Subject : SBR
Assignment No : 1
Date Given : 26th Dec 2023
Assignment Deadline date : 28th Dec 2023
Background
SolarTech, a publicly listed company, is facing challenges while preparing its financial statements for
the year ended 31 December 20X2. The company has underperformed in terms of profits and
operating cash flows, leading to shareholder dissatisfaction. The CFO, with a strong influence over
the accounting team, is pushing for accounting practices that may overly enhance the financial
statements' appearance.
Impairment of Assets
SolarTech's manufacturing plant, initially valued at $50 million, is now expected to have a recoverable
amount of only $30 million due to market conditions. However, the CFO is pressuring the accounting
team to avoid recognizing this impairment, citing concerns about negative shareholder reactions and
potential impacts on management bonuses.
Disposal Group Classified as Held for Sale
SolarTech has classified its subsidiary, LunarTech, as held for sale as of November 20X2. LunarTech's
carrying amount is $20 million, while its fair value less costs to sell is estimated at $18 million.
Despite this, the CFO insists on reporting a higher value, potentially misleading stakeholders.
Deferred Tax
SolarTech revalued a piece of land upwards by $15 million during the year, leading to a revaluation
surplus. The applicable tax rate is 30%. The accounting team has recognized the tax on the
revaluation surplus in Profit & Loss statement.
Discuss the accounting treatment in each of the above scenerios. (12 marks)
Impairment of Assets
State: 1mark
According to IAS 36 Impairment of Assets, an entity must assess at each reporting date whether
there is any indication that an asset may be impaired. If such indication exists, the entity shall
estimate the recoverable amount of the asset.
Apply: 2marks
In SolarTech’s case, the manufacturing plant, initially valued at $50 million, now has a recoverable
amount of only $30 million due to market conditions. This situation indicates impairment as per
IAS 36. The financial statements should reflect an impairment loss of $20 million ($50
million - $30 million), recognizing the plant's reduced value.
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Conclude: 1mark
Avoiding this impairment recognition, as the CFO suggests, would result in overstating
the asset’s value and the company's financial position, leading to misleading financial
statements.
Disposal Group Classified as Held for Sale
State: 1 mark
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requires that a
non-current asset (or disposal group) be classified as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing
use. It should be measured at the lower of its carrying amount and fair value less costs
to sell.
Apply: 2 mark
For SolarTech, LunarTech is classified as held for sale with a carrying amount of $20
million and a fair value less costs to sell of $18 million. The financial statements should
report LunarTech at $18 million.
Conclude: 1 mark
Reporting a higher value, as suggested by the CFO, would violate IFRS 5 and mislead
stakeholders about the company's true financial condition.
Deferred Tax
State: 1 mark
IAS 12 Income Taxes states that deferred tax liabilities and assets should be recognized
for all taxable and deductible temporary differences. A revaluation surplus gives rise to a
taxable temporary difference.
Apply: 2 mark
SolarTech revalued a piece of land upwards by $15 million. The applicable tax rate is
30%, resulting in a deferred tax liability of $4.5 million. This liability should be
recognized in other comprehensive income, not in the Profit & Loss statement.
Conclude: 1 mark
Incorrectly recognizing this in the P&L, as done by SolarTech’s accounting team, distorts
net income and does not comply with IAS 12.
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