Topic: Impairment of Assets (IAS 36)

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

Ondo Telecoms Limited is one of the biggest telecoms companies in Abuja. One month after the year-end, the Chief Finance Officer (CFO), while reviewing the company’s activities came up with the following issues for the year ended 30 September, 2014:

(a) The Board of Directors is not impressed with the performance of the Home Broadband operating segment which posted a loss of N1.7 billion in 2014 financial year following another loss of N0.8 billion in the 2013 financial year.

(b) The carrying amount of the assets in the segment is N4.3 billion as at 30 September, 2014 and N4.5 billion as at 30 September, 2013. Professional valuers were engaged and they came up with a fair value of N4.2 billion as at 30 September, 2013.

(c) The Board of Directors made the final decision in June 2014 to sell off the assets in this segment and concentrate on other business lines. Since the beginning of September, four serious bidders have been negotiating with Ondo. The board anticipates the sale to be concluded by the end of May 2015 with the transaction cost of N0.3 million.

(d) On 1 November 2013, Ondo Telecoms Limited acquired a block of flats with an estimated useful life of 50 years at a total cost of N225 million. The blocks of flats are to be rented out to its employees and engineers at market prices. The decision to acquire the block of flats was made by the board due to the need to have the engineers close to the head office to attend to technical issues immediately they arise.

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

(f) International Telecom Limited, which acquired Edo Communications Limited during the year, has just published its results. Edo Communications Limited was a direct competitor to Ondo Telecoms Limited and does similar business. The CFO noted that International Telecom Ltd. shows an asset of N110 million arising from Edo Communication Limited customer lists’. This made the CFO realize how valuable the customer details are and has engaged a professional valuer who valued them at N98 million.

(g) Over the years, Ondo Telecoms Limited’s main business has been the provision of mobile and fixed landlines services as well as broadband services. In July 2013, Ondo Telecoms Limited bid for the award of a subscription television license from the government.

(h) Ondo Telecoms Limited won the bid and paid N560 million for a five-year license beginning 1 October 2013. The license is transferred and at the time of winning the bid, the fair value of the license was estimated at N580 million. Due to the slow uptake of the television business, the license was revalued at N420 million as at 30 September, 2014 by a professional valuer.

Required:
Advise, with suitable computations, how the above transactions should be accounted for in the financial statements of Ondo Telecoms Limited under IFRS for the year ended 30 September, 2014.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2017 – L3 – Q3c – Impairment of Assets (IAS 36)

Allocate an impairment loss across assets in a cash-generating unit based on IAS 36.

Question

A cash-generating unit holds the following assets:

Asset	Value (N’Million)
Goodwill	160
Patent	320
Property, Plant and Equipment	480

An annual impairment review is required as the cash-generating unit contains goodwill. The most recent review assesses its recoverable amount to be N720 million. An impairment loss of N240 million has been incurred and has been recognised in profit or loss.

Required:
Show how the value of the assets held by the cash-generating unit will change after the impairment test based on the information provided above.

Answer

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Tags: Asset Allocation, CGU, Goodwill, IAS 36, Impairment Loss
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2017 – L3 – Q3b – Impairment of Assets (IAS 36)

Identify indicators of impairment and discuss how to test for impairment of assets with dependent cash flows.

Question

IAS 36 stipulates how a company should test for impairment of assets. A multinational oil marketing company operating in Nigeria is not sure how to test for impairment of its assets, especially those that do not generate cash flows that are independent of other assets.

Required:

(i) Identify TWO external and TWO internal indicators that an asset of the multinational oil company may have been impaired. (2 Marks)

(ii) Briefly discuss how the multinational oil company should test for impairment of assets that do not generate independent cash flows. (6 Marks)

Answer

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Tags: Cash Flows, IAS 36, Impairment, Multinational Company, Testing
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2017 – L3 – Q3a – Impairment of Assets (IAS 36)

Discuss why FRCN should focus on impairment of non-financial and deferred tax assets during economic recession.

Question

The economic environment in the country has been very harsh, and it is now common knowledge that the economy is in a recession. This downturn impacts the income-generating capacity of companies, particularly in industries experiencing a significant decline in fortunes. Consequently, financial reporting regulators must closely examine evidence of impairment of assets in financial statements submitted by such companies.

Required:
Discuss briefly the reasons why the Financial Reporting Council of Nigeria (FRCN) should focus on the impairment of non-financial assets and deferred tax assets of listed companies in Nigeria during this period of slow economic growth. Also, outline the key areas entities should focus on when accounting for these items.

Answer

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Tags: Deferred Tax, Economic Recession, IAS 12, IAS 36, Impairment
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2021 – L3 – Q6 – Associates and Joint Ventures (IAS 28)

Discuss equity accounting for investment, accounting for deferred tax, and calculate the recoverable amount of equipment.

Question

Awa Publish has just recently acquired 18% of the shareholding in Tunbe, making it the second largest single shareholder. The majority shareholder has 58% voting shares, while the remainder of the shares is held by ten other shareholders, none holding more than 5% voting shares. The board of directors of Tunbe is made up of 12 members, with Awa Publish having 3 members and the majority shareholder having 7 members.

Awa Publish was able to negotiate its representation on the board due to its strategic importance in Tunbe’s operations and expansion plans. The directors of Awa Publish accounted for its investment in Tunbe as an equity investment. The directors feel that Tunbe should not be accounted for as an associate because Awa Publish does not have 20% of the voting interest and thus does not exercise significant influence over Tunbe.

Tunbe has been making losses for the past three years and has only returned a taxable profit once in the last five years. The projection is that Tunbe will return to making taxable profits in another five years. As part of the acquisition of shares in Tunbe, deferred tax assets for deductible temporary differences arose. The directors of Awa Publish are unsure how to account for this deferred tax asset.

Awa Publish has an item of equipment that cost N56 million. This item of plant and equipment currently has a carrying amount in the financial statements of N39.2 million. Awa Publish expects the operation of the equipment to generate undiscounted cash flows of N7 million per year for the next five years.

Awa Publish could generate immediate cash flow of N40 million if it sold the equipment today. However, if it did go ahead with the sale, it will have to pay a sales commission of 8.5%. The directors of Awa Publish are performing an annual impairment review and understand that determining the recoverable amount is an important part of this exercise.

Required:

a. Discuss how the investment in Tunbe should be accounted for in the financial statements of Awa Publish. (7 Marks)

b. Advise the directors of Awa Publish how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Awa Publish to determine the recoverable amount of the equipment. You may assume a discount rate of 10% or five-year annuity rate of 3.791, if relevant. (6 Marks)

Answer

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Tags: Deferred Tax, Equity Accounting, IAS 12, IAS 36, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36), Income Taxes (IAS 12)

CR – Nov 2020 – L3 – Q3 – Impairment of Assets (IAS 36)

Discuss the accounting treatment of Tupe Print's investment in Adowa plc, advise on deferred tax assets, and determine the recoverable amount of equipment.

Question

Tupe Print plc has just recently acquired 18% of the shareholding in Adowa plc, making it the second largest single shareholder. The majority shareholder has 58% voting shares, while the remainder of the shares are held by ten other shareholders, with none holding more than 5% voting shares. The board of directors of Adowa is made up of 12 members, with Tupe Print having 3 members and the majority shareholder having 7 members. Tupe Print was able to negotiate its representation on the board due to its strategic importance in Adowa‘s operations and expansion plans. The directors of Tupe Print have accounted for its investment in Adowa as an equity instrument investment. The directors feel Adowa should not be accounted for as an associate because Tupe Print does not have 20% of the voting interest and thus does not exercise significant influence over Adowa.

Adowa has been making losses for the past three years and has only returned a taxable profit once in the last five years. The projection is that Adowa will return to making taxable profits in another five years. As part of the acquisition of shares in Adowa, deferred tax assets for deductible temporary differences arose. The directors of Tupe Print are unsure of how to account for this deferred tax asset.

Tupe Print has an item of equipment which costs N56 million. This item of plant and equipment currently has a carrying value in the financial statements of N39.2 million. Tupe Print expects the operation of the equipment to generate undiscounted cash flows of N7 million per year for the next five years. Tupe Print could generate immediate cash flow of N40 million if the equipment is disposed of today. However, if the disposal is carried out, it will have to pay a sales commission of 8.5%. The directors of Tupe Print are performing an annual impairment review and understand that determining the recoverable amount is an important part of this exercise.

Required:

a. Discuss how the investment in Adowa plc should be accounted for in the financial statements of Tupe Print plc. (7 Marks)

b. Advise the directors of Tupe Print on how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Tupe Print in determining the recoverable amount of the equipment. You may assume a discount rate of 10% or a five-year annuity rate of 3.791 (if relevant). (6 Marks)

Answer

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Tags: Deferred Tax, Equity Instrument, Impairment Review, Investment Accounting, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36)

CR – May 2018 – L3 – SB – Q3b – Impairment of Assets (IAS 36)

valuate discontinuation conditions and prepare profit or loss statement for Bamgbose Plc with comparative figures.

Question

Bamgbose Plc. is a long-established travel agent, operating through a network of retail outlets and online store. In recent years, the business has seen its revenue from the online store grow strongly, and that of retail outlets decline significantly. On July 1, 2017, the board decided to close the retail network at the financial year end of December 31, 2017, and put the buildings up for sale on that date. The directors are seeking advice regarding the treatment of the buildings in the statement of financial position as well as the treatment of the trading results of the retail division for the year. The following figures are available at December 31, 2017:

Carrying amount of buildings: ₦30.0 million
Fair value less costs to sell of buildings: ₦25.8 million
Other expected costs of closure: ₦5.85 million

Required:

(i) Outline the conditions which must be met in order to present the results of an operation as “discontinued” and the accounting treatment that applies when such a classification is deemed appropriate. (5 Marks)

(ii) Draft the statement of profit or loss for Bamgbose Plc. for year ended December 31, 2017, together with the comparative figures for 2016, taking the above information into account. (8 Marks)

Answer

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Tags: Accounting Treatment, Closure Costs, Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets, Profit or Loss Statement, Revenue
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2018

CR – May 2018 – L3 – SB – Q3a – Impairment of Assets (IAS 36)

Outline conditions for classifying assets as held for sale and their accounting treatment under IFRS 5.

Question

(a) “IFRS 5 Non-current Asset held for Sale and Discontinued Operations” sets out the principles governing the measurement and presentation of non-current assets that are expected to be realized through sale rather than through continuing use. The standard also deals with reporting the results of operations that qualify as discontinued.

Required:

Discuss the conditions which must be met for a non-current asset to be classified as being “held for sale” and explain the accounting treatment that applies when such a classification is deemed appropriate. (7 Marks)

Answer

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Tags: Accounting Treatment, Classification Conditions, Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2018

CR – Nov 2018 – L3 – SC – Q5 – Impairment of Assets (IAS 36)

Evaluate if a manufacturing machine is impaired due to market changes and calculate the impairment charge.

Question

Atigen Manufacturing Limited bought a new machine for its factory in Otta, Ogun State, for N140 million on January 1, 2015. At acquisition, the machine was estimated to have a life span of 7 years with no scrap value. The carrying amount at December 31, 2017, is N80 million.

The machine generates largely independent cash flows and is therefore tested for impairment as a standalone asset. Due to a downturn in the economy and the reduction and cancellation of major customer orders, the directors concluded that the machine might be impaired.

You are provided with the following information:

Fair value of the machine: N60 million
Selling costs: 5% of the fair value
Value-in-use based on discounted future cash flows: N63.5 million

Required:

a. Determine if the machine is impaired based on the above information. (6 Marks)

b. Calculate (if any) the impairment charge that the directors should recognize in profit or loss. (9 Marks)

Answer

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Tags: Asset Valuation, Depreciation, Impairment, Recoverable Amount
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2022 – L3 – Q7 – Impairment of Assets (IAS 36)

: Evaluate the treatment of a property held for sale and assess impairment adjustments per IFRS 5.

Question

Kukundawa Plc acquired a property for N8 million on which annual depreciation is charged on a straight-line basis at the rate of 7.5%. An impairment loss of N700,000 was recognized at the end of the May 31, 2018 financial year when accumulated depreciation was N2 million. Consequently, the property was valued at its estimated value in use. The company planned to move to new premises before the property was reclassified as held for sale on October 1, 2018. By this time, the fair value less costs to sell was N4.8 million. Kukundawa Plc published interim financial statements on December 1, 2018, by which time the property market value had improved, and the fair value less costs to sell was reassessed at N5.04 million. At the year end, on May 31, 2019, it had improved further, so that the fair value less costs to sell was N5.9 million. The property was disposed of eventually on June 5, 2019, for N6 million.

Required:
a. Assess the above transactions based on the requirements of IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of the events occurring on the property over time and on the financial statements up to the date of disposal. (10 Marks)
(Total 15 Marks)

Answer

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Tags: Financial Position, IFRS 5, Impairment, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: NOV 2022

CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2017 – L3 – Q3c – Impairment of Assets (IAS 36)

Allocate an impairment loss across assets in a cash-generating unit based on IAS 36.

Question

A cash-generating unit holds the following assets:

Asset	Value (N’Million)
Goodwill	160
Patent	320
Property, Plant and Equipment	480

Required:
Show how the value of the assets held by the cash-generating unit will change after the impairment test based on the information provided above.

Answer

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Tags: Asset Allocation, CGU, Goodwill, IAS 36, Impairment Loss
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2017 – L3 – Q3b – Impairment of Assets (IAS 36)

Identify indicators of impairment and discuss how to test for impairment of assets with dependent cash flows.

Question

Required:

(i) Identify TWO external and TWO internal indicators that an asset of the multinational oil company may have been impaired. (2 Marks)

(ii) Briefly discuss how the multinational oil company should test for impairment of assets that do not generate independent cash flows. (6 Marks)

Answer

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Tags: Cash Flows, IAS 36, Impairment, Multinational Company, Testing
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2017 – L3 – Q3a – Impairment of Assets (IAS 36)

Discuss why FRCN should focus on impairment of non-financial and deferred tax assets during economic recession.

Question

Answer

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Tags: Deferred Tax, Economic Recession, IAS 12, IAS 36, Impairment
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2021 – L3 – Q6 – Associates and Joint Ventures (IAS 28)

Discuss equity accounting for investment, accounting for deferred tax, and calculate the recoverable amount of equipment.

Question

Required:

a. Discuss how the investment in Tunbe should be accounted for in the financial statements of Awa Publish. (7 Marks)

b. Advise the directors of Awa Publish how the deferred tax asset that has arisen should be accounted for. (7 Marks)

Answer

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Tags: Deferred Tax, Equity Accounting, IAS 12, IAS 36, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36), Income Taxes (IAS 12)

CR – Nov 2020 – L3 – Q3 – Impairment of Assets (IAS 36)

Discuss the accounting treatment of Tupe Print's investment in Adowa plc, advise on deferred tax assets, and determine the recoverable amount of equipment.

Question

Required:

a. Discuss how the investment in Adowa plc should be accounted for in the financial statements of Tupe Print plc. (7 Marks)

b. Advise the directors of Tupe Print on how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Tupe Print in determining the recoverable amount of the equipment. You may assume a discount rate of 10% or a five-year annuity rate of 3.791 (if relevant). (6 Marks)

Answer

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Tags: Deferred Tax, Equity Instrument, Impairment Review, Investment Accounting, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36)

CR – May 2018 – L3 – SB – Q3b – Impairment of Assets (IAS 36)

valuate discontinuation conditions and prepare profit or loss statement for Bamgbose Plc with comparative figures.

Question

Carrying amount of buildings: ₦30.0 million
Fair value less costs to sell of buildings: ₦25.8 million
Other expected costs of closure: ₦5.85 million

Required:

Answer

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Tags: Accounting Treatment, Closure Costs, Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets, Profit or Loss Statement, Revenue
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2018

CR – May 2018 – L3 – SB – Q3a – Impairment of Assets (IAS 36)

Outline conditions for classifying assets as held for sale and their accounting treatment under IFRS 5.

Question

Required:

Answer

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Tags: Accounting Treatment, Classification Conditions, Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2018

CR – Nov 2018 – L3 – SC – Q5 – Impairment of Assets (IAS 36)

Evaluate if a manufacturing machine is impaired due to market changes and calculate the impairment charge.

Question

You are provided with the following information:

Fair value of the machine: N60 million
Selling costs: 5% of the fair value
Value-in-use based on discounted future cash flows: N63.5 million

Required:

a. Determine if the machine is impaired based on the above information. (6 Marks)

b. Calculate (if any) the impairment charge that the directors should recognize in profit or loss. (9 Marks)

Answer

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Tags: Asset Valuation, Depreciation, Impairment, Recoverable Amount
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2022 – L3 – Q7 – Impairment of Assets (IAS 36)

: Evaluate the treatment of a property held for sale and assess impairment adjustments per IFRS 5.

Question

Answer

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Tags: Financial Position, IFRS 5, Impairment, Non-current Assets
Level: Level 3