Accounting for impairments
Q1. A company owns a car that was involved in an accident at the year end.
It is barely useable, so the value in use is estimated at $1,000. However,
the car is a classic and there is a demand for the parts. This results in a
fair value less costs to sell of $3,000. The opening carrying value was
$8,000 and the car was estimated to have a life of eight years from the
start of the year. Identify the recoverable amount of the car and any
impairment required.
Q2 An entity owns a property which was originally purchased for $300,000. The
property has been revalued to $500,000 with the revaluation of $200,000 being
recognised as other comprehensive income and recorded in the revaluation
reserve. The property has a current carrying value of $460,000 but the
recoverable amount of the property has just been estimated at only $200,000.
What is the amount of impairment and how should this be treated in the
financial statements?
Q3. A company runs a unit that suffers a massive drop in income due to the
failure of its technology on 1 January 20X8. The following carrying
values were recorded in the books immediately prior to the impairment:
Goodwill 20
Technology 5
Brands 10
Land 50
Buildings 30
Other net assests 40
The recoverable value of the unit is estimated at $85 million. The technology is
worthless, following its complete failure. The other net assets include inventory,
receivables and payables. It is considered that the book value of other net assets
is a reasonable representation of its net realisable value.
Show the impact of the impairment on 1 January
Q4.
Answer:
Q1: Impairment of a Car
Given:
• Opening carrying value: $8,000
• Useful life: 8 years → Annual depreciation = $8,000 ÷ 8 = $1,000
• Year-end carrying value (after 1 year): $8,000 - $1,000 = $7,000
• Value in use: $1,000
• Fair value less costs to sell: $3,000
Recoverable amount is the higher of:
• Value in use = $1,000
• Fair value less costs to sell = $3,000
Recoverable amount = $3,000
Impairment loss = Carrying amount - Recoverable amount
= $7,000 - $3,000 = $4,000
Q2: Impairment of a Revalued Property
Given:
• Original cost: $300,000
• Revalued to: $500,000 → Revaluation surplus = $200,000
• Current carrying amount: $460,000
• Recoverable amount: $200,000
Impairment loss = Carrying amount - Recoverable amount
= $460,000 - $200,000 = $260,000
Treatment:
1. First, reverse the revaluation surplus in equity (OCI) to the extent it
exists:
→ Use $200,000 from the revaluation reserve
2. Remaining $60,000 (i.e., 260,000 - 200,000) is recognized as
impairment loss in profit or loss
Journal entries:
• Dr Revaluation Reserve (OCI) $200,000
• Dr Impairment Loss (P&L) $60,000
• Cr Property, Plant and Equipment $260,000
Q3: Impairment of a CGU (Cash Generating Unit)
Given (All amounts in millions):
• Total assets before impairment:
o Goodwill: 20
o Technology: 5
o Brands: 10
o Land: 50
o Buildings: 30
o Other net assets: 40
o Total = 155
• Recoverable amount of unit = $85 million
• Technology is worthless = Fully impaired
Step-by-step:
1. Total impairment = 155 - 85 = $70 million
2. Start with specific asset impairments first:
o Technology is worthless → Impair full $5 million
o Remaining impairment to allocate = 70 - 5 = $65 million
3. Impair goodwill next (fully):
o Goodwill = 20 → Impair full 20
o Remaining = 65 - 20 = $45 million
4. Allocate remaining $45 million across other assets (excluding
already impaired Tech and Goodwill, and assuming other net
assets are stated at fair value so not impaired):
o Remaining assets:
▪ Brands: 10
▪ Land: 50
▪ Buildings: 30
▪ Total = 90
5. Allocation by proportion:
o Brands: (10 ÷ 90) × 45 = 5
o Land: (50 ÷ 90) × 45 = 25
o Buildings: (30 ÷ 90) × 45 = 15
Final impairment allocation:
Asset Impairment
Technology $5m
Goodwill $20m
Brands $5m
Land $25m
Buildings $15m
Total $70m
Let me know if you want journal entries for any of these or a summary for
reports!
Q4. Step 1: Adjustments & Calculations
A. Depreciation Calculation
1. Property (building only, as land is not depreciated)
• Total cost of property = $150,000
• Land = $30,000 → Building = $120,000
• Life = 25 years → Depreciation = $120,000 / 25 = $4,800
2. Plant and equipment
• Opening balance of depreciation = $48,600
• Depreciation rate = 20% reducing balance
• Cost = $176,200
• Depreciation = 20% × $176,200 = $35,240
B. Impairment of Damaged Machinery (Note 3)
• Damaged machine cost = $70,000 (acquired on 1 July 2005)
• Depreciated using 20% reducing balance
Carrying value at 30 June 2007:
• Year 1 depreciation = 20% × 70,000 = 14,000 → CV end of 2006 =
56,000
• Year 2 depreciation = 20% × 56,000 = 11,200 → CV end of 2007 =
$44,800
Option (i): Selling the machine
• Buyer will pay 80% of CV = 80% × $44,800 = $35,840
• Less repair and delivery costs:
o Labour = 2,160
o Delivery = 2,100
o Insurance = 580
o Total costs = $4,840
Net selling value = $35,840 - 4,840 = $31,000
Option (ii): Use in business
• Value in use (PV of cash flows) = $31,800
Recoverable amount = higher of $31,800 (value in use) and $31,000
(fair value less cost to sell)
Recoverable amount = $31,800
Impairment loss = Carrying amount - Recoverable amount = 44,800 -
31,800 = $13,000
C. Provision for tax = $6,500 (Given)
Step 2: Statement of Profit or Loss for the year ended 30 June 2007
Particulars $
Revenue 390,000
Less: Cost of Sales
- Opening Depreciation (Property) 38,400
- Add: Depreciation (Building) 4,800
- Add: Depreciation (Plant & Equip.) 35,240
- Add: Impairment of machinery 13,000
- Other cost of sales 210,600
Total Cost of Sales (302,040)
Gross Profit 87,960
Distribution Costs (6,800)
Particulars $
Admin Expenses (12,700)
Loan Interest Paid (3,600)
Profit before tax 64,860
Taxation (6,500)
Profit for the year 58,360
Step 3: Statement of Financial Position as at 30 June 2007
Assets
Non-current assets:
Particulars $
Property (150,000 - 38,400 - 4,800) 106,800
Plant & Equipment (176,200 - 48,600 - 35,240 - 13,000) 79,360
Total Non-current assets 186,160
Current assets:
Particulars $
Inventory 18,100
Trade Receivables 31,600
Bank 1,950
Total Current 51,650
Total Assets = 186,160 + 51,650 = 237,810
Equity and Liabilities
Equity:
Particulars $
Ordinary Share Capital 50,000
Share Premium 9,000
Retained Earnings (Opening) 11,450
Add: Profit for the year 58,360
Total Equity 128,810
Non-current liabilities:
Particulars $
12% Loan note 40,000
Current liabilities:
Particulars $
Trade Payables 25,400
Taxation Provision 6,500
Total Current 31,900
Total Liabilities = 40,000 + 31,900 = 71,900
Total Equity & Liabilities = 128,810 + 71,900 = $200,710
