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Notes On IAS 36 – IMPAIRMENT OF ASSETS

Home > Study Notes > Notes On IAS 36 – IMPAIRMENT OF ASSETS
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Questions and answers practice of IAS 36

Sohail A / Sharjah

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Qualification: M.phill Chemistry (Physical) University of the punjab Lahore M.Sc Chemistry (physical) from Punjab university lahore, B.Sc – Botany – Zoology – Chemistry and Completed B.Ed. (Bachelors of Education)

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  1. Chapter - 9 QUESTION NO. 12 IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS (398) Olsson Company uses special strapping equipment in its packing business. The equipment was purchased in January 2004 for Rs. 8,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2005, new technology was introduced that would accelerate the obsolescence of Olssons' equipment. Olssons' controller estimates that present value of expected future net cash flows on the equipment will be Rs. 5,300,000 and that the fair value of the equipment is Rs. 4,400,000. Olsson intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Olsson uses straight line depreciation. Instructions: (a) (b) Prepare the journal entry (if any) to record the impairment at December 31, 2005. Prepare any journal entries for the equipment at December 31, 2006. The fair value of the equipment at December 31, 2006 is estimated to be Rs. 4,200,000. QUESTION NO. 13 Olsson company uses special strapping equipment in its packaging business. The equipment was purchased in January 2004 for Rs. 8,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2005, new technology was introduced that would accelerate the obsolescence of Olsson's equipment. Olsson's controller estimates that present value of expected future net cmsh flows on the equipment will be Rs. 5,300,000 and that the fair value of the equipment is Rs. 4,400,000. Olsson intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Olsson uses straight line depreciation. Instructions: (a) (b) QUESTION NO. 14 Prepare the journal entry (if any) to record the impairment at December 31 , 2005. Prepare any journal entries for the equipment at December 31, 2006. The fair value of the equipment at December 31, 2006, is estimated to be Rs. 4,600,000. Presented below is information related to equipment owned by Suarez Company at December 31 , 2004. cost Accumulated depreciation to date Present value of expected future net cash flows Fair value 9,000,000 4,800,000 Assume that Suarez will continue to use this asset in the future. As of December 31, 2004, the equipment has a remaining useful life of 4 years. Instructions: (a) (b) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2004. Prepare the journal entry to record depreciation expense for 2005.
  2. Chapter - 9 (c) QUESTION NO. 15 IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS (399) The fair value of the equipment at December 31, 2005, is Rs. 5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value. Presented below is information related to equipment owned by Suarez Company at December 31 , 2004. cost Accumulated depreciation to date Present value of expected future net cash flows Fair value 9,000,000 4,800,000 Assume that Suarez will continue to use this asset in the future. As of December 31, 2004, the equipment has a remaining useful life of 4 years. Instructions: (a) (b) (c) Prepare the journal entry (if any) to record the impairment of the asset at December 3 1, 2004. Prepare the journal entry to record depreciation expense for 2005. The fair value of the equipment at December 31, 2005, is Rs. 5,430,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
  3. Chapter - 9 IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS SOLUTION TO QUESTION NO.12 cost Life Depreciation per annum 8 Years Carrying amount at 31-12-2005 - - Recoverable amount at 31-12-2005 (higher of 5,300,000 and Impairment loss - (400) 6,000,000 700 000 31-12-05 Impairment loss Journal entry Accumulated depreciation & impairment losses New depreciation Carrying amount at 31-12-2006 The reversal of an impairment loss will be recorded up to the: 700,000 700.000 - 1,325,000 3,975,000 Lower of Recoverable amount Recoverable amount Identified asset's depreciable historical cost (i.e. carrying amount of asset had there been no impairment) Identified asset's depreciable historical cost 4 So the reversal shall be limited up to 4,200,000 since it is lower than 4,500,000. Carrying amount after reversal Carrying amount before reversal Reversal of impairment loss 31-12-06 Journal entry 4,200,000 4,500,000 4,200,000 3.975.000 225,000 225,000 Accumulated depreciation & impairment losses Impairment loss reversed (SOCI) SOLUTION TO QUESTION NO.13 (a) At 01.01.2004: Cost of asset Useful life Residual value Rs. 8 million 8 Years Nil
  4. Chapter - 9 At 31-12-2005: IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS (401) Value in use (A) Fair value (B) Cost of asset Less: Acc. Depreciation (8,000,000 x Net carrying amount Net carrying amount Less: Higher of (A) and (B) Impairment loss 5,300,000 31-12-05 Journal entry Impairment loss (SOCI) Accumulated depreciation & impairment losses (b) cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount At 31-12-2006 Fair value of equipment Value-in-use Useful life (Remaining) Net carrying amount Depreciation charges for 2006 Before reversal of impairment loss cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount 4,600,000 N/A 4 years 5,300,000 4 1,325,000 8,000,000 2 6,000.000 6,000,000 (5.300.oom 700,001) 700,000 700.000 (2,000,000) (700.000) (3,325,000) (700.000) The reversal of an impairment loss will be recorded up to the: Recoverable amount Lower of Identified asset's depreciable historical cost (i.e. carrying amount of asset had there been no impairment)
  5. Chapter - 9 Recoverable Amount cost IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS Less: Accumulated depreciation 8 Identified asset's depreciable historical cost xl 4 The carrying amount of asset shall be brought up to Rs. 4,500,000. Carrying amount (After reversal) Carrying amount (Before reversal) Reversal of Impairment loss (402) 8,000,000 (3.500.oom 4,500,000 31-12-06 Journal entry Accumulated depreciation & impairment losses Impairment loss reversed (SOCIj After reversal of impairment loss, NBV will be cost Less: Accumulated depreciation & impairment losses Net carrying amount SOLUTION TO QUESTION NO.14 (a) Before recording impairment loss cost Less: Accumulated depreciation Net carrying amount Value in use Fair value 525,000 525.000 8,000,000 (3.500.000) 9,000,000 (I.ooo.oom 8.000.000 4,800,000 Recoverable amount in this case is 7,000,000. Since it is higher than 4,800,000. 31-12-04 Journal entry Impairment loss (SOCI) Accumulated depreciation & impairment losses At 31-12-04 cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount 1 .ooo.ooo 9,000,000 (1.000,000) 7
  6. Chapter - 9 IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS (403) (b) (c) Depreciation expense for 2005: 31-12-05 Depreciation charge 4 Journal entry Depreciation expense (SOCI) Accumulated depreciation & impairment losses Before impairment test cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount Fair value Impairment loss 150,000 31-12-05 Journal entry Impairment loss (SOCI) Accumulated depreciation & impairment losses At 31-12-2005 cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount SOLUTION TO QUESTION NO.IS (a) Before recording impairment loss Cost Less: Accumulated depreciation Net carrying amount Value in use Fair value 1.750.000 9,000,000 (2,750,000) (I.ooo.oom 5.250.ooo 150,000 150.000 9,000,000 (2,750,000) (1.150.oom 9,000,000 (I.ooo.oom 7,000,000 Recoverable amount in this case is 7,000,000. Since it is higher than 4,800,000. 31-12-04 Journal entry Impairment loss (SOCI) Accumulated depreciation & impairment losses At 31-12-04 cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount 1.000.000 9,000,000 (1.000.000) 7 000 0
  7. Chapter - 9 IAS 36 - IMPAIRMENT OF ASSETS - SOLUTIONS (404) (b) (c) Depreciation expense for 2005: 31-12-05 Depreciation charge 4 Journal entry Depreciation expense (SOCI) Accumulated depreciation & impairment losses Before impairment test cost Less: Accumulated depreciation Less: Accumulated impairment loss Net carrying amount 1.750.000 9,000,000 (2,750,000) (I.ooo.oom 5.250.ooo The reversal of an impairment loss will be recorded up to the: Recoverable amount Lower of Identified asset's depreciable historical cost (i.e. carrying amount of asset had there been no impairment) Recoverable amount cost Less: Accumulated depreciation (1 Identified asset's depreciable historical cost The carrying amount of asset shall be brought up to Rs. 5,430,000. Journal entry Accumulated depreciation & impairment losses Impairment loss reversed (SOCI) After reversal of impairment loss, NBV will be cost Less: Accumulated depreciation & impairment losses Net carrying amount 5,430,000 180,000 180,000 9,000,000 (3.570.oom

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