- 5 Marks
Question
Kwik Ltd (Kwik) runs a unit in Ablekuma Metropolis that has suffered a massive drop in income due to failure in its technology on 1 January 2018. As a result, the following carrying amounts were recorded in the books immediately before the impairment test.
| Asset | Carrying Amount (GH¢million) |
|---|---|
| Goodwill | 20 |
| Technology | 5 |
| Equipment | 10 |
| Land | 50 |
| Buildings | 30 |
| Other net assets | 40 |
| Total | 155 |
The value in use of the unit is estimated at GH¢85 million, and Kwik has received an offer of GH¢75 million for the unit. The technology is worthless following its complete failure. Other net assets include inventory, receivables, and payables. It is considered that the carrying amount of other net assets is a reasonable representation of its net realisable value.
Required:
In accordance with IAS 36: Impairment of Assets, show the accounting treatment for the above transactions.
Answer
Step 1: Calculate the impairment loss
- The carrying amount of the cash-generating unit (CGU) is GH¢155 million.
- The recoverable amount is the higher of the value in use (GH¢85 million) and the fair value less costs of disposal (GH¢75 million). Therefore, the recoverable amount is GH¢85 million.
- The impairment loss is the difference between the carrying amount and the recoverable amount:
Impairment loss = GH¢155 million – GH¢85 million = GH¢70 million.
Step 2: Allocation of impairment loss
- According to IAS 36, the impairment loss should be allocated first to goodwill, then to other assets on a pro-rata basis based on their carrying amounts, excluding any assets that are already at their fair value (e.g., technology, which is now worthless, and other net assets, which are at their net realisable value).
Allocation of impairment loss:
| Asset | Carrying Amount (GH¢million) | Impairment Allocation (GH¢million) | Carrying Amount after Impairment (GH¢million) |
|---|---|---|---|
| Goodwill | 20 | (20) | 0 |
| Technology | 5 | (5) | 0 |
| Equipment | 10 | (5) | 5 |
| Land | 50 | (25) | 25 |
| Buildings | 30 | (15) | 15 |
| Other net assets | 40 | 0 | 40 |
| Total | 155 | (70) | 85 |
Explanation of Allocation:
- Goodwill is written off first: GH¢20 million impairment allocated to reduce goodwill to GH¢0.
- Technology is worthless, so GH¢5 million is written off entirely.
- The remaining GH¢45 million impairment is allocated pro-rata to equipment, land, and buildings based on their carrying amounts.
Step 3: Final carrying amounts after impairment
- The total carrying amount of the CGU after impairment is GH¢85 million, matching the recoverable amount.
Impairment loss calculation: 1 mark
Allocation of impairment to goodwill and assets: 2 marks
Calculation of final carrying amounts: 2 marks
Total: 5 marks
- Tags: Allocation of Impairment, Cash-Generating Unit, Fair Value, Goodwill, Impairment, Value in Use
- Level: Level 2
- Topic: Financial Reporting Standards and Their Applications
- Series: NOV 2021
- Uploader: Dotse