Question

Exercise – MFRS 136 Impairment of Assets

a. Naluri Sdn Berhad has a year end of 31 December and owns an item of plant which it uses to produce and package pharmaceuticals. The plant was purchased at a cost of RM750,000 on 1 January 2012 and, at that date, had an estimated useful life of five years. The plant’s selling price on 31 December 2012 is estimated to be RM550,000 and the cost to disposal is estimated to be RM20,000. On 31 December 2012, Naluri Sdn Bhd was informed by a major customer that it would no longer be placing orders with Naluri Sdn Bhd. As a result, Naluri Sdn Bhd revised its estimates that net cash inflows earned from the plant for the next four years would be:

Year	Cash Flows (RM)
2013	180,000
2014	120,000
2015	120,000
2016	130,000

On 31 December 2014, the economic environment improved. Due to such economic improvement, the demands for the products improved and it was expected that demand will remain at the high level for the next two years. The market value for the plant is RM300,000. The revised cash flows on 31 December 2015 and 2016 are RM200,000 for each year.

Naluri Sdn Bhd’s cost of capital is 8%. The following is an extract of the Present Value Factor Tables:

Period	8% Ordinary Annuity	8% Single Future Amount
1	0.9259	0.9259
2	1.7833	0.8573
3	2.5771	0.7938
4	3.3121	0.7350

Required:

1. Identify whether the plant owned by Najmi Berhad has any indication that it is possibly impaired in accordance with MFRS 136. Justify your answer.

2. Calculate the impairment loss as at 31 December 2012.

(2 mark)

3. Show the journal entries (including the narrations) to record the impairment loss and the extract of Statement of Financial Position as at 31 December 2012.

4. Calculate the reversal of impairment loss as at 31 December 2014.

(Sub-total = 17 marks)

Answer 1

Ans : MFRS 136/ FRS 136: Impairment of Assets

Key definition :

1) Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount

2) Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses

3) Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use

4) Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

5) Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit

a) Original Cost on 1 January 2012 - RM750,000

Fair value on 31^st December 2012 - RM550,000 less RM20,000 = RM 530,000

Value in use –

Year	Cash flow	Discounting factor @ 8%	Present value
2013	180,000	0.9259	166662
2014	120,000	0.8573	102876
2015	120,000	0.7938	95256
2016	130,000	0.7350	95550
	Value in use	460334

Recoverable amount = Higher of , Value in use and Fair value

                                    = 460334 or 530000 = RM 530000

             Carrying amount = Original Cost less Depreciation = 750000 – ( 750000 / 5 years ) = RM 600000

Impairment loss = Since , Carrying amount is more than recoverable amount , we can say there is impairment Loss

b) Impairment loss = C.A. less R.A. = 600000 – 530000 = RM 70000

Carrying amount = RM 600000               Recoverable amount = 530000

c) Journal entry :

31.12.2012 – Accumulated Depreciation – Plant Dr . 150000

                      Impairment Loss – Plant                 Dr.    70000

                      Plant                                                   Cr.             220000

( Being Depreciation and Impairment loss recorded )

Statement of profit or loss 31.12.2012

Depreciation – Plant       RM 150000

Impairment loss – Plant   RM 70000

Statement of financial position 31.12.2012

Plant – O.C – RM 750000

Less : Acc Dep   150000

Less : Imp Loss 70000

   530000

d) 31.12.2014

MFRS 136/ FRS 136 requires that an impairment loss recognised in prior years for an asset other than goodwill should be reversed if there has been a change in the estimates used to determine recoverable amount.

An impairment loss is reversed only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined.

O.C. on 01.01.2012                                           =    750000

Less : dep for 3 yrs ( 750000 * 3 /5)                  =    450000

Carrying amount on 31.12.2014                        =     300000

Fair value on 31st December 2014 - RM 300000

Value in use –

Year     Cash flow         Discounting factor @ 8%          Present value

2015     200000              0.9259                                      185180

2016     200000             0.8573                                      171460

VALUE IN USE                                                             356640

Recoverable amount = Higher of , Value in use and Fair value

                                     = 356640 OR 300000 = RM 356640

Since R.A. is more than C.A. , we can reverse Impairment loss = 356640 – 300000 = RM 56640