Question

In: Accounting

Shape Limited purchased a machine several years ago. On the 31st December 2017 The machine had...

Shape Limited purchased a machine several years ago.

On the 31st December 2017

  • The machine had a Net Book Value of €140,000.
  • A revaluation reserve of €10,000 existed in respect of the machine.
  • Residual value of the asset is Nil.
  • Useful life of the asset from 1 January 2018 is 5 years

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:

  1. Explain what is meant by an impairment review. Your answer should include reference to assets that may form a cash generating unit.   
  2. Identify and describe those factors included in IAS 36 which indicate that an asset might be impaired.                                                             
  1. Determine the asset’s value in use, assuming that all cash flows occur at the end of the year concerned and using a discount rate of 6%;

                                                                                                                 

Discount factors for discount rate of 6%

Period 1               0.943

Period 2               0.890

Period 3               0.840

Period 4               0.792

  1. Determine the asset’s recoverable amount;                                        
  1. Quantify the amount of the impairment loss;                                       
  1. Explain in detail how the impairment loss should be accounted for in the company’s financial statements in respect of fiscal 2017;

            

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.

Solutions

Expert Solution

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


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