10 (Ten) Case Study Solutions on IAS 36 –Impairment of Assets

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It’s another edition of IFRS is easy.

As much as IFRS provides a principle-based approach to the preparation of financial statements, there are some elements of rules in the standards that you must adhere to, so as to enable you to prepare your financial statements in accordance with the required global standard. 

IAS 36 –Impairment of Assets provides some hidden rules that most students, business experts, and accountants might not be aware of, if they don’t take time to study the concepts carefully.

Here are some few points you might like to commit to memory before attempting to solve the questions we’ve provided for you:

Impairment loss:   The amount by which the Carrying Amount of an asset (or a cash-generating unit) exceeds its Recoverable Amount.

Carrying Amount:   The Cost of an asset less Accumulated Depreciation.

Recoverable Amount:   The higher of an asset’s fair value minus costs of disposal, and its value in use.

Fair Value less cost to sell:   The amount obtainable from the sale of an asset or cash-generating unit in an orderly transaction between market participants at the measurement date, less the costs of disposal.

Value in use:   The present value of future cash flows from using an asset, including its eventual disposal.

Cash-generating unit:   The smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

When testing for impairment, note the following:

• Where a question gives details at the end of the year for computation of impairment loss, the figure for Carrying Amount that will be compared with the Recoverable Amount is simply the Cost of the asset less Accumulated Depreciation (including the current year depreciation). The resulting Carrying Amount is then compared with the Recoverable Amount to determine the impairment loss figure.

• When a question states that calculation should be to the nearest ₦1,000. It means that any multiplication that results in decimals should be rounded off in thousands. For example, 2.5 multiplied by 20,500 will result in 51,250. Your answer will therefore be stated as 51 (not 51.25).

• Once inventories are already stated at the lower of Cost and Net Realizable Value, they can no longer be subjected to impairment test, as this in itself is an implicit impairment test in accordance with IAS 2 (you can check our IAS 2 Edition for more clarification).

• When addressing the issue of Cash Generating Units. Three important things are considered after deriving the overall impairment for the CGU:

1. Firstly, charge the impairment loss to any asset that is specifically damaged or destroyed;
2. Then, write off the carrying amount of any goodwill allocated to the cash-generating unit; and
3. Charge the remaining balance to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.

• Where intangible assets with indefinite useful lives apart from goodwill are part of the assets (e.g. Patent, Brand etc.), treat them exactly like the way the goodwill is treated. But where their market value is given, reduce their figure to their new Market Value. The difference in their Carrying Amount and their Market Value is treated as impairment.

• Reversal of impairment does not affect Goodwill and other intangible assets with indefinite useful lives.

Yeah, so let’s test your understanding of the standard. Click below to view or download the pdf.

            IAS 36 Impairmentof Assets Questions and Answers

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