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 – Nov 2022 – L3 – Q3 – Impairment of Assets (IAS 36)

Evaluate impairment of a CGU for Evo Plc, considering fair value, cost to sell, and cash flows.

Question

Evo Plc acquired a cash-generating unit (CGU) several years ago. The directors of Evo Plc were concerned that the value of the CGU had declined because of a reduction in sales due to new competitors entering the market. At February 28, 2021, the carrying amounts of the assets in the CGU before any impairment testing were:

Asset	Carrying Amount (N’m)
Goodwill	3
Property, Plant and Equipment	10
Other Assets	19
Total	32

The fair values of the property, plant, and equipment and the other assets at February 28, 2021, were N10 million and N17 million, respectively, and their costs to sell were N100,000 and N300,000, respectively. The CGU’s cash flow forecasts for the next five years are as follows:

Date (Year Ended)	Pre-tax Cash Flow (N’m)	Post-tax Cash Flow (N’m)
28 February 2022	8	5
28 February 2023	7	5
28 February 2024	5	3
28 February 2025	3	1.5
28 February 2026	13	10

The pre-tax discount rate for the CGU is 8%, and the post-tax discount rate is 6%. Evo Plc has no plan to expand the capacity of the CGU and believes that a reorganisation would bring cost savings, but as yet, no plan has been approved. The directors of Evo Plc need advice as to whether the CGU’s value is impaired.

The following extract from a table of present value factors has been provided:

Year	Discount Rate 6%	Discount Rate 8%
1	0.9434	0.9259
2	0.8900	0.8573
3	0.8396	0.7938
4	0.7921	0.7350
5	0.7473	0.6806

Required:
a. How is impairment loss determined and accounted for by a business entity? (6 Marks)
b. Advise the directors of Evo Plc on:
i. Whether the CGU’s value is impaired. (7 Marks)
ii. How the transactions above should be treated in its financial statements in accordance with the provisions of IAS 36 – Impairment of Assets. (7 Marks)
(Total 20 Marks)

Answer

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Tags: Cash-Generating Unit, Fair Value, Financial Reporting, Impairment, Value in Use
Level: Level 3

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

CR – Nov 2017 – L3 – Q6 – Impairment of Assets (IAS 36)

Provide advice on provisions and disclosures for Eko Exports Limited’s financial statements based on events in 2016.

Question

The following information pertains to Eko Exports Limited (EEL) for the financial year ended December 31, 2016:

A customer who owed ₦1 million was declared bankrupt after his warehouse was destroyed by fire on February 10, 2017. It is expected that the customer would be able to recover 50% of the loss from the insurance company.
An employee of EEL forged the signatures of directors and made cash withdrawals of ₦7.5 million from the bank. Of these, ₦1.5 million were withdrawn before December 31, 2016. Investigations revealed that an employee of the bank was also involved, and under a settlement arrangement, the bank paid 60% of the amount to EEL on January 27, 2017.
EEL has filed a claim against one of its vendors for supplying defective goods. EEL’s legal consultant is confident that damages of ₦1 million would be paid to EEL. The supplier has already reimbursed the actual cost of the defective goods.
A suit for infringement of patents, seeking damages of ₦2 million, was filed by a third party. EEL’s legal consultant is of the opinion that an unfavorable outcome is most likely. Based on past experience, he has advised that there is a 60% probability that the amount of damages would be ₦1 million and a 40% likelihood that the amount would be ₦1.5 million.

Required:
Advise EEL about the amount of provision that should be incorporated and the disclosures that are required to be made in the financial statements for the year ended December 31, 2016.
Total: 15 Marks

Answer

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Tags: Bankruptcy, Contingent Liabilities, Forgery, Legal claims, Provisions
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: NOV 2017

FR – May 2015 – L2 – SC – Q5 – Impairment of Assets (IAS 36)

Discuss intangible assets, characteristics and recognition of goodwill, development cost conditions, and calculate goodwill on consolidation.

Question

IAS 38 – Intangible Assets, specifies the criteria that must be met before an intangible asset can be recognised by an entity in its Financial Statements. Intangible assets are identifiable non-monetary assets without physical substance and include goodwill, brands, copyright and research and development expenditure. They could be
purchased and/or internally generated.
Required:

(a) Identify any TWO characteristics of goodwill which distinguish it from other intangible assets. (2 Marks)

(b) Explain THREE differences between purchased goodwill and non-purchased goodwill. (3 Marks)

(c) Identify any THREE conditions that must be met under IAS 38 for development expenditure to be recognised as an intangible asset. (3 Marks)

(d) State any FOUR factors to be considered when determining the useful life of an intangible asset. (4 Marks)

(e) Calculate the goodwill on consolidation from the information below:
Parent has 80% interests in subsidiary.

Item	Amount (N’000)
Parent’s cost of investment in subsidiary	299,700
Fair value of non-controlling interest at acquisition date	169,500
Net asset at acquisition date (subsidiary)	345,800
Impairment of goodwill	62,200

Required: Compute the goodwill on consolidation. (3 Marks)

Answer

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Tags: Development Costs, Goodwill, Intangible Assets, Purchased vs Non-Purchased Goodwill, Useful Life
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2015

FR – May 2021 – L2 – Q3b – Impairment of Assets (IAS 36)

Prepare a statement of profit or loss for Wizkid Bottling Company Plc showing continuing and discontinued operations.

Question

Wizkid Bottling Company Plc specializes in the production of alcoholic wine known as Blue Bull and a soft drink called “Wiz-Cola,” operating two divisions: Blue Bull and Wiz-Cola. Due to high labor costs and raw material shortages for wine production, the Blue Bull division has incurred significant operating losses. Management decided to close down the Blue Bull division and drew up a plan to discontinue its operations.

On February 1, 2019, the Board of Directors of Wizkid Bottling Company Plc approved and immediately announced the formal plan.

The following figures are available for the current and prior year ending March 31:

	2019		2018
	Blue Bull	Wiz-Cola	Blue Bull	Wiz-Cola
Revenue	235,000	1,570,000	250,000	1,250,000
Cost of sales	175,000	505,000	200,000	450,000
Admin. expenses	35,000	311,000	25,000	255,000
Distribution costs	20,000	186,500	10,000	157,500
Other operating	15,000	124,500	10,000	102,500
expenditure
Taxation expense	(3,000)	130,500	1,500	85,000

Additional Information:

Severance pay of N42.5 million was incurred between February 1, 2019, and March 31, 2019.
An evaluation of the recoverability of assets in the Blue Bull Division in terms of IAS 36 led to recognizing an impairment loss of N9.5 million, which is included in other operating expenses above.

Required:

i. Draft the statement of profit or loss for Wizkid Bottling Company Plc for the years ended March 31, 2019, and 2018, in compliance with IFRS 5, showing continuing and discontinuing operations.
(10 Marks)

ii. List additional disclosures required by IFRS 5 for the discontinued operations in the financial statements for the year ended March 31, 2019.
(3 Marks)

Answer

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Tags: Additional Disclosures, Discontinued Operations, IFRS 5, Profit or Loss
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2021

FR – May 2021 – L2 – Q3a – Impairment of Assets (IAS 36)

Discuss conditions to classify non-current assets as held for sale under IFRS 5.

Question

International Financial Reporting Standards (IFRS 5) on Non-Current Assets held for Sale and Discontinued Operations specifies the accounting treatment for assets held for sale and disclosure of discontinued operations.

Required:
Discuss the conditions which must exist in order to classify a Non-Current Asset as being held for sale and explain the accounting treatments that apply when such classification is deemed appropriate.

Answer

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Tags: Classification Conditions, Held for Sale, IFRS 5, Non-current Assets
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2021

FR – May 2021 – L2 – Q2 – Impairment of Assets (IAS 36)

Analyze asset sale due to privatization, calculate impairment, and address valuation criteria per IAS 36.

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

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Tags: Asset sale, Fair Value, Impairment, Privatization, Public Finance, Railway
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2021

FR – Nov 2014 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Analyze a trial balance to prepare financial statements, compute impairment, and adjust inventories for a corporate entity.

Question

The Trial Balance of Excellent Plc. as at 30 June 2014 is as follows:

The following notes are relevant:
i. Inventories as at 30/6/2013:

The net realisable values of these commodities per unit are as follows:

ii. Inventories on 30 June 2014 amounted to N9,000,000

iii. Prepaid salaries and wages were N10,000,000

iv. Included in the plant and machinery maintenance cost was depreciation of
N14,800,000.

v. The allowances for receivables are no longer required. The outstanding 10%
loan notes interest was paid on 30 June 2014 and this has not been accounted
for. The fair value of goods is N40,000,000 at the end of the year.

vi. The value in use of delivery van for the year 30 June 2014 is N31,000,000. The
prevailing market interest rate is 21% per annum and the Discounting Factor for
this year is 0.8264.

vii. The fair value of delivery van at an arm’s length transaction as at 30 June 2014
was N28,000,000 and the cost to sell was N2,000,000. All non-current assets
were depreciated at 10% per annum on reducing balance basis.

viii. Current tax provision for the year is N165,000,000.

Required:

a. Identify any FOUR of the cost items that are EXCLUDED in the valuation of inventories under IAS 2. (4 Marks)

b. Calculate the following:

(i) Value of opening inventories to be included in the Statement of Profit or Loss and Other Comprehensive Income. (2 Marks)
(ii) The present value in the use of delivery van (1 Mark)
(iii) The fair value and recoverable amount of delivery van (2 Marks)
(iv) The carrying amount and impairment if any on delivery van (2 Marks)

c. Prepare the Statement of Profit or Loss and Other Comprehensive Income (OCI) and Statement of Changes in Equity for the year ended 30 June 2014. (11 Marks)

d. Prepare the Statement of Financial Position as at 30 June 2014. (8 Marks)

Show all relevant workings

Answer

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Tags: Comprehensive Income, Depreciation, Financial Position, Impairment, Inventory Valuation, Trial Balance
Level: Level 2

Topic: Impairment of Assets (IAS 36), Inventory Accounting (IAS 2), Presentation of Financial Statements (IAS 1)
Series: NOV 2014

FR – May 2024 – L2 – SB – Q7 – Impairment of Assets (IAS 36)

Discuss the measurement models for intangible assets and calculate the carrying amount and revaluation surplus for Olumo-Taxi Limited.

Question

a. IAS 38 – Intangible Assets allows a business to choose one of two measurement models as its accounting policy for intangible assets after acquisition. However, the same model should be applied to all assets in the same class.

Required:
Discuss the TWO measurement models for intangible assets. (3 Marks)

b. Olumo-Taxi Limited’s financial year ends on December 31. The company adopted the revaluation model for its intangible assets and revalues them on a regular three-year cycle.

However, for intangible assets with a finite life, Olumo-Taxi Limited transfers the relevant amount from revaluation reserve to retained earnings each year.

During the year 2019, Olumo-Taxi Limited incurred N700,000 on the process of preparing an application for licenses for 15 taxis to operate in a holiday resort very close to Abeokuta. In order to prevent congestion and excessive traffic pollution, the licensing authority only allowed a small number of taxis to operate.

The outcome of the company’s application was uncertain up to November 30, 2019, when the local government authority accepted its application. In December 2019, Olumo-Taxi Limited incurred a cost of N90,000 in registering its licenses. The licenses were for a period of 9 years from January 1, 2019.

The licenses are freely transferable, and an active market in them exists. The fair value at December 31, 2019, was N94,500 per taxi, and Olumo-Taxi Limited carried them at fair value in its statement of financial position at December 31, 2019.

At December 31, 2022, Olumo-Taxi Limited undertook its regular revaluation. On that date, the licensing authority announced that it would triple the number of licenses offered to taxi operators, and there were transactions in the active market for licenses with six years to run at N45,000.

Required:
Calculate, with explanations, the carrying amount and revaluation surplus of the intangible assets of Olumo-Taxi Limited according to IAS 38 as at:
i. December 31, 2019
ii. December 31, 2022 (before regular revaluation)
iii. December 31, 2022 (after regular revaluation)
(12 Marks)

Answer

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Tags: Amortization, IAS 38, Intangible Assets, Measurement Models, Revaluation
Level: Level 2

Topic: Impairment of Assets (IAS 36)
Series: MAY 2024

FR – May 2024 – L2 – SB – Q4 – Impairment of Assets (IAS 36)

Differentiate between impairment and depreciation, and discuss the indicators and accounting treatment of impairment as per IAS 36.

Question

a. Differentiate between impairment and depreciation. (5 Marks)

b. Discuss the following as contained in IAS 36 – Impairment of Assets: i. Indicators of impairment.
ii. How to identify and account for impairment of assets. (6 Marks)

c. A non-current asset in the statement of financial position of Zamfara Ltd, an SME, at the beginning of the financial year had a carrying amount of ₦800,000. The asset had previously been revalued, and there was a revaluation surplus of ₦50,000 relating to it in the revaluation reserve. At the end of the financial year, Zamfara Ltd suspected that the asset had been impaired. It, therefore, estimated the recoverable amount of the asset and found this to be ₦600,000. The depreciation charge on the asset for the year would be ₦80,000.

Required:
As the finance manager of Zamfara Ltd, explain with relevant computation the accounting treatments required in line with the provisions of IAS 36. (9 Marks)

Answer

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Tags: Depreciation, Financial Reporting, IAS 16, IAS 36, Impairment
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2024

FR – Nov 2015 – L2 – Q4b – Impairment of Assets (IAS 36)

Assess whether plant and equipment is impaired and explain how impairment loss should be treated in the books.

Question

The following information relates to individual plant and equipment used by Phonex Nigeria Limited for its telecommunication operations as at December 31, 2014.

Plant and Equipment	Carrying Amount (N’000)	Fair Value less cost to sell (N’000)	Value in use (N’000)
1. Mast	297,500	302,500	285,000
2. Generators	592,500	517,500	512,500
3. Computer equipment	287,500	292,500	307,500
4. Credit card machines	207,500	187,500	197,500
5. Motor vehicles	77,500	65,000	–

Additional information:

i. The Mast and the Generator are carried at revalued amounts, and the cumulative revaluation surplus in other comprehensive income for the equipment are N30,000,000 and N15,000,000, respectively.

ii. The motor vehicles are buses used for transporting employees in the morning and evening, and it is not possible to determine the value in use of the buses separately because the buses do not generate cash inflows from continuing use that are independent of the cash flows from other assets.

Required:
Draft a memo addressed to your boss indicating whether each of the plant and equipment is impaired or not and also explaining how the impairment loss should be treated in the books of Phonex Nigeria Limited as at December 31, 2014.

Answer

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Tags: Assets, Financial Reporting, IAS 36, Impairment, Impairment Loss, Plant and Equipment
Level: Level 2