Question

Question 1

Bonita 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, 2017, are as follows:

Land............ $42,000

Building .......$72,000

Equipment... $47,000

Trucks ..........33,000

Total .........$194,000

The lawn maintenance division has been assessed for impairment and it is determined that the division’s value in use is $182,000, fair value less costs to sell is $149,000, and undiscounted future net cash flows is $218,000.

Question A. Determine if the cash-generating unit is impaired and prepare the journal entry, if any, to record the impairment at December 31, 2017, assuming that none of the individual assets in the division has a determinable recoverable amount.

Question B. Prepare the journal entry, if any, to record the impairment at December 31, 2017, 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 $68,000.

Question C.. Assume that Bonita 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, 2017, assuming that none of the individual assets in the division has a determinable recoverable amount.

Question 2

The information that follows relates to equipment owned by Pearl Limited at December 31, 2017:

Cost ...................................................$8,820,000

Accumulated depreciation to date.......... 980,000

Expected future net cash flows (undiscounted).....6,860,000

Expected future net cash flows (discounted, value in use) ....6,223,000

Fair value .......6,076,000

Costs to sell (costs of disposal) ....49,000

A. Assume that Pearl will continue to use this asset in the future. As at December 31, 2017, the equipment has a remaining useful life of four years. Pearl uses the straight-line method of depreciation.Assume that Pearl is a private company that follows ASPE.

1.Prepare the journal entry at December 31, 2017, to record asset impairment, if any.

2.Prepare the journal entry to record depreciation expense for 2018.

3.The equipment’s fair value at December 31, 2018, is $6.37 million. Prepare the journal entry, if any, to record the increase in fair value.

(1) December 31, 2017

(2) December 31, 2018

(3) December 31, 2018

B. Repeat the requirements in (A) above assuming that Pearl is a public company that follows IFRS.

(1) December 31, 2017

(2) December 31, 2018

(3)December 31, 2018

Answer 1

Answer of Question-1

A.

Recoverable amount of a cash generating unit is higher of value in use and fair value less cost of sale. In the given question the value in use is $182000 and fair value less cost of sale is $149000.

Therefore the recoverable amount will be $182000.

Impairment amount of of cash generating unit will be carrying amount less recoverable amount.

Therefore impairment of cash generating unit will be = $194000-$182000 = $12000.

The total impairment amount will be charged to individual asset in the ration of their carrying amount as on 31 Dec 2017. The general entry will as follows:

Impairment loss A/c Debit $12000

To land a/c credit $2598

To Building a/c credit $ 4454

To Equipment a/c credit $2907

To Truck a/c credit $2041

(Being impairment of CGU was recorded)

B.

Impairment loss of building will be $4000 ($72000-$68000), the remaining impairment loss will be allocated on pro-rata basis among remaining assets.

Impairment loss A/c Debit $12000

To Building a/c credit $ 4000

To Equipment a/c credit $3082

To Truck a/c credit $2164

  To land a/c credit $2754

(Being impairment of CGU was recorded and allocated to the assets)

C.

As per the provisions of ASPE recognition and measurement criteria for impairment of assets is as follows:

1. An impairment loss shall be recognised when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.

2. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the un-discounted cash flows expected to result from its use and eventual disposition

3. If carrying value > un-discounted cash flows; Impairment loss = carrying value –fair value

In the given question the un-discounted future net cash flows is $218,000 and carrying amount of assets of cash generating unit is $194000, hence the carrying amount is less than the amount of un-discounted cash flows. Therefore no recognition of impairment loss.

Answer of Question-2

Carrying amount of the equipment = $8820000-$980000 = $7840000

Un-discounted future cash flows = $6860000

Value in Use = $6223000

Fair value less cost to sale ($6076000-$49000) = $6027000

Impairment loss, If carrying value > un-discounted cash flows; Impairment loss = carrying value –fair value

Therefore impairment loss = $7840000-$6027000) = $1813000

A. 1. Journal entry for impairment:

Impairment loss a/c debit $ 1813000

To Equipment a/c credit $1813000

(Being impairment of equipment recognised)

2. Depreciation a/c debit $1506750

Equipment a/c credit $1506750

(Being depreciation for 2018 was recognised)

3. Under ASPE, reversal of impairment losses is not permitted. Therefore no journal entry for reversal of impairment loss would be passed.

B.1. Journal entry for impairment under IFRS:

Impairment loss a/c debit $ 1617000

To Equipment a/c credit $1617000

(Being impairment of equipment recognised under IFRS)

2. Depreciation a/c debit $1555750

Equipment a/c credit $1555750

(Being depreciation for 2018 was recognised)

3. Equipment A/c debit $1212750

To Impairment loss a/c credit $1212750

(Being impairment loss was reversed on 31-12-2018 due to increase in fair value to the extent the carrying amount would have been, if the original impairment loss had never been recognised)

Note : calculation of reversal amount of impairment loss-

Fair value on 31-12-2018 = $6370000

Original carrying amount of equipment on 31-12-2018 without impairment = $7840000*3/4 = $5880000

Carrying amount on 31-12-2018 considering impairment = $6223000*3/4 = $4667250

Therefore maximum reversal of impairment = $5880000-$4667250 = $1212750