- 20 Marks
Question
As a result of privatisation and commercialisation exercise currently going on in the country, the Ministry of Transport sold the assets and liabilities of the newly constructed standard gauge railway to a private company known as Stalus Rail Limited (SRL) to ensure smooth operations of the railway services by freeing it from government bureaucracy.
The summarised extracts of the statement of financial position at fair value of SRL on January 1, 2019, reflecting the terms and conditions of the sales agreement of the Transport Ministry are as follows:
| N’m | Assets |
|---|---|
| Goodwill | 150,000 |
| Operating licence | 900,000 |
| Property – Train stations and land | 225,000 |
| Rail tracks and coaches | 225,000 |
| Two (2) train engines | 750,000 |
| Total Assets | 2,250,000 |
Liabilities:
- Sundry liabilities: Nil
The operating licence is for a ten-year period issued on January 1, 2019, by the Transport Ministry and is stated at cost. The carrying value of the property and rail track and coaches is based on value in use, while the engines are valued at their net selling prices.
On February 1, 2019, one of the train engines got damaged due to a technical fault from the manufacturer and was completely destroyed. The sale of the assets to SRL was without recourse to the Transport Ministry or the manufacturer of the engines.
In view of this, it was estimated that there would be reduced passenger capacity, and the estimated value in use of the whole train service business of SRL was assessed at N1,500 billion.
The number of passengers after one of the engines was damaged was below expectation, even allowing for the reduced capacity. Consequently, the value in use of SRL rail services was re-assessed on March 31, 2019, at N1,350 billion. On this date, SRL received an offer of N675 billion from Papaya Railway Services Limited (PRSL) for the operating licence (since it is transferable). The realisable value of the other assets has not changed significantly.
Required:
a. Draft a memo addressed to the MD of Stalus Rail Limited (SRL) explaining the basis of allocating an impairment loss to the assets of a cash-generating unit in accordance with IAS 36 on impairment of assets.
(6 Marks)
b. Calculate the carrying amount of the assets of SRL Limited as at February 1, 2019, and March 1, 2019.
(10 Marks)
c. Explain TWO conditions that must exist before an impairment loss can be reversed.
(4 Marks)
Answer
(a) Memo to MD on Allocating Impairment Loss:
From: The Accountant
To: The Managing Director
Subject: Allocation of Impairment Loss to Assets of a Cash-Generating Unit
Dear Sir,
In accordance with IAS 36 on impairment of assets, a cash-generating unit (CGU) represents the smallest identifiable group of assets generating cash flows independently. The allocation of impairment losses to the assets in a CGU follows these steps:
- Specific Impairment: If a particular asset within the CGU is impaired, the loss is allocated to that specific asset.
- Goodwill: If any impairment remains, it should first reduce goodwill to zero.
- Remaining Allocation: Any remaining impairment loss is allocated to other assets on a pro-rata basis, based on their carrying amounts.
- Exclusions: Monetary assets such as receivables should not be impaired below their net realizable value.
- Asset Reduction Limits: No asset’s carrying amount should be reduced below the highest of its net realizable value, its value in use, or zero.
Thank you,
[Your Name]
Accountant
(b) The impairment losses are allocated as required by IAS 36 as calculated below:-
(c) Conditions for Reversing Impairment Loss:
- Improvement in Impairment Indicators: Evidence must indicate that the asset’s value has increased due to improvements or positive changes in economic conditions.
- Carrying Amount Limitation: The reversal should not exceed the original carrying amount of the asset, as if the impairment had never been recorded.
- Tags: Asset sale, Fair Value, Impairment, Privatization, Public Finance, Railway
- Level: Level 2
- Topic: Impairment of Assets (IAS 36)
- Series: MAY 2021
- Uploader: Kwame Aikins