Question Tag: Cash-Generating Unit

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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

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

Question

Hukpor Ltd (Hukpor) manufactures a variety of consumer products. The company’s founders have managed the company for thirty years and are now interested in selling the company and retiring. Seekers Ltd is looking into the acquisition of Hukpor and has requested the company’s latest financial statements and selected financial ratios in order to evaluate Hukpor’s financial stability and operating efficiency. The summary of information provided by Hukpor is presented below:

Statements of Financial Position as at 31 December

Selected Financial Ratios of Hukpor Ltd for 2017
Current ratio 1.61:1
Acid-test ratio 0.64:1
Inventory turnover 3.17 times
Times interest earned 8.55 times
Debt-to-equity ratio 86%
Required:
a) Calculate ratios for the years 2018 for Hukpor in comparison with ratios for 2017. (5 marks)
b) For each of the ratios computed for 2018, analyse Hukpor’s performance for 2018 based
on the results of the ratio computed, in comparison with the results for 2017. (10 marks) c) Explain FIVE (5) limitations of accounting ratios. (5 marks)
(Total: 20 marks)

Answer

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Tags: Cash-Generating Unit, Fair Value, IAS 36, Impairment, Value in Use
Level: Level 2

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

Question

Kwik Ltd (Kwik) runs a unit in Ablekuma Metropolis that has suffered a massive drop in income due to failure in its technology on 1 January 2018. As a result, the following carrying amounts were recorded in the books immediately before the impairment test.

Asset	Carrying Amount (GH¢million)
Goodwill	20
Technology	5
Equipment	10
Land	50
Buildings	30
Other net assets	40
Total	155

The value in use of the unit is estimated at GH¢85 million, and Kwik has received an offer of GH¢75 million for the unit. The technology is worthless following its complete failure. Other net assets include inventory, receivables, and payables. It is considered that the carrying amount of other net assets is a reasonable representation of its net realisable value.

Required:
In accordance with IAS 36: Impairment of Assets, show the accounting treatment for the above transactions.

Answer

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Tags: Allocation of Impairment, Cash-Generating Unit, Fair Value, Goodwill, Impairment, Value in Use
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

Question

Afoko Ltd acquired a car taxi business on 1 January 2015 for GH¢230,000. The value of the assets of the business at that date based on net selling price were as follows:

Assets	GH¢’000
Vehicles	120
Intangible assets	30
Trade receivables	10
Cash	50
Trade payables	(20)
Net assets	190

On 1 February 2015, the taxi business had three (3) of its vehicles stolen. The net selling values of these vehicles was GH¢30,000, and because of non-disclosure of certain risks to the insurance company, the business was uninsured. As a result of this event, Afoko Ltd wishes to recognize an impairment loss of GH¢45,000, inclusive of the loss of the stolen vehicles due to the decline in value of the stolen income-generating unit, that is the taxi business. On 1 March 2015, a rival taxi company commenced business in the same area. It is anticipated that the business revenue of Afoko Ltd would be reduced by 25%, leading to a decline in the present value in use of the business, which is calculated at GH¢150,000. The net selling value of the taxi license has fallen to GH¢25,000 as a result of the rival taxi operator. The net selling values of the other assets have remained the same as at 1 January 2015.

Required:
Recommend how Afoko Ltd should account for the above transaction in its financial statements in accordance with IAS 36 Impairment of Assets.
(6 marks)

Answer

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Tags: Cash-Generating Unit, Goodwill, Impairment, Recoverable Amount
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: NOV 2016

CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets

Apply IAS 36 to determine impairment of a cash-generating unit, including goodwill allocation and fair value considerations.

Question

a) Sandoo Ltd is a company which manufactures machinery for industrial use and has a year end of 31 December 2021. The directors of Sandoo Ltd require advice on the following transaction:

i) Sandoo Ltd acquired a cash-generating unit (CGU) several years ago but, at 31 December 2021, the directors of Sandoo Ltd were concerned that the value of the CGU had declined because of a reduction in sales due to new competitors entering the market. At 31 December 2021, the carrying amounts of the assets in the CGU before any impairment testing were:

ii) The fair values of the Property, Plant and Equipment and the other assets at 31 December 2021 were GH¢20 million and GH¢34 million respectively and their costs to sell were GH¢200,000 and GH¢600,000 respectively. The CGU’s cash flow forecasts for the next five years are as follows:

iii) The pre-tax discount rate for the CGU is 8% and the post-tax discount rate is 6%. Sandoo Ltd has no plans to expand the capacity of the CGU and believes that a reorganisation would bring cost savings but, no plan has been approved. The directors of Sandoo Ltd need advice as to whether the CGU’s value is impaired. The following extract from a table of present value factors has been detailed below:

Required: With reference to relevant International Financial Reporting Standards: Advise the directors of Sandoo Ltd on how the above transactions should be accounted for in its financial statements as at 31 December 2021.

(10 marks)

Answer

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Tags: Cash-Generating Unit, Fair Value Less Costs to Sell, Goodwill, IAS 36, Impairment of Assets, Value in Use
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: JULY 2023

CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

Question

Samed Ltd is a Ghanaian company located in the Northern Region that manufactures goods such as washing machines, tumble dryers, and dishwashers. The manufacturing industry in Ghana is highly competitive with many products on the market. Samed Ltd’s current accounting year-end is 31 December 2022.

Samed Ltd has a production facility that started showing serious cracks and signs of possible leakage since July 2022. It is probable that Samed Ltd will have to undertake major repairs sometime during 2023 to rectify the problem. Samed Ltd does not have an insurance policy covering the production facility. The Chief Operating Officer has refused to disclose the issue in the financial statements for the year ended 31 December 2022, and no repair costs have yet been undertaken, although he is aware that this is contrary to International Financial Reporting Standards (IFRSs). According to the Chief Operating Officer, he does not believe that the need for major repairs on the production facility is an indicator of impairment. Furthermore, the Chief Operating Officer argues that no provision for the repair to the production facility should be made as there is no legal or constructive obligation to repair the facility.

Samed Ltd has a revaluation policy for property, plant, and equipment, and there is a balance on the revaluation surplus of GH¢20 million in the financial statements for the year ended 31 December 2022. However, this balance does not relate to the production facility, but the Chief Operating Officer is of the opinion that this surplus can be used for any future loss arising from the collapse of the production facility.

Required:
In accordance with relevant IFRSs, discuss the accounting treatment which Samed Ltd should adopt to account for the above transaction in its financial statements for the year ended 31 December 2022.
(5 marks)

Answer

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Tags: Cash-Generating Unit, Contingent Liabilities, Impairment, Production Facility, Provision, Revaluation Surplus
Level: Level 3

Topic: contingent liabilities and contingent assets, IAS 36: Impairment of assets
Series: DEC 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

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

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 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

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

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

Question

Answer

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Tags: Cash-Generating Unit, Fair Value, IAS 36, Impairment, Value in Use
Level: Level 2

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

Question

Asset	Carrying Amount (GH¢million)
Goodwill	20
Technology	5
Equipment	10
Land	50
Buildings	30
Other net assets	40
Total	155

Required:
In accordance with IAS 36: Impairment of Assets, show the accounting treatment for the above transactions.

Answer

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Tags: Allocation of Impairment, Cash-Generating Unit, Fair Value, Goodwill, Impairment, Value in Use
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

Question

Afoko Ltd acquired a car taxi business on 1 January 2015 for GH¢230,000. The value of the assets of the business at that date based on net selling price were as follows:

Assets	GH¢’000
Vehicles	120
Intangible assets	30
Trade receivables	10
Cash	50
Trade payables	(20)
Net assets	190

Required:
Recommend how Afoko Ltd should account for the above transaction in its financial statements in accordance with IAS 36 Impairment of Assets.
(6 marks)

Answer

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Tags: Cash-Generating Unit, Goodwill, Impairment, Recoverable Amount
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: NOV 2016

CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets

Apply IAS 36 to determine impairment of a cash-generating unit, including goodwill allocation and fair value considerations.

Question

a) Sandoo Ltd is a company which manufactures machinery for industrial use and has a year end of 31 December 2021. The directors of Sandoo Ltd require advice on the following transaction:

(10 marks)

Answer

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Tags: Cash-Generating Unit, Fair Value Less Costs to Sell, Goodwill, IAS 36, Impairment of Assets, Value in Use
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: JULY 2023

CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

Question

Answer

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Tags: Cash-Generating Unit, Contingent Liabilities, Impairment, Production Facility, Provision, Revaluation Surplus
Level: Level 3

Topic: contingent liabilities and contingent assets, IAS 36: Impairment of assets
Series: DEC 2022

Question Tag: Cash-Generating Unit

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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.

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets

Apply IAS 36 to determine impairment of a cash-generating unit, including goodwill allocation and fair value considerations.

CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

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.

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets

Apply IAS 36 to determine impairment of a cash-generating unit, including goodwill allocation and fair value considerations.

CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

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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.

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FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

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FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

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CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

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CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets

Apply IAS 36 to determine impairment of a cash-generating unit, including goodwill allocation and fair value considerations.

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CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

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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.

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FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

You're reporting an error for "FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis"

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

You're reporting an error for "FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications"

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

You're reporting an error for "CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets"

CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets

Apply IAS 36 to determine impairment of a cash-generating unit, including goodwill allocation and fair value considerations.

You're reporting an error for "CR – July 2023 – L3 – Q3a – IAS 36: Impairment of assets"

CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

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