Question Tag: Impairment testing

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  • 30 Marks

AAA – Nov 2023 – L3 – SA – Q1 – Audit of Complex Entities

Prepare the consolidated statement of financial position for Sports PLC Group as of September 30, 2020, with adjustments for subsidiaries, non-controlling interests, goodwill, and investments.

BP Fashion Limited is trading and expanding in the fashion industry. Over the years, the company has been audited by LMP Professional Services. The company is considering going to the stock market to raise funds through an increase in its issued share capital for the purpose of expansion into new markets.

The summarised two-year financial statements and the nine (9) months accounts of the company are given below:

BP Fashion Limited

Summarised Income Statement For the Years Ended December 31,

2019 2020 2021 (9 months)
Revenue ₦2,952m ₦3,510m ₦4,139m
Cost of sales (₦1,402m) (₦1,671m) (₦1,987m)
Gross profit ₦1,550m ₦1,839m ₦2,152m
Other income ₦15m ₦21m ₦25m
Operating costs:
– Employee costs (₦390m) (₦460m) (₦538m)
– Occupancy costs (₦262m) (₦312m) (₦373m)
– Other operating costs (₦278m) (₦326m) (₦389m)
Earnings before interests, taxes, depreciation and amortisation (EBITDA) ₦635m ₦762m ₦877m

 

Summarised Statement of Financial Position

2019 2020 2021 (9 months)
Non-current assets
Property, plant and equipment ₦375m ₦470m ₦470m
Deferred tax ₦30m ₦35m ₦40m
Total non-current assets (A) ₦405m ₦505m ₦510m
Current assets
Inventories ₦425m ₦525m ₦655m
Trade and other receivables ₦125m ₦150m ₦175m
Cash and equivalents ₦425m ₦545m ₦780m
Total current assets (B) ₦975m ₦1,220m ₦1,610m
Total assets (A + B) ₦1,380m ₦1,725m ₦2,120m

Equity and Liabilities

2019 2020 2021 (9 months)
Share capital and reserves ₦885m ₦1,135m ₦1,430m
Long-term loans ₦125m ₦125m ₦125m
Employees’ benefits ₦20m ₦35m ₦50m
Deferred tax ₦55m ₦65m ₦70m
Non-current liabilities ₦200m ₦225m ₦245m
Trade and other payables ₦270m ₦335m ₦410m
Tax payable ₦25m ₦30m ₦35m
Current liabilities ₦295m ₦365m ₦445m
Total equity and liabilities ₦1,380m ₦1,725m ₦2,120m

It has become necessary, and as part of the NGX Exchange Limited‟s requirements,
to appoint another firm of accountants to review the financial statements for some
specified periods. Your firm Stratcom Partners has been approached to carry out the
necessary review.

Required:

a. Highlight the features of professional engagements as contained in ISRE 2410:
International Standard on Review Engagement and ISRS 4410 (revised):
International standard on Related Services. (8 Marks)
b. Detail out the procedures to be carried out in the review of interim financial
information. (6 Marks)

c. In view of the changes in inventories in the financial statements given above,
between the last two periods, provide the substantive procedures that would
be carried out to establish a reliable evidence of the change. (6 Marks)

d. Prepare the outline of the reporting requirements of a compilation engagement.
(10 Marks)

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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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  • 6 Marks

CR – Apr 2022 – L3 – Q2a – Impairment of assets, IAS 36

Discuss the significance of three factors affecting impairment testing under IAS 36, including market capitalization and allocation of goodwill.

An assessment of accounting practices for asset impairments is important in the context of financial reporting quality, especially during periods of economic uncertainty. The exercise of management judgment in impairment accounting is crucial. There are several factors that can influence the quality of impairment accounting and disclosures, including changes in circumstances, market capitalization, and the allocation of goodwill to cash-generating units.

Required:
Discuss the significance of the THREE (3) factors above when conducting an impairment test under IAS 36: Impairment of Assets.

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  • 30 Marks

AAA – Nov 2023 – L3 – SA – Q1 – Audit of Complex Entities

Prepare the consolidated statement of financial position for Sports PLC Group as of September 30, 2020, with adjustments for subsidiaries, non-controlling interests, goodwill, and investments.

BP Fashion Limited is trading and expanding in the fashion industry. Over the years, the company has been audited by LMP Professional Services. The company is considering going to the stock market to raise funds through an increase in its issued share capital for the purpose of expansion into new markets.

The summarised two-year financial statements and the nine (9) months accounts of the company are given below:

BP Fashion Limited

Summarised Income Statement For the Years Ended December 31,

2019 2020 2021 (9 months)
Revenue ₦2,952m ₦3,510m ₦4,139m
Cost of sales (₦1,402m) (₦1,671m) (₦1,987m)
Gross profit ₦1,550m ₦1,839m ₦2,152m
Other income ₦15m ₦21m ₦25m
Operating costs:
– Employee costs (₦390m) (₦460m) (₦538m)
– Occupancy costs (₦262m) (₦312m) (₦373m)
– Other operating costs (₦278m) (₦326m) (₦389m)
Earnings before interests, taxes, depreciation and amortisation (EBITDA) ₦635m ₦762m ₦877m

 

Summarised Statement of Financial Position

2019 2020 2021 (9 months)
Non-current assets
Property, plant and equipment ₦375m ₦470m ₦470m
Deferred tax ₦30m ₦35m ₦40m
Total non-current assets (A) ₦405m ₦505m ₦510m
Current assets
Inventories ₦425m ₦525m ₦655m
Trade and other receivables ₦125m ₦150m ₦175m
Cash and equivalents ₦425m ₦545m ₦780m
Total current assets (B) ₦975m ₦1,220m ₦1,610m
Total assets (A + B) ₦1,380m ₦1,725m ₦2,120m

Equity and Liabilities

2019 2020 2021 (9 months)
Share capital and reserves ₦885m ₦1,135m ₦1,430m
Long-term loans ₦125m ₦125m ₦125m
Employees’ benefits ₦20m ₦35m ₦50m
Deferred tax ₦55m ₦65m ₦70m
Non-current liabilities ₦200m ₦225m ₦245m
Trade and other payables ₦270m ₦335m ₦410m
Tax payable ₦25m ₦30m ₦35m
Current liabilities ₦295m ₦365m ₦445m
Total equity and liabilities ₦1,380m ₦1,725m ₦2,120m

It has become necessary, and as part of the NGX Exchange Limited‟s requirements,
to appoint another firm of accountants to review the financial statements for some
specified periods. Your firm Stratcom Partners has been approached to carry out the
necessary review.

Required:

a. Highlight the features of professional engagements as contained in ISRE 2410:
International Standard on Review Engagement and ISRS 4410 (revised):
International standard on Related Services. (8 Marks)
b. Detail out the procedures to be carried out in the review of interim financial
information. (6 Marks)

c. In view of the changes in inventories in the financial statements given above,
between the last two periods, provide the substantive procedures that would
be carried out to establish a reliable evidence of the change. (6 Marks)

d. Prepare the outline of the reporting requirements of a compilation engagement.
(10 Marks)

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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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  • 6 Marks

CR – Apr 2022 – L3 – Q2a – Impairment of assets, IAS 36

Discuss the significance of three factors affecting impairment testing under IAS 36, including market capitalization and allocation of goodwill.

An assessment of accounting practices for asset impairments is important in the context of financial reporting quality, especially during periods of economic uncertainty. The exercise of management judgment in impairment accounting is crucial. There are several factors that can influence the quality of impairment accounting and disclosures, including changes in circumstances, market capitalization, and the allocation of goodwill to cash-generating units.

Required:
Discuss the significance of the THREE (3) factors above when conducting an impairment test under IAS 36: Impairment of Assets.

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