Question Tag: Impairment testing

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

Ondo Telecoms Limited is one of the biggest telecoms companies in Abuja. One month after the year-end, the Chief Finance Officer (CFO), while reviewing the company’s activities came up with the following issues for the year ended 30 September, 2014:

(a) The Board of Directors is not impressed with the performance of the Home Broadband operating segment which posted a loss of N1.7 billion in 2014 financial year following another loss of N0.8 billion in the 2013 financial year.

(b) The carrying amount of the assets in the segment is N4.3 billion as at 30 September, 2014 and N4.5 billion as at 30 September, 2013. Professional valuers were engaged and they came up with a fair value of N4.2 billion as at 30 September, 2013.

(c) The Board of Directors made the final decision in June 2014 to sell off the assets in this segment and concentrate on other business lines. Since the beginning of September, four serious bidders have been negotiating with Ondo. The board anticipates the sale to be concluded by the end of May 2015 with the transaction cost of N0.3 million.

(d) On 1 November 2013, Ondo Telecoms Limited acquired a block of flats with an estimated useful life of 50 years at a total cost of N225 million. The blocks of flats are to be rented out to its employees and engineers at market prices. The decision to acquire the block of flats was made by the board due to the need to have the engineers close to the head office to attend to technical issues immediately they arise.

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

(f) International Telecom Limited, which acquired Edo Communications Limited during the year, has just published its results. Edo Communications Limited was a direct competitor to Ondo Telecoms Limited and does similar business. The CFO noted that International Telecom Ltd. shows an asset of N110 million arising from Edo Communication Limited customer lists’. This made the CFO realize how valuable the customer details are and has engaged a professional valuer who valued them at N98 million.

(g) Over the years, Ondo Telecoms Limited’s main business has been the provision of mobile and fixed landlines services as well as broadband services. In July 2013, Ondo Telecoms Limited bid for the award of a subscription television license from the government.

(h) Ondo Telecoms Limited won the bid and paid N560 million for a five-year license beginning 1 October 2013. The license is transferred and at the time of winning the bid, the fair value of the license was estimated at N580 million. Due to the slow uptake of the television business, the license was revalued at N420 million as at 30 September, 2014 by a professional valuer.

Required:
Advise, with suitable computations, how the above transactions should be accounted for in the financial statements of Ondo Telecoms Limited under IFRS for the year ended 30 September, 2014.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

Question

a. Bata Plc, which operates in the manufacturing sector, has been surviving the challenges operating in the Nigerian economic environment. The draft Statements of Financial Position of Bata Plc and its subsidiaries as at October 31, 2016, are as follows:

Bata	N’million	Jewe	N’million	Gaba	N’million
Non-current assets		Property, plant, and equipment	4,320	360	420
Investments in subsidiaries	1,110	600	–
Financial assets	500	–	–
Total Non-current assets	5,930	960	420
Current assets	1,050	570	540
Total assets	6,980	1,530	960
Equity		Share capital – N1 ordinary shares	2,400	600	300
Retained earnings	3,410	540	390
Other components of equity	450	–	–
Total equity	6,260	1,140	690
Current liabilities	720	390	270
Total liabilities and equity	6,980	1,530	960

Additional Information:

Acquisition of Subsidiaries:
- Bata Plc acquired 60% of the share capital of Jewe Plc on November 1, 2012, and 10% of Gaba Plc on November 1, 2013. The costs of the combinations were N852 million and N258 million, respectively.
- Jewe Plc acquired 70% of the share capital of Gaba Plc on November 1, 2013.
Retained Earnings Balances:

Date	Jewe Plc (N’million)	Gaba Plc (N’million)
November 1, 2012	270	–
November 1, 2013	360	240

Fair Value Adjustments:
- At acquisition dates, the fair value of the net assets was N930 million for Jewe Plc and N660 million for Gaba Plc. The difference in the fair value and book value relates to non-depreciable land.
- The fair value of non-controlling interest (NCI) was N390 million for Jewe Plc and N330 million for Gaba Plc. Bata Plc adopts the full goodwill method under IFRS 3 to account for NCI.
Impairment Testing:
- Jewe Plc suffered an impairment loss of N60 million.
- Gaba Plc did not suffer any impairment loss.
Intra-group Inventory Sales:
- During the year ended October 31, 2016, Bata Plc sold inventory to Jewe Plc and Gaba Plc.
- The invoiced prices of the inventories were N480 million and N360 million, respectively.
- Bata Plc invoices goods to achieve a markup of 25% on cost to all third parties, including group companies.
- At the year-end, half of the inventory sold to Jewe Plc remained unsold, but the entire inventory sold to Gaba Plc had been sold to third parties.
Financial Asset:
- Bata Plc purchased a deep discount bond for N500 million on November 1, 2015.
- The bonds will be redeemed in 3 years for N740.75 million and are carried at amortized cost in line with IAS 39.
- The Accountant has not passed the correct entries to reflect amortized cost valuation at year-end, and the financial asset is shown at N500 million.

Compound sum of N1: (1 + r)^n

Year	12%	14%
1	1.1200	1.1400
2	1.2544	1.2996
3	1.4049	1.4815
4	1.5735	1.6890

Required:

Prepare a Consolidated Statement of Financial Position for Bata Plc and its subsidiaries as at October 31, 2016. (25 Marks)
Explain to the directors of Bata Plc how the assets, liabilities, income, and expenses of a foreign subsidiary, including the resulting goodwill, are translated for consolidation purposes under IAS 21. (5 Marks)

(Total: 30 Marks)

Answer

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Tags: Consolidation, Exchange Rate Effects, Foreign subsidiary, Goodwill, Group Accounting, Impairment testing
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)
Series: NOV 2016

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.

Question

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)

Answer

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Topic: Audit of Complex Entities
Series: NOV 2023

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

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

Question

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)

Answer

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Tags: Goodwill, IAS 36, Impairment testing, Intangible Assets, Mandatory Testing
Level: Level 2

Topic: Impairment of Assets
Series: APR 2022

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.

Question

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.

Answer

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Tags: Cash-generating units, Changes in circumstances, Goodwill, Impairment testing, Market capitalization
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: APR 2022

CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

Question

Bata	N’million	Jewe	N’million	Gaba	N’million
Non-current assets		Property, plant, and equipment	4,320	360	420
Investments in subsidiaries	1,110	600	–
Financial assets	500	–	–
Total Non-current assets	5,930	960	420
Current assets	1,050	570	540
Total assets	6,980	1,530	960
Equity		Share capital – N1 ordinary shares	2,400	600	300
Retained earnings	3,410	540	390
Other components of equity	450	–	–
Total equity	6,260	1,140	690
Current liabilities	720	390	270
Total liabilities and equity	6,980	1,530	960

Additional Information:

Acquisition of Subsidiaries:
- Bata Plc acquired 60% of the share capital of Jewe Plc on November 1, 2012, and 10% of Gaba Plc on November 1, 2013. The costs of the combinations were N852 million and N258 million, respectively.
- Jewe Plc acquired 70% of the share capital of Gaba Plc on November 1, 2013.
Retained Earnings Balances:

Date	Jewe Plc (N’million)	Gaba Plc (N’million)
November 1, 2012	270	–
November 1, 2013	360	240

Fair Value Adjustments:
- At acquisition dates, the fair value of the net assets was N930 million for Jewe Plc and N660 million for Gaba Plc. The difference in the fair value and book value relates to non-depreciable land.
- The fair value of non-controlling interest (NCI) was N390 million for Jewe Plc and N330 million for Gaba Plc. Bata Plc adopts the full goodwill method under IFRS 3 to account for NCI.
Impairment Testing:
- Jewe Plc suffered an impairment loss of N60 million.
- Gaba Plc did not suffer any impairment loss.
Intra-group Inventory Sales:
- During the year ended October 31, 2016, Bata Plc sold inventory to Jewe Plc and Gaba Plc.
- The invoiced prices of the inventories were N480 million and N360 million, respectively.
- Bata Plc invoices goods to achieve a markup of 25% on cost to all third parties, including group companies.
- At the year-end, half of the inventory sold to Jewe Plc remained unsold, but the entire inventory sold to Gaba Plc had been sold to third parties.
Financial Asset:
- Bata Plc purchased a deep discount bond for N500 million on November 1, 2015.
- The bonds will be redeemed in 3 years for N740.75 million and are carried at amortized cost in line with IAS 39.
- The Accountant has not passed the correct entries to reflect amortized cost valuation at year-end, and the financial asset is shown at N500 million.

Compound sum of N1: (1 + r)^n

Year	12%	14%
1	1.1200	1.1400
2	1.2544	1.2996
3	1.4049	1.4815
4	1.5735	1.6890

Required:

Prepare a Consolidated Statement of Financial Position for Bata Plc and its subsidiaries as at October 31, 2016. (25 Marks)
Explain to the directors of Bata Plc how the assets, liabilities, income, and expenses of a foreign subsidiary, including the resulting goodwill, are translated for consolidation purposes under IAS 21. (5 Marks)

(Total: 30 Marks)

Answer

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Tags: Consolidation, Exchange Rate Effects, Foreign subsidiary, Goodwill, Group Accounting, Impairment testing
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)
Series: NOV 2016

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.

Question

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

Required:

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

Answer

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Topic: Audit of Complex Entities
Series: NOV 2023

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

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

Question

Answer

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Tags: Goodwill, IAS 36, Impairment testing, Intangible Assets, Mandatory Testing
Level: Level 2

Topic: Impairment of Assets
Series: APR 2022

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.

Question

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

Answer

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Tags: Cash-generating units, Changes in circumstances, Goodwill, Impairment testing, Market capitalization
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: APR 2022

Question Tag: Impairment testing

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

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.

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

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

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.

CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

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.

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

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

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.

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Question Tag: Impairment testing

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

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CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

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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.

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

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

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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.

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

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CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

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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.

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

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

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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.

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