Question 1

Calculate impairment if any

Rupees
Carrying amount of Machine 650,000
Fair Value 450,000
Cost to Sell 6% of fair value
Value in use 615,000

Recoverable amount would be:

a) Rs 650,000
b) Rs 615,000
c) Rs 423,000
d) Rs 192,000

Question 2
Which of the following are not fair value:

1. Offer price quoted by Seller

2. Bid price quoted by buyer
3. Value of similar assets
4. Forced Sales Value

a) All of above
b) 2, 3 and 4
c) 1, 3 and 4
d) 2 and 4

Question 3
What definition is appropriate for Financial Reporting:

a) Simplifying the accounting results to make it understandable to non accountants

b) Preparation and posting of journal entries in the accounting system
c) accounting for complex transactions
d) Preparing long essay type reports for tax investigation

Question 4
Furniture purchased for an outlet which is expected to last 4 years giving uniform economic
benefits throughout useful life is:
a) An asset not to be depreciated
b) An asset that should be subjected to straight line method of depreciation
c) An Asset subject to depreciation using diminishing balance method
d) Should be expensed out on first day of acquisition
Question 5

Cost of Asset (Plant) 345,000

Accumulated depreciation - 138,000
Carrying amount 207,000

Fair Value - Cost to Sell 310,000

Value in use 202,000

Which statement is correct:

a) Asset is impaired by Rs 5,000

b) Asset is impaired by Rs 103,000
c) Asset is not impaired at all
d) Income of Rs 103,000 to be booked

Correct Answers

Solution 1

Fair Value 450,000

Cost to Sell - 27,000 6% of FV
FV - Cost to sell 423,000
Value in use 615,000

Recoverable amount 615,000

Higher of 2
Option b) is correct

Solution 2

Fair Value is the bid price quoted by the market participant quoted for an asset. All
other measures are not fair values.

Correct option is c)

Solution 3

Financial reporting is simplifying the accounting results to make it understandable to

non accountants

Option a) is correct
Solution 4
An asset which is expected to provide uniform economic benefits should be subjected
to straight line method of depreciation

Option b) is correct

Solution 5

Cost of Asset (Plant) 345,000

Accumulated depreciation - 138,000
Carrying amount 207,000

Fair Value - Cost to Sell 310,000

Value in use 202,000
Recoverable amount (higher) 310,000

Conclusion: Asset is not impaired

Option c) is correct
Question 1
Assume you are the financial analyst at Astra Ltd. You are tasked with performing an impairment review on
a plant at the end of the fiscal year. The following data is available:

Carrying Amount of Plant: Rs 300,000

Fair Value Less Cost to Sell: Rs 280,000

Future Cash Flows from the Use of Asset:

Year 1: Rs 80,000 80,000 76,190
Year 2: Rs 75,000 75,000 68,027
Year 3: Rs 70,000 70,000 60,469
Year 4: Rs 60,000 80,000 65,816
Cash Flows on Disposal of Asset: Rs 20,000 270,503

Discount Rate: 5%

Required: Identify if the plant is impaired and, if so, calculate the amount of impairment.

Solution:
1. Calculate the Value in Use:
First, we need to calculate the present value of the future cash flows, including the cash flows on disposal.
Value in Use=80,000/(1+0.05)1+75,000/(1+0.05)2+70,000/(1+0.05)3+60,000/(1+0.05)4+20,000/(1+0.05)4
Value in Use=76,190.48+68,027.21+60,262.36+50,270.45+16,756.82
Value in use: Rs 270,503

2. Determine the Recoverable Amount:

The recoverable amount is the higher of the fair value less cost to sell and the value in use.
Recoverable Amount Higher of Rs 280,000 and Rs 271,507.32 = Rs 280,000

3. Calculate the Impairment Loss:

Impairment loss is calculated as the difference between the carrying amount and the
recoverable amount.

impairment Loss = 300,000 - 280,000 = Rs 20,000

Question 2

Susan Limited has reviewed its only plant for impairment at 31 December 2020 and at 31
December 2021. Data is as under:

Carrying amount at 31 December 2020 Rs 800,000

Remaining useful life on 31 Dec 2020 5 Years

Fair Value less cost to sell:

At 31 December 2020 745,000
At 31 December 2021 655,000

Expected cash Flows for value in use:

At the end of 31 December 2020

Year Expected cash Flows

2020 350,000
2021 300,000
2022 260,000
2023 250,000
2024 220,000

Expected cash flows changed in 2021 due to change in economic scenario:

At the end of 31 December 2021

Year Expected cash Flows

2021 275,000
2022 228,750
2023 185,000
2024 170,000

Discount rate is 16%.

Required
Calculate impairment loss (if any) on 31 December 2020 and 31 December 2021
Solution 31 December
2020 2021
Carrying amount 800,000 640,000
Recoverable Amount 934,062 619,479
Impairment Loss Nil - 20,521

Recoverable amount at 31 December 2020

Fair Value less cost to sell 745,000

Value in use
Year Cash Flows PV at 16%
1 350,000 301,724
2 300,000 222,949
3 260,000 166,571
4 250,000 138,073
5 220,000 104,745
934,062
Recoverable amount higher of (FV-CTS and VIU) 934,062

Recoverable amount at 31 December 2021

Fair Value less cost to sell 600,000

Value in use
Year Cash Flows PV at 16%
1 275,000 237,069
2 228,750 169,999
3 185,000 118,522
4 170,000 93,889
619,479
Recoverable amount higher of (FV-CTS and VIU) 619,479
Question 1
Dossier Limited is engaged in the production of USB drives for the last two years. The
company acquired a plant at the inception of the business (1 Jan 2020) costing Rs
960,000 with a useful life of 6 years.

The company is considering to initiate an impairment review at 31 December

2021 for its only plant. Details are as under:

Current Fair value 600,000

Cost to sell 47,100

Cash Flows expected from the plant

Annual Sales 605,000

Less
Annual variable Cost (272,250)
Annual operating cost (75,625)
Commission (30,250)
Interest payments (4,000)
Repairs and Maintenance (18,150)
Profit before tax 204,725
Tax payment 25% (51,181)
Net Profit after tax 153,544

Annual net cash flows will reduce by 5% in all remaining years of useful life.
Discount rate applicable to the company is 12%.

Required
Calculate impairment (if any)

Solution

Cost of plant at 1 Jan 2020 960,000

Depreciation for 2020 (160,000)
Depreciation for 2021 (160,000)
Carrying amount 31 Dec 2021 640,000
Recoverable amount 592,247
Impairment (47,753)

Recoverable Amount

Fair value - cost to sell 552,900

Value in use
0 1 2 3 4
Annual Sales 605,000
Less
Annual variable Cost (272,250)
Annual operating cost (75,625)
Commission (30,250)
Repairs and Maintenance (18,150)
Net Cash Flows 208,725 198,289 188,374 178,956
reduced by 5% every year

PV at 12% 186,362 158,075 134,081 113,730

PV at 12% 592,247

Question 2

Following are the net cash flows (inflows - outflows) expected from the use of asset:

Year Net Cash Flows

1 250,000
2 215,000
3 206,000
4 180,000
5 165,000
Outflows include
Year Interest Income Tax
1 24,000 30,000
2 20,000 25,800
3 23,000 24,720
4 32,000 21,600
5 34,500 19,800

Discount rate is 6%.

Required
Calculate value in use

Solution
1 2 3 4 5
Net Inflows 250,000 215,000 206,000 180,000 165,000
Addback
Interest 24,000 20,000 23,000 32,000 34,500
Tax 30,000 25,800 24,720 21,600 19,800
Net Cash Flows 304,000 260,800 253,720 233,600 219,300
PV at 6% 286,792 232,111 213,028 185,033 163,874
Value in Use 1,080,839
Question

Following calculations are performed by Subhan Limited's Chief Accountant with respect to a
plant's value in use at 31 December 2021:

1 2 3 4
Sales - in current condition 450,000 495,000 534,600 577,368
Additional sales after overhauling 186,000 210,000
Production cost (180,000) (198,000) (213,840) (230,947)
Production cost for add sales (74,400) (84,000)
Operating Cost (56,250) (61,875) (66,825) (72,171)
Repairs and maintenance (22,500) (24,750) (26,730) (28,868)
Interest on loans (12,400) (13,020) (14,000) (16,850)
Overhauling cost (125,995)
Profit before tax 178,850 71,360 324,805 354,531
Tax at 25% (44,713) (17,840) (81,201) (88,633)
Profit after tax 134,138 53,520 243,604 265,899
PV at 5% 127,750 48,544 210,434 218,755
Value in use 605,484

Required
Recalculate Value in use

Correct Value in use

1 2 3 4
Sales - in current condition 450,000 495,000 534,600 577,368
Additional sales after overhauling 186,000 210,000
Production cost (180,000) (198,000) (213,840) (230,947)
Production cost for add sales (74,400) (84,000)
Operating Cost (56,250) (61,875) (66,825) (72,171)
Repairs and maintenance (22,500) (24,750) (26,730) (28,868)
Interest on loans (12,400) (13,020) (14,000) (16,850)
Overhauling cost (125,995)
Profit before tax 178,850 71,360 324,805 354,531
Tax at 25% (44,713) (17,840) (81,201) (88,633)
Profit after tax 134,138 53,520 243,604 265,899
PV at 5% 127,750 48,544 210,434 218,755
Value in use 605,484
Question 4

Keyboard Limited is acquired a plant on 1 Jan 2016 costing Rs 300,000. Useful life of the plant
was determined to be 5 years. Expected residual value at the end of useful life is determined to
be Rs 50,000. The plant was subjected to produce TV remotes for "Sangsang" company. The
market of remotes was very promising initially. On 1 January 2017 the chief accountant was
informed that the sales of remotes are expected to go down significantly as Mobile Apps are now
developed to cater for the need.

Following are the estimates of cash flows for the remainder of the life:

1 Useful life is now considered to be 4 years in total

2 Sales for the next year would be Rs 140,000 and thereafter it is expected to go down
by 10% for the next 2 years
3 Variable production cost amounted to Rs 40,500 which is expected to move inline
with sales
4 Fixed annual production cost amounted to Rs 20,600 which is expected to inflate at
5% per anum.
5 The company pays Rs 10,600 interest on its loans obtained for the acquisition of asset
and other avenues.
6 Income tax is paid by the company at 25% p.a.
7 Residual value at the end of revised useful life is Rs 60,800.
8 Discount rate applicable to the company is 12%.
9 Fair value less cost to sell at 31 December 2016 is Rs 140,600.

Required
Calculate impairment (if any)

Solution

Impairment Loss

Carrying Amount 250,000

Recoverable Amount 209,068
Impairment (40,932)

Carrying amount
Cost 300,000
Depreciation 2016 (300k-50k)/5 (50,000)
250,000

Recoverable Amount

FV-CTS 140,600
Value in use

1 2 3
Sales (10% decr) 140,000 126,000 113,400
Variable Cost (10% decr) (40,500) (36,450) (32,805)
Fixed Cost (5% Incr) (20,600) (21,630) (22,712)
Residual Value 60,800
Net Cash Flows 78,900 67,920 118,684
PV at 12% 70,446 54,145 84,477
Value in use 209,068