer wondering if someone can work through it for me

Pink has following net assets:

Goodwill 30
Property 60
plant 90
Total 180

Recoverable amount is 135.

Required is to allocate the impairment loss.

Really struggling:001_unsure:

Comments

  • peugeot
    peugeot Registered Posts: 624
    The first thing you need to get your head around is the order an impairment loss should be offset under IAS 36. The provisions of IAS 36 state that the impairment loss should be allocated in the following order:

    First to goodwill and then to the carrying value of the other assets of the cash generating unit on a pro rata basis. You must also be aware that you cannot reduce the carrying amount of the asset below the highest of (a) its fair value (b) its value in use and (c) zero.

    So in your question I would suggest you work in a table format:

    ............................Goodwill.........Property.........Plant.........Total

    Carrying amount.........30..................60..............90.............180

    Impairment loss.........(30).................(6)............(9).............(45)

    Carrying amount
    post impairment.........nil...................54..............81.............135

    So we have followed the order in IAS 36 and offset the loss against the goodwill first and then we have offset the remaining loss against the other assets on a pro rata basis.
  • Barry
    Barry Registered Posts: 101 ? ? ?
    Cheers steve I follow that. My tutor at our college is not all that good. He said that if you don't get asset impairment then compare the requirements to that of investment properties. Any ideas what he means.
  • peugeot
    peugeot Registered Posts: 624
    I have absolutely no idea what your tutor is talking about.

    IAS 40 is "Investment Properties". Under this standard if you measure investment properties at fair value then you do not test for impairment as at each balance sheet date the carrying value of the investment property is stated at market value. If measured using the cost model then you account for it under the IAS 16 (Property plant and equipment) provisions which means you depreciate it.

    I can only think your tutor is trying to compare a reduction in market value using the fair value model to that of an impairment loss but the 2 issues here are completely different. A loss due to reduced market values is recognised in profit or loss in the period it arises (as are gains) but losses due to impairment have to follow the order prescribed in IAS 36 ie to goodwill then to the other assets of the CGU on a pro rata basis.

    How you can realistically compare the 2 is beyond me and I would never, ever advise any student to compare IAS 36 to IAS 40 for ease of remembering.

    Kind regards
    Steve
  • Barry
    Barry Registered Posts: 101 ? ? ?
    Steve

    Have decided to look for another college as the teacher we have is awful. can I ask which college you lecture at. Is it anywere near High Wycombe at all.

    Thanks in advance

    Baz
  • peugeot
    peugeot Registered Posts: 624
    Hi Barry,

    I am not a tutor - I work in practice but will be running some seminars in the next few weeks relating to DFS if this will be any help to you.

    I will post more details in the coming weeks.

    Kind regards
    Steve
  • Barry
    Barry Registered Posts: 101 ? ? ?
    Thanks anyway. I am looking to move as are most of my class because our tutor does not know what he is doing.

    We did a question on fixed asset and we were asked to write about why an employee cannot be classed as an asset even though they help make money for a company. I am still uncertain why but our tutor just said because you cannot place a price on a person. Is this right?

    I am also doing a question on a grant as I have my mock exam next week am I right in putting this to the profit and loss statement?

    sorry for all the questions but I am walking through mud at the minute:thumbup1:

    Baz
  • peugeot
    peugeot Registered Posts: 624
    Hi Barry,

    Your tutor does have a point, though the measurement criteria is not the primary the reason for non-capitalisation of employees in IFRS.

    The reason you cannot capitalise an employee is because of 'control'. The IASB's 'Framework Document' says that an 'asset' is a resource 'controlled' by the entity. For example, an entity can control access to inventory by way of door codes, or keys. Control is lost by an employer in respect of employees by virtue of the fact that their staff could leave - the employer cannot stop an employee looking for a new job. I can see where your tutor is coming from, but if asked this question in an exam I would be more inclined to cite (a) the definition of an asset as per the IASB's Framework and (b) the fact that an employer cannot 'control' what their employees do and they can choose to leave. Do not cite the 'measurement' criteria advised by your tutor as this demonstrates a misunderstanding of what the mainstream Framework Document classes an asset to actually be.

    With government grants, you have 2 options under IAS 20. First the grant received can be treated as 'deferred income' i.e. a liability in the balance sheet. This will then be released to the income statement over the life of the grant i.e. DR deferred income creditor, CR income statement.

    The second option is to deduct the value of the grant from the non-current asset(s) it relates to. This has the same effect as above, but what this method does is reduce the actual depreciation charges charged to the income statement over the life of the grant.

    Both methods would be acceptable in a DFS exam as they are in IFRS.

    Best wishes
    Steve
  • peugeot
    peugeot Registered Posts: 624
    In addition, what I would always, always, always advise any student to do who is doing a DFS paper is if they get stuck on a question such as what Barry is asking, then always fall back onto the Framework document. It is an extremely easy thing to revise and will always score you marks even if you cannot do the numbers!

    For example if you are asked about provisions. Provision questions are always a gift, but can sometimes contain 'grey areas'. If you're struggling thinking about whether or not a liability should be recognised, go back to the Framework Document. This says that a liability is "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".

    In other words (i.e. plain English) you owe money. If you can't remember the provisions in IAS 37 then think (logically) if a liability would realistically exist given the scenario presented to you in the exam.

    You may have already answered this in an earlier part of the paper, so will pick up bonus points! Falling back on the Framework Document in various parts of a DFS paper will score you highly because the Framework (although, in itself not a standard) does apply the main principles - though it is worth noting that because the Framework is NOT a standard, if there is a conflict between an accounting standard under IFRS and the Framework, then an accounting standard will always prevail over the Framework.

    For more information about the Framework have a look at my recent article.

    Best wishes
    Steve

    Best wishes
    Steve
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