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  • 20 Marks

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.

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)

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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

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.

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.

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  • 15 Marks

CR – May 2016 – L3 – Q2b – IAS 36: Impairment of assets

Advise on impairment effects on consolidated financial statements for various scenarios including subsidiaries, plant assets, and R&D projects.

AT Group Ltd is preparing its financial statements to 30th June 2015. The following situations have been identified by an impairment review team;

On 1st July 2014, AT Group Ltd acquired the whole share capital of two subsidiary companies, Accra Ltd and Tema Ltd, in separate acquisitions. Consolidated goodwill was calculated as follows;

Accra Ltd Tema Ltd GH¢’000 GH¢’000 Purchase Consideration 24,000 9,000 Estimated fair value of net assets (16,000) (6,000) Consolidated goodwill 8,000 3,000

i) A review of the fair value of each subsidiary’s net assets was undertaken in June 2015. Unfortunately both companies’ net assets had declined in value. The estimated value of Accra Ltd.’s net assets as at 1st July 2014 was now only GH¢15,000,000. This was due to more detailed information becoming available about the market value of its specialized properties. Tema Ltd.’s net assets were estimated to have a fair value of GH¢1,000,000 less than their carrying value. This fall was due to some physical damage occurring to its plant and machinery. (4 marks)

ii) AT Group Ltd has an item of earth moving plant, which is rented out to companies on short-term contracts. Its carrying value, based on depreciated historical cost is GH¢400,000. The estimated selling price of this asset is only GH¢250,000, with associated selling expenses of GH¢5,000. A recent review of its value in use based on its forecast future cash flows was estimated at GH¢500,000. Since this review was undertaken, there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by AT Group Ltd to discount the future cash flows of the plant. (6 marks)

iii) AT Group Ltd is engaged in a research and development project to produce a new product. In the year to 30th June 2015, the company spent GH¢120,000 on research that concluded that there were sufficient grounds to carry the project on to its development stage and a further GH¢75,000 had been spent on development. At that date management having decided that they were not sufficiently confident in the ultimate profitability of the project wrote off all the expenditure to date to the income statement. In the current year further direct development costs have been incurred of GH¢80,000 and the development work is now complete with only an estimated GH¢10,000 of costs to be incurred in the future. Production is expected to commence within the next few months. Unfortunately the total trading profit from sales of the new product is not expected to be as good as market research data originally forecast and is estimated at only GH¢150,000. As the future benefits are greater than the remaining future costs, the project will be completed, but due to the overall deficit expected, the directors have again decided to write off all the development expenditure. (5 marks)

Required: Advise, with numerical illustrations where possible, how the information in (i) to (iii) above would affect the preparation of AT Group Ltd.’s consolidated financial statements to 30th June 2015.

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  • 5 Marks

CR – Mar 2023 – L3 – Q3a – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40) ,IAS 36: Impairment of Assets,

Discuss the impairment of a printing machine owned by Dajanso Plc, including necessary computations.

Dajanso Plc owns a number of printing shops across the country. On 1 January 2021, the carrying amount of Dajanso’s largest printing machine was GH¢65 million. The machine had a remaining useful life of five years and a residual value of GH¢7 million using the cost model. Due to a fall in demand for printed books, management conducted an impairment review of the printing machine on 30 June 2021.

At this date, the estimated selling price was GH¢55 million, including GH¢4 million, which would be received after reconditioning the asset. Agent fees would be 5% of the appropriate fair price. If the machine is kept in use, it is estimated to generate real cash flows of GH¢20 million a year over its remaining life (now estimated to be three years), with a revised residual value of GH¢6 million. The following discount rates are applicable:

Rate Type Pre-tax Nominal Pre-tax Real Post-tax Nominal Post-tax Real
Discount Rate (p.a.) 11.9% 8.3% 10.5% 6.6%

Required:
In line with IAS 16 Property, Plant, and Equipment and IAS 36 Impairment of Assets, recommend how Dajanso would account for the plant in its financial statements for the year ended 31 December 2021. Show appropriate computations where necessary.

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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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  • 20 Marks

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.

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)

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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

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.

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.

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  • 15 Marks

CR – May 2016 – L3 – Q2b – IAS 36: Impairment of assets

Advise on impairment effects on consolidated financial statements for various scenarios including subsidiaries, plant assets, and R&D projects.

AT Group Ltd is preparing its financial statements to 30th June 2015. The following situations have been identified by an impairment review team;

On 1st July 2014, AT Group Ltd acquired the whole share capital of two subsidiary companies, Accra Ltd and Tema Ltd, in separate acquisitions. Consolidated goodwill was calculated as follows;

Accra Ltd Tema Ltd GH¢’000 GH¢’000 Purchase Consideration 24,000 9,000 Estimated fair value of net assets (16,000) (6,000) Consolidated goodwill 8,000 3,000

i) A review of the fair value of each subsidiary’s net assets was undertaken in June 2015. Unfortunately both companies’ net assets had declined in value. The estimated value of Accra Ltd.’s net assets as at 1st July 2014 was now only GH¢15,000,000. This was due to more detailed information becoming available about the market value of its specialized properties. Tema Ltd.’s net assets were estimated to have a fair value of GH¢1,000,000 less than their carrying value. This fall was due to some physical damage occurring to its plant and machinery. (4 marks)

ii) AT Group Ltd has an item of earth moving plant, which is rented out to companies on short-term contracts. Its carrying value, based on depreciated historical cost is GH¢400,000. The estimated selling price of this asset is only GH¢250,000, with associated selling expenses of GH¢5,000. A recent review of its value in use based on its forecast future cash flows was estimated at GH¢500,000. Since this review was undertaken, there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by AT Group Ltd to discount the future cash flows of the plant. (6 marks)

iii) AT Group Ltd is engaged in a research and development project to produce a new product. In the year to 30th June 2015, the company spent GH¢120,000 on research that concluded that there were sufficient grounds to carry the project on to its development stage and a further GH¢75,000 had been spent on development. At that date management having decided that they were not sufficiently confident in the ultimate profitability of the project wrote off all the expenditure to date to the income statement. In the current year further direct development costs have been incurred of GH¢80,000 and the development work is now complete with only an estimated GH¢10,000 of costs to be incurred in the future. Production is expected to commence within the next few months. Unfortunately the total trading profit from sales of the new product is not expected to be as good as market research data originally forecast and is estimated at only GH¢150,000. As the future benefits are greater than the remaining future costs, the project will be completed, but due to the overall deficit expected, the directors have again decided to write off all the development expenditure. (5 marks)

Required: Advise, with numerical illustrations where possible, how the information in (i) to (iii) above would affect the preparation of AT Group Ltd.’s consolidated financial statements to 30th June 2015.

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  • 5 Marks

CR – Mar 2023 – L3 – Q3a – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40) ,IAS 36: Impairment of Assets,

Discuss the impairment of a printing machine owned by Dajanso Plc, including necessary computations.

Dajanso Plc owns a number of printing shops across the country. On 1 January 2021, the carrying amount of Dajanso’s largest printing machine was GH¢65 million. The machine had a remaining useful life of five years and a residual value of GH¢7 million using the cost model. Due to a fall in demand for printed books, management conducted an impairment review of the printing machine on 30 June 2021.

At this date, the estimated selling price was GH¢55 million, including GH¢4 million, which would be received after reconditioning the asset. Agent fees would be 5% of the appropriate fair price. If the machine is kept in use, it is estimated to generate real cash flows of GH¢20 million a year over its remaining life (now estimated to be three years), with a revised residual value of GH¢6 million. The following discount rates are applicable:

Rate Type Pre-tax Nominal Pre-tax Real Post-tax Nominal Post-tax Real
Discount Rate (p.a.) 11.9% 8.3% 10.5% 6.6%

Required:
In line with IAS 16 Property, Plant, and Equipment and IAS 36 Impairment of Assets, recommend how Dajanso would account for the plant in its financial statements for the year ended 31 December 2021. Show appropriate computations where necessary.

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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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