Question

On 1 July 2017, Blenheim Ltd purchased an item of machinery for $280,000. On this date it was estimated that the item of machinery had a useful life of seven years and zero residual value. Blenheim Ltd uses the cost model to measure items of property, plant and equipment and the straight-line method of depreciation. Blenheim Ltd has a 30 June reporting date.

In relation to the item of machinery, Blenheim Ltd has identified indicators of impairment for the reporting periods ending 30 June 2019 and 30 June 2020 and indicators for a reversal of impairment for the reporting period ending 30 June 2021. The fair value less costs of disposal and the value in use of the item of machinery on these dates were as follows:

Date                                                      Fair value less                           Value in use

                                                         costs of disposal

30 June 2019                                                 $170,000                                $180,000

30 June 2020                                                   128,000                                  120,000

30 June 2021                                                   125,000                                  130,000

Required

1. Prepare the journal entries to account for any impairment losses in relation to the item of machinery on 30 June 2019 and/or 30 June 2020.   

2. Explain and calculate the ceiling beyond which the carrying amount of the item of machinery cannot be increased on 30 June 2021 when reversing any previously recognised impairment losses. What is the purpose of the ceiling?                

3. Prepare the journal entry on 30 June 2021 to account for the reversal of any previously recognised impairment losses.   

4. Explain how the item of machinery would be accounted for on 30 June 2019 if Blenheim Ltd used the revaluation model to measure items of property, plant and equipment and, on this date, the fair value of the item of machinery was $174,000 and costs of disposal were $4,000.

Answer 1

The Impairment process under IFRS is a 1 step process.

The Book value of the asset is compared to the recoverable amount .If the recoverable amount is less than book value, the difference will be recognized as an impairment loss.

Recoverable amount is higher of (fair value of asset –cost of sale ) or value in use

Value in use is the present value of future net cash flows expected to be received from the asset.

Cost Price	$280000
Estimated life	7 years
Residual value	0
Depreciation Method	Straightline

Date	Fair Value Less cost of disposal	Value in Use	Recoverable Amount	Book Value	Cost-Acc.Dep	Impairment Loss	Asset Value	Revaluation gain
30-06-2019	170000	180000	180000	200000	(280000-80000)	20000	180000
30-06-2020	128000	125000	128000	140000	(200000-40000)	12000	128000
30-06-2021	125000	130000	130000	88000	(128000-40000)	0		32000

a)

Date	Particulars	Debit	Credit
30-06-2019	Impairment Loss	$20000
	Accumulated Depreciation		$20000
	(Impairment loss recognised)
30-06-2020	Impairment Loss	$12000
	Accumulated Depreciation		$12000
	(Impairment loss recognised)

a)Under IFRS a company has the provision to write up the value of assets if its fair value has increased when compared to its book value.The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if impairment had not been recognised .That is the ceiling beyond which carrying amount of the asset cannot be increased

Here $ 280000 , which is the original cost price of the asset

(-) Accumulated depreciation for 4 years 40000*4 = $160000

Ceiling =$120000

Any reversal of previously recognized impairment loss cannot exceed this amount.

a)

Date	Particulars	Debit	Credit
30-06-2021	Accumulated Depreciation	$32000
	Revaluation Gain		$32000

Total Gain is $42000 (130000-88000) Hoowever cieling is 120000 , we cannot write up beyond that amount.

a) Under Revaluation Method Asset value is revalued at fair price ,i.e 170000 (174000-4000)

Carrying Value at the date = $200000

Therefore any decrease will be debited to impairment loss account and increase will be credited to revaluation surplus(OCI)

Here Impairment Loss will be $30000 (200000-170000)

Date	Particulars	Debit	Credit
30-06-2019	Impairment Loss	$30000
	Accumulated Depreciation		$30000