- 15 Marks
FR – L2 – Q36 – Impairment of Assets
Calculate and explain the accounting for an impaired plant in Ashanti-Co Group's financial statements for the year ended 30 September 20X4.
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.
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