In: Accounting
Shape Limited purchased a machine several years ago.
On the 31st December 2017
A new competitor has entered the market place and has been very disruptive in the industry which has prompted the company to carry out an impairment review at the 2017 year end.
Estimates of the cash flows expected to be generated over the remaining useful life of the machine are set out below:
Year Inflows Outflows
€000 €000
2018 45 15
2019 40 14
2020 85 28
The asset could be sold at fair value on December 31, 2017 for €135,000 and associated disposal costs are estimated to be €10,000.
Required:
For the purposes of financial reporting in accordance with International Accounting Standards 36 Impairment of Assets:
Discount factors for discount rate of 6%
Period 1 0.943
Period 2 0.890
Period 3 0.840
Period 4 0.792
g. Calculate the amount of the depreciation that should be charged in relation to the asset for each of the remaining years of its useful life.
The aim of IAS 36 is that the Assets shouldnt be carried more than by their recoverable amount.
Carrying value means the Net Book value, Recoverable amount means the net realisable value ( Net Sales)
Impairment loss occurs when carrying value of the asset ( cash generating unit) exceeds the recoverable amount.
Calculation of Imapirment Loss: | |||||
31-Dec-17 | Net Book Value | 140,000 | 28000 | ||
Sales value | 135000 | ||||
Less associated costs | 10000 | ||||
Net Sales value | 125000 | ||||
Impairment Loss = Carrying value is reduced net recoverable value | |||||
=140000-125000 | |||||
Impairment Loss | 15000 |
Asset's Value at the end of year 2020 | |||||
Inflows | Outflows | Discounted I/f | Discounted O/f | ||
2018 | 0.943 | 45000 | 15000 | 42435 | 14145 |
2019 | 0.89 | 40000 | 14000 | 35600 | 12460 |
2020 | 0.84 | 85000 | 28000 | 71400 | 23520 |
Total | 149435 | 50125 | |||
Asset's value @6% discounting factor | 99310 |
Depreciation Calculation:
Net Book Value 140,000, life of the machine - 5 years, depreciation = 140,000/5 = 28,000