- 15 Marks
FR – L2 – Q36 – Impairment of Assets
Question
Ashanti-Co Group
The assistant financial controller of the Ashanti-Co Group, a public listed company, has identified the matters below which she believes may indicate an impairment to one or more assets:
(a) Ashanti-Co owns and operates an item of plant that cost GH¢640,000 and had accumulated depreciation of GH¢400,000 at 1 October 20X3. It is being depreciated at 12½% on cost. On 1 April 20X4 (exactly half way through the year) the plant was damaged when a factory vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity. Also it is expected that as a result of the damage the remaining life of the plant from the date of the damage will be only two years. Based on its reduced capacity, the estimated present value of the plant in use is GH¢150,000. The plant has a current disposal value of GH¢20,000 (which will be nil in two years’ time), but Ashanti-Co has been offered a trade-in value of GH¢180,000 against a replacement machine which has a cost of GH¢1 million (there would be no disposal costs for the replaced plant). Ashanti-Co is reluctant to replace the plant as it is worried about the long-term demand for the product produced by the plant. The trade-in value is only available if the plant is replaced.
Required
(a). Prepare extracts from the statement of financial position and statement of profit or loss of Ashanti-Co in respect of the plant for the year ended 30 September 20X4. Your answer should explain how you arrived at your figures.
(b). On 1 April 20X3 Ashanti-Co acquired 100% of the share capital of Asamankese Limited, whose only activity is the extraction and sale of spa water.
Asamankese Limited had been profitable since its acquisition, but bad publicity resulting from several consumers becoming ill due to a contamination of the spa water supply in April 20X4 has led to unexpected losses in the last six months. The carrying amounts of Asamankese Limited’s assets at 30 September 20X4 are:
| GH¢’000 | |
|---|---|
| Brand (Vita-Cola – see below) | 7,000 |
| Land containing spa | 12,000 |
| Purifying and bottling plant | 8,000 |
| Inventories | 5,000 |
| 32,000 |
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Vita-Cola’, but because of the contamination it has re-branded its bottled water as ‘PureSpring’. After a large advertising campaign, sales are now starting to recover and are approaching previous levels. The carrying amount of the brand in the statement of financial position is the depreciated amount of the original brand name of ‘Vita-Cola’.
The directors have acknowledged that GH¢1.5 million will have to be spent in the first three months of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old ‘Vita-Cola’ bottled water at a cost of GH¢2 million; the remaining inventories are labelled with the new brand ‘PureSpring’. Samples of all the bottled water have been tested by the health authority and have been passed as fit to sell. The old bottled water will have to be relabelled at a cost of GH¢250,000, but is then expected to be sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of Asamankese Limited at 30 September 20X4, calculated according to the guidance in IAS 36, is GH¢20 million. There is no reliable estimate of the fair value less costs to sell of Asamankese Limited.
Required
Calculate the amounts at which the assets of Asamankese Limited should appear in the consolidated statement of financial position of Ashanti-Co at 30 September 20X4. Your answer should explain how you arrived at your figures.
Answer
(a). The plant had a carrying amount of GH¢240,000 on 1 October 20X3. The accident that may have caused impairment occurred on 1 April 20X4 and an impairment test would be done at this date. The depreciation on the plant from 1 October 20X3 to 1 April 20X4 would be GH¢40,000 (640,000 × 12½% × 6/12) giving a carrying amount of GH¢200,000 at the date of impairment. An impairment test requires the plant’s carrying amount to be compared with its recoverable amount. The recoverable amount of the plant is the higher of its value in use of GH¢150,000 or its fair value less costs to sell. If Ashanti-Co trades in the plant it would receive GH¢180,000 by way of a part exchange, but this is conditional on buying new plant which Ashanti-Co is reluctant to do. A more realistic amount of the fair value of the plant is its current disposal value of only GH¢20,000. Thus the recoverable amount would be its value in use of GH¢150,000 giving an impairment loss of GH¢50,000 (GH¢200,000 – GH¢150,000).
The remaining effect on income would be that a depreciation charge for the last six months of the year would be required. As the damage has reduced the remaining life to only two years (from the date of the impairment) the remaining depreciation would be GH¢37,500 (GH¢150,000 / 2 years × 6/12). Thus extracts from the financial statements for the year-ended 30 September 20X4 would be:
Statement of financial position
Non-current assets
Plant (150,000 – 37,500) GH¢112,500
Statement of profit or loss
Plant depreciation (40,000 + 37,500) 77,500
Plant impairment loss 50,000
(b). There are a number of issues relating to the carrying amount of the assets of Asamankese Limited that have to be considered. It appears the value of the brand is based on the original purchase of the ‘Vita-Cola’ brand. The company no longer uses this brand name; it has been renamed ‘PureSpring’. Thus it would appear the purchased brand of ‘Vita-Cola’ is now worthless. Asamankese Limited cannot transfer the value of the old brand to the new brand, because this would be the recognition of an internally developed intangible asset and the brand of ‘PureSpring’ does not appear to meet the recognition criteria in IAS 38. Thus prior to the allocation of the impairment loss the value of the brand should be written off as it no longer exists.
The inventories are valued at cost and contain GH¢2 million worth of old bottled water (Vita-Cola) that can be sold, but will have to be relabelled at a cost of GH¢250,000. However, as the expected selling price of these bottles will be GH¢3 million (GH¢2 million × 150%), their net realisable value is GH¢2,750,000. Thus it is correct to carry them at cost i.e. they are not impaired. The future expenditure on the plant is a matter for the following year’s financial statements.
Applying this, the revised carrying amount of the net assets of Asamankese Limited’s cash-generating unit (CGU) would be GH¢25 million (GH¢32 million – GH¢7 million re the brand). The CGU has a recoverable amount of GH¢20 million, thus there is an impairment loss of GH¢5 million. This would be applied first to goodwill (but there is none) then to the remaining assets pro rata. However under IAS 36 the value of the inventories should not be reduced as their net realisable value is in excess of their carrying amount. Thus the impairment loss is applied to the land and the plant as follows:
| Land | Plant | Total | |
|---|---|---|---|
| Carrying amount (GH¢’000) | 12,000 | 8,000 | 20,000 |
| % | 60% | 40% | 100% |
| Impairment loss (GH¢’000) | 3,000 | 2,000 | 5,000 |
| Revised carrying amount (GH¢’000) | 9,000 | 6,000 | 15,000 |
Consolidated statement of financial position at 30 September 20X4 (extracts)
| GH¢’000 | |
|---|---|
| Land containing spa | 9,000 |
| Purifying and bottling plant | 6,000 |
| Inventories | 5,000 |
- Topic: Impairment of Assets
- Uploader: Samuel Duah