Impairment – Page 2

FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

Question

Peak Limited conducts its activities from two properties, a main office in the centre and a property in the rural area where staff training is conducted. Both properties were acquired on 1 April 20X1 and had estimated lives of 25 years with no residual value. The company has a policy of carrying its land and buildings at current values. However, until recently property prices had changed for some years. On 1 October 20X3 the properties were revalued by a firm of surveyors. Details of this and the original costs are:

Land	Main office	Training premises
Cost 1 April 20X1	500	300
Valuation 1 October 20X3	700	350
Buildings	Main office	Training premises
Cost 1 April 20X1	1,200	900
Valuation 1 October 20X3	1,350	600

Required
Show the effect of the above transactions on the statement of profit or loss and statement of financial position of Peak Limited for the year ended 31 March 20X4.

Answer

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Tags: Depreciation, Financial Statements, IAS 16, Impairment, Non-current Assets, Profit or Loss, Property Valuation, Revaluation, Revaluation Reserve
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

Question

The following is relevant to three tangible non-current assets held by Chantelle (Ghana) Ltd.

Machine 1 was purchased on 1 January Year 1 for GH¢420,000. It had an estimated residual value of GH¢50,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 6 Chantelle (Ghana) Ltd revalued this machine to GH¢275,000 and reassessed its total useful life as fifteen years. On 1 January Year 7 an impairment review showed machine 1’s recoverable amount to be GH¢100,000 and its remaining useful life to be five years.

Machine 2 was purchased on 1 January Year 1 for GH¢500,000. It had an estimated residual value of GH¢60,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 7 this machine was classified as held for sale, at which time its fair value was estimated at GH¢200,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢210,000.

Machine 3 was purchased on 1 January Year 1 for GH¢600,000. In Year 1 depreciation of GH¢30,000 was charged. On 1 January Year 2 this machine was revalued to GH¢800,000 and its remaining useful life assessed as eight years. On 1 January Year 7 this machine was classified as held for sale, at which time, its fair value was estimated at GH¢550,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢550,000.

Tax is at the rate of 30%.

Required
For each machine show the effect of the above on profit or loss, other comprehensive income and revaluation reserve of Chantelle (Ghana) Ltd in Year 7. You should also show the brought forward balance on the revaluation reserve (at 1 January Year 7) in respect of machines 1 and 3.

Answer

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Tags: Depreciation, Held for Sale, IAS 36, IFRS 5, Impairment, Non-current Assets, Other Comprehensive Income, Profit or Loss, Revaluation, Revaluation Reserve
Level: Level 2

Topic: Impairment of Assets

FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

Question

33 AKYEM TRADERS LIMITED

(a) Following are the criteria that should be used while recognizing intangible assets from research and development work.

(i) No intangible asset arising from research shall be recognised.

(ii) An intangible arising from development shall be recognised if, and only if, an entity can demonstrate all of the following:

the technical feasibility of completing the intangible asset so that it will be available for use or sale.
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(b) (i) Since the product met all the criteria for the development of the product, it should be recognised as an intangible in the statement of financial position (SOFP) of the company. However, RI should capitalise only the development work (i.e. GH¢9 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to the research work, training of staff and cost of trial run.

Since the product has a useful life of 7 years, the amortization expense amounting to GH¢0.32 million (GH¢9 million × 3/12 ÷ 7 years) should be recorded in the statement of profit or loss.

(ii) This purchasing of right to manufacture should be recognised as an intangible in the SOFP because:

it is for an established product which would generate future economic benefits.
cost of the patent can be measured reliably.

Since there is a finite life, the patent must be amortised over its useful life. The useful life will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years). The amortization to be recorded in SOCI is GH¢2.83 million (GH¢17 million × 10/12 ÷ 5).

(iii) The acquired brand should be recognised as an intangible in the SOFP because acquisition price is a reliable measure of its value. The amortization to be recorded in SOCI is GH¢0.12 million (GH¢2 million ÷ 10 years × 7/12).

(iv) The carrying amount of the intangible asset should be increased to GH¢10 million in the SOFP. Since there is an indefinite useful life of the intangible assets, it should not be amortised. Instead, RI should test the intangible asset for impairment by comparing its recoverable amount with its carrying amount.

Required

In the light of International Financial Reporting Standards, explain how each of the above transactions should be accounted for in the financial statements of Akyem Traders Limited for the year ended 31 December 20X4

Answer

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Tags: Amortization, Capitalization, Financial Statements, IAS 38, Impairment, Intangible assets, Research and Development
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

Question

Tobi Plc entered into the following transactions during the year ended 31 December 20X4. The directors of Tobi Plc wish to capitalise all assets where possible.

(1) On 1 January Tobi Plc acquired the net assets of Gidi for GH¢105,000. The assets acquired had the following book and fair values:

	Book value	Fair value
Goodwill	–	5,000
Patents	5,000	5,000
Non-current assets	50,000	50,000
Other sundry net assets	40,000	40,000

The recoverable amount of the goodwill at 31 December 20X4 was estimated at GH¢2,000.

(2) On 1 April Tobi Plc purchased a patent for GH¢20,000. The patent has a remaining useful life of eight years.

(3) On 1 April Tobi Plc purchased a brand for GH¢50,000. The brand has a remaining useful life of five years.

(4) During the year Tobi Plc incurred expenditure of GH¢30,000 developing a new brand.

(5) During the year Tobi Plc incurred expenditure of GH¢40,000 developing customer lists.

Required
Show how the above transactions would appear in the financial statements (including notes to the financial statements) of Tobi Plc as of 31 December 20X4.

Answer

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Tags: Amortisation, Capitalisation, Financial Statements, Goodwill, IAS 38, Impairment, Intangible assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

PSAF- L2 – Q10.4 – International Public Sector Accounting Standards

Determine recoverable amount of three intangible assets for Nandom Technical University.

Question

The following information relates to three intangible assets in respect of Nandom Technical University.

	Brands (GHC)	Software (GHC)	Trade Marks (GHC)
Carrying amount	200,000	300,000	240,000
Net realisable value	220,000	250,000	200,000
Value in use	240,000	260,000	180,000

Required:
(a) What is the recoverable amount of each asset?

(b) Calculate the impairment provision for each of the assets.

Answer

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Tags: Accounting Standards, Asset Valuation, Financial Reporting, Impairment, Impairment Loss, Intangible assets, IPSAS, Non-current Assets, Public Sector Accounting, Recoverable Amount
Level: Level 2

Topic: International Public Sector Accounting Standards

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FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

PSAF- L2 – Q10.4 – International Public Sector Accounting Standards

Determine recoverable amount of three intangible assets for Nandom Technical University.

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FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

You're reporting an error for "FR – L2 – Q35 – Financial Reporting Standards and Their Applications"

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

You're reporting an error for "FR – L2 – Q34 – Impairment of Assets"

FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

You're reporting an error for "FR – L2 – Q33 – Intangible Assets"

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

You're reporting an error for "FR – L2 – Q32 – Intangible Assets"

PSAF- L2 – Q10.4 – International Public Sector Accounting Standards

Determine recoverable amount of three intangible assets for Nandom Technical University.

You're reporting an error for "PSAF- L2 – Q10.4 – International Public Sector Accounting Standards"

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