Question Tag: IAS 36

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  • 5 Marks

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.

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.

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  • 8 Marks

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.

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)

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  • 7 Marks

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.

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.

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  • 20 Marks

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.

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)

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  • 20 Marks

AAA – May 2024 – L3 – SB – Q2 – Overview of Advanced Audit and Assurance

Discuss audit review types, include necessary IAS 16 and IAS 36 information in the audit checklist, and advise on misclassified asset treatment.

The statement below is an extract of property, plant and equipment from the “notes to the financial statements” of ABC Plc:

Land and buildings Plant, equipment, fixtures and fittings, and motor vehicles Total
Costs (₦)
At January 1, 2020 75,230,481 120,454,850 195,685,331
Additions 12,540,000 16,000,500 28,540,500
Acquisitions through business combinations 24,400,000 35,750,430 60,150,430
Classified as held for sale (10,200,450) (15,450,600) (25,651,050)
Disposals (5,000,465) (10,700,250) (15,700,715)
At December 31, 2020 96,969,566 146,054,930 243,024,496
Accumulated depreciation and impairment losses
At January 1, 2020 46,660,254 66,675,860 113,336,114
Depreciation charge for the year 5,594,523 17,220,518 22,815,041
Classified as held for sale (7,650,338) (9,270,000) (16,920,338)
Disposals (3,762,523) (9,034,069) (12,796,592)
Impairment losses 5,267,533 6,022,713 11,290,246
Reversal of Impairment losses (4,515,028) (4,818,170) (9,333,198)
At December 31, 2020 41,594,421 66,796,852 108,391,273

Net carrying amount
At December 31, 2020: ₦55,375,145 (Land and buildings), ₦79,258,078 (Plant, equipment, fixtures, and fittings, and motor vehicles), Total: ₦134,633,223
At December 31, 2019: ₦28,590,212 (Land and buildings), ₦53,778,390 (Plant, equipment, fixtures, and fittings, and motor vehicles), Total: ₦82,368,602

The above was the situation of the statement of financial position of the company when it was signed at the board of directors meeting. During further review to sign off the audit file, it was discovered that the classification of some of the assets as impaired was due to wrong classification and the value had actually increased due to a new road network in the location. This affected the impairment losses for the year. The new value of the buildings affected and shown in the note above as available from market survey had actually grown to ₦8.5 million within the period under review.

Required:

  1. Evaluate the different types of audit review, the purposes, and the scope of the reviews. (10 Marks)
  2. Discuss the necessary information to be included in the audit checklist based on the information above in relation to IAS 16 – Property, Plant, and Equipment and IAS 36 – Impairment of Assets. (7 Marks)
  3. Advise on the treatment of the issue raised with regard to the wrongly classified assets. (3 Marks)

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  • 30 Marks

CR – Nov 2023 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Sports PLC Group, considering goodwill, non-controlling interests, impairments, and disposals.

Sports PLC is a company which operates in the service sector. Sports PLC has a business relationship with Football PLC and Volleyball PLC. The financial positions of these companies as at September 30, 2020, are stated below:

Item Sports PLC Football PLC Volleyball PLC
Non-current assets: N’m N’m N’m
Property, plants, and equipment 1,840 600 620
Investment in subsidiaries:
– Football PLC 1,460 – –
– Volleyball PLC 640 – –
Investment in Handball PLC 96 – –
Intangible assets 396 60 70
Total Non-current assets 3,792 1,300 690
Current assets 1,790 960 500
Total assets 5,582 2,260 1,190

Equity and liabilities

Item Sports PLC Football PLC Volleyball PLC
Ordinary share capital 1,840 800 400
Other components of equity 146 74 50
Retained earnings 1,790 884 278
Total equity 3,776 1,758 728
Non-current liabilities 990 246 186
Current liabilities 816 256 276
Total liabilities 1,806 502 462
Total equity and liabilities 5,582 2,260 1,190

Additional Information

  1. Acquisition of Football PLC:
    • On October 1, 2018, Sports PLC acquired 70% of the equity interest in Football PLC. The purchase consideration was cash of N1,460 million. At the acquisition date, the fair value of the non-controlling interests (NCI) in Football PLC was N590 million. The fair value of the identifiable net assets acquired was N1,670 million. Retained earnings of Football PLC were N638 million, and other components of equity were N54 million. The excess in fair value is due to non-depreciable land.
  2. Acquisition of Volleyball PLC:
    • On October 1, 2019, Football PLC acquired 80% of the equity interest in Volleyball PLC for a cash consideration of N640 million. The fair value of the non-controlling interests for 20%, 30%, and 44% holdings was N144 million, N216 million, and N322 million, respectively. At the date of acquisition, the fair value of the identifiable net assets of Volleyball PLC was N724 million. Retained earnings were N212 million, and other components of equity were N40 million. The excess in fair value is due to non-depreciable land. The group’s policy is to measure the non-controlling interests at fair value at the acquisition date.
  3. Impairment Testing:
    • As of September 30, 2020, both Football PLC and Volleyball PLC were tested for impairment. The recoverable amounts for Football PLC and Volleyball PLC were N2,850 million and N1,208 million, respectively. Directors determined that impairment was due to poor performance of intangible assets.
  4. Investment in Handball PLC:
    • On October 1, 2018, Sports PLC acquired a 14% interest in Handball PLC for N36 million, classified as fair value through other comprehensive income (FVTOCI). On April 1, 2020, Sports PLC acquired an additional 16% interest for N54 million, achieving significant influence. The value of the original 14% investment on April 1, 2020, was N42 million. Handball PLC reported after-tax profits of N40 million for the year ending September 30, 2019, and N60 million for the year ending September 30, 2020. In September 2020, Sports PLC received a dividend of N4 million from Handball PLC, credited to other components of equity.
  5. Project Development Costs:
    • Sports PLC purchased patents costing N20 million on October 1, 2019, to develop new products. An additional investigative cost of N14 million was incurred, and a working prototype was created at a cost of N8 million. Another N6 million was spent to prepare the product for sale, and marketing costs amounted to N4 million. All costs were included in intangible assets.
  6. Disposal Plan:
    • Sports PLC intends to dispose of a major patent line. At the date the criteria for “held for sale” were met, the carrying amounts were:
      • Property, Plant, and Equipment: N36 million
      • Inventories: N98 million
      • Current Liabilities (Trade Payables): N6 million
    • Expected proceeds are N60 million. No adjustments have been made to the financial statements for this decision.

Required: Prepare the consolidated statement of financial position for Sports PLC Group as of September 30, 2020. (30 Marks)

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  • 20 Marks

FR – May 2017 – L2 – SB – Q3 – Partnership Account

Advise Bode Limited on accounting treatment for impairment, borrowing costs, and reclassification to investment property in accordance with IAS 36, IAS 23, and IAS 40.

You are a financial reporting consultant. The management of Bode Limited, a well-diversified company with branches in all states of the federation, has some transactions for which it requires advice. Bode Limited has a financial accountant who is not yet a qualified accountant. These transactions are as follows:

  1. Impairment of Assets: Bode Limited recognized a cash-generating unit during the year ended December 31, 2015, comprising:
    • Property, plant, and equipment: N4,050 million
    • Goodwill: N450 million
    • Other assets: N2,700 million
      Total carrying amount: N7,200 million

    The management estimated the recoverable amount of the cash-generating unit at N6,300 million as of December 31, 2015. The financial accountant understands some provisions of IAS 36 on asset impairment but is uncertain about how to allocate impairment across these assets within the unit.

  2. Borrowing Costs: On January 1, 2015, Bode Limited borrowed N300 million to fund the construction of two assets, expected to take a year to complete. The funds were drawn on January 1 and were allocated as follows, with the remaining funds invested temporarily:
    • Asset X: N50 million on January 1, N50 million on July 1
    • Asset Y: N100 million on January 1, N100 million on July 1
      The loan interest rate is 9% per annum, and surplus funds can be invested at a rate of 7% per annum.
  3. Investment Property Reclassification: The company’s head office in Abuja, previously owner-occupied, was vacated and let out on June 30, 2015, due to a cost-saving decision to move operations to a nearby branch office. The property, initially recognized under IAS 16 at a cost of N37.5 million with a 50-year useful life, was revalued to N52.5 million by an independent valuer as of December 31, 2015. Bode Limited’s accounting policy for investment properties is to use the fair value model.

Required:
Write a memo advising Bode Limited on the accounting treatments for each transaction in their financial statements. Provide relevant calculations where necessary.

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  • 20 Marks

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.

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)

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  • 15 Marks

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.

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.

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  • 5 Marks

FR – Nov 2015 – L2 – Q4a – Impairment of Assets (IAS 36)

List external and internal factors an entity should consider to assess asset impairment.

The purpose of IAS 36: Impairment of Assets is to provide entities with guidance to determine whether an asset is impaired and how the impairment should be recognized.

Required:
a. In assessing whether there is an indication that an asset may be impaired, what factors should an entity consider?

 

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  • 5 Marks

FR – Nov 2021 – L2 – Q1b – Impairment of Assets (IAS 36)

Explain how an entity should identify and account for impairment of assets under IAS 36.

Under IAS 36 – Impairments of Assets:

Required:

To briefly explain how an entity should identify and account for the impairment of assets.

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  • 7 Marks

FR – May 2018 – L2 – Q7b – Impairment of Assets (IAS 36)

Explain the process of identifying and accounting for impairment of property, plant, and equipment under IAS 36.

As the accounting officer in charge of your company’s property, plant, and equipment (PPE), draft a memo to the chief accountant explaining how impairment of PPE should be identified and accounted for by your company in accordance with IAS 36.

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  • 5 Marks

FR – April 2022 – L2 – Q5b – Financial Reporting Standards and Their Applications

Outlines mandatory testing requirements for impairment of certain assets under IAS 36.

In accordance with IAS 36: Impairment of Assets, an entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indications exist, the entity shall estimate the recoverable amount of the asset. However, some assets would require mandatory testing for impairment.
Required:
Outline assets that require mandatory testing for impairment in accordance with IAS 36: Impairment of Assets. (5 marks)

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  • 20 Marks

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

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

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)

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  • 5 Marks

July 2023 – L2 – Q2a – Impairment of Assets (IAS 36)

Treatment of brand name in Bondito Ltd’s financials following impairment of its subsidiary Manyabe Ltd.

Bondito Ltd acquired 100% of a subsidiary, Manyabe Ltd, on 1 January 2021. The carrying amount of the assets of Manyabe Ltd in the consolidated financial statements of the Bondito group at 31 December 2021, immediately before an impairment review, were as follows:

Assets GH¢ million
Goodwill 1.4
Brand name 2
Property, plant, and equipment 6
Current assets (at recoverable amount) 2.4
Total 11.8

The recoverable amount of Manyabe Ltd was estimated at GH¢9.6 million at 31 December 2021, and the impairment of the investment in Manyabe Ltd was deemed to be GH¢2.2 million. Bondito Ltd applies IAS 16: Property, Plant, and Equipment, and IAS 36: Impairment of Assets in preparing its financial statements.

Required:
Assuming Manyabe Ltd represents a cash-generating unit, show the financial reporting treatment of the brand name at 31 December 2021 in the books of Bondito Ltd following the impairment review.
(Total: 5 marks)

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  • 6 Marks

FR – May 2018 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculate the carrying amount of a plant asset after applying impairment losses as at 31 March 2018 in line with IAS 36.

Devine Education Ltd acquired an item of plant at a cost of GH¢800,000 on 1 April 2016. The plant had an estimated residual value of GH¢50,000 and an estimated useful life of five years, neither of which has changed. Devine Education Ltd uses straight-line depreciation.

On 31 March 2018, Devine Education Ltd was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Devine Education Ltd. Even before this information was known, Devine Education Ltd had been having difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant for the next three years will be:

Year ended GH¢’000
31 March 2019 220.00
31 March 2020 180.00
31 March 2021 170.00

Devine Education Ltd has confirmed that there is no market in which to sell the plant as at 31 March 2018, but is confident that it can still be sold for its original estimated realisable value on 31 March 2021. Devine Education Ltd’s cost of capital is 10%, and the following values should be used:

Value of GH¢1 at:
End of year 1 0.91
End of year 2 0.83
End of year 3 0.75

Required:
In line with IAS 36: Impairment of Assets, calculate the carrying amount of the asset above as at 31 March 2018 after applying any impairment losses. (Note: Calculations should be to the nearest GH¢1,000). (6 marks)

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  • 3 Marks

FR – Nov 2018 – L2 – Q2b- Financial Reporting Standards and Their Applications

This question relates to the impairment test of an asset, applying IAS 36.

Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢11 million at 31 December 2017 (after adjusting for depreciation for the year) may be impaired due to a change in use. An impairment test conducted on 31 December 2017 revealed its fair value less cost of disposal to be GH¢5 million. The machine is now expected to generate an annual net income of GH¢2 million for the next three years at which point the asset would be sold for GH¢2.4 million. An appropriate discount rate is 10%. Pusiga charges depreciation at 20% on a reducing balance method on machinery.

Note:

  • The present value of ordinary annuity of GH¢1 at 10% for one year, two years, and three years is 0.909, 1.736, and 2.487 respectively.
  • The present value of GH¢1 at 10% for one year, two years, and three years is 0.909, 0.826, and 0.751 respectively.

Required:
In accordance with IAS 36: Impairment of Assets, explain with justification the required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31 December 2017.

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  • 5 Marks

CR – May 2016 – L3 – Q2a – IAS 36: Impairment of assets

Analyze the circumstances under which impairment losses arise and demonstrate the circumstances that may indicate that a company's assets may have become impaired as per the provisions of IAS 36 – Impairment of Assets.

Analyze the circumstances under which impairment losses arise and demonstrate the circumstances that may indicate that a company’s assets may have become impaired as per the provisions of IAS 36 – Impairment of Assets.

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  • 7 Marks

CR – Mar 2024 – L3 – Q2b – IAS 36: Impairment of Assets

This question focuses on determining impairment losses and adjusting carrying values for the CGUs of Sikaman Plc, considering head office allocation.

Sikaman Plc has three cash-generating units (CGUs), a head office, and a research facility. The carrying amounts of the assets and their recoverable amounts are as follows:

Unit X Unit Y Unit Z Head Office Research Facility Sikaman Plc
Carrying value (GH¢m) 500 700 1,000 750 250 3,250
Recoverable amount (GH¢m) 645 820 1,355 – – 2,920

The assets of the head office can be reasonably allocated to the three units as follows:

  • Unit X: GH¢95m
  • Unit Y: GH¢280m
  • Unit Z: GH¢375m

The assets of the research facility cannot be reasonably allocated to the CGUs.

Required:
Assuming all assets can be adjusted for impairment, show how the revised/adjusted carrying values of the assets of Sikaman Plc should be determined in line with IAS 36: Impairment of Assets after taking into account any impairment losses in the above scenario. Show the relevant financial statements extracts.

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  • 10 Marks

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.

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)

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