Question

Waterway Landscaping Limited has determined that its lawn maintenance division is a cash-generating unit under IFRS. The carrying amounts of the division’s assets at December 31, 2020, are as follows:

Land		$20,000
Building		56,000
Equipment		31,000
Vehicles		15,000
		$122,000

The lawn maintenance division has been assessed for impairment and it is determined that the division’s value in use is $109,800, fair value less costs to sell is $77,000, and undiscounted future net cash flows are $146,000.

---- Determine if the cash-generating unit is impaired and prepare the journal entry, if any, to record the impairment at December 31, 2020, assuming that none of the individual assets in the division has a determinable recoverable amount. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Do not round intermediate calculations. Round final answers to 0 decimal places, e.g. 5,275.)

-----Prepare the journal entry, if any, to record the impairment at December 31, 2020, assuming that the division’s only individual asset that has a determinable recoverable amount is the building, which has a fair value less costs to sell of $52,000. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Do not round intermediate calculations. Round final answers to 0 decimal places, e.g. 5,275.)

-----Assume that Waterway prepares financial statements under ASPE instead, and that the lawn maintenance division is an asset group. Determine if the asset group is impaired and prepare the journal entry, if any, to record the impairment at December 31, 2020, assuming that none of the individual assets in the division has a determinable recoverable amount. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Answers:

(a)

Under IFRS, the recoverable amount of the cash-generating unit (CGU) is the higher of (1) value in use and (2) fair value less costs to sell. The recoverable amount of the CGU is $109,800, which is lower than the carrying amount of the CGU ($122,000), therefore the CGU is impaired. The impairment loss is $12,200 ($122,000 - $109,800).

The impairment loss is allocated to the individual assets in the unit, but no individualasset is reduced to below the highest of (1) its value in use, (2) its fair value less coststo sell, or (3) zero.

Allocation of impairment loss to assets in cash-generating unit (CGU):

	Carrying Amount (before impairment)	Proportion	Loss Allocation	Carrying Amount (after impairment)
Land	$20,000	20/122	$2,000	$18,000
Building	56,000	56/122	5,600	50,400
Equipment	31,000	31/122	3,100	27,900
Trucks	15,000	15/122	1,500	13,500
	$122,000		$12,200	$109,800

The journal entry to recognize the impairment loss is:

	Loss on Impairment.......................................	12,200
	Land.........................................................		2,000
	Accumulated Impairment Losses—              Buildings...........................................		5,600
	Accumulated Impairment Losses—                Equipment........................................		3,100
	Accumulated Impairment Losses—               Trucks................................................		1,500

(b)

Since the recoverable amount of the building is determined to be $52,000, the building cannot be reduced to below $52,000 (note that from part (a), a true proportionate allocation would result in building carrying amount of less than $52,000).

Allocation of impairment loss to assets in cash-generating unit (CGU):

	Carrying Amount (before impairment)	Proportion	Loss Allocation	Carrying Amount (after impairment)
Land	$20,000	*20/66	**$2,485	$17,515
Buildings	56,000		4,000	52,000
Equipment	31,000	31/66	3,852	27,148
Trucks	15,000	15/66	1,863	13,137
	$122,000		$12,200	$109,800

*Allocation base = $20,000 + $31,000 + $15,000 = $66,000

**Impairment loss to allocate = $12,200 total – $4,000 allocated to buildings = $8,200; $8,200 impairment loss to allocate X 20/66 = $2,485 allocated to land

The journal entry to recognize the impairment loss is:

	Loss on Impairment.......................................	12,200
	Land.........................................................		2,485
	Accumulated Impairment Losses—               Buildings..........................................		4,000
	Accumulated Impairment Losses—                  Equipment.......................................		3,852
	Accumulated Impairment Losses—                  Trucks..............................................		1,863

(c)

Under ASPE, the asset group is impaired if its undiscounted future net cash flows are less than its carrying amount. The undiscounted future net cash flows are $146,000, which is higher than the asset group’s carrying amount of $122,000. Therefore the asset group is not impaired and no entry is necessary.