Question

Sefam Ltd owns an item of plant which has a carrying amount of Rs. 2,480,000 as at 1 April 2014. It is
being depreciated at 12½% per annum on a reducing balance basis.
The plant is used to manufacture a line of fabric which has been suffering a slow decline in sales. Sefam has
estimated that the plant will be retired from use on 31 March 2018. The estimated net cash flows from the
use of the plant and their present values are:
Net cash flows Present values
As at 31/3/15
Year to 31/03/16 1,200,000 1,092,000
Year to 31/03/17 800,000 664,000
Year to 31/03/18 520,000 390,000
On 1 April 2015, Sefam had an alternative offer from Khaadi, a rival to purchase the plant for Rs. 2,000,000.
Assuming the impairment test was performed on 31 March 2015 at what value should the plant should be
shown in the statement of financial position as at 31 March 2015?

Answer 1

Impairment of asset occurred when the book value of asset cannot be recovered through sale or use.Asset should be tested for impairment when situation like Significant decrease in the market value of asset,adverse change in business climate etc....

When one of the situation exists, a two step recoverability test is used to determine whether impairment has occurred

Step 1 : If the sum of undiscounted future net cash flows expected from the use and disposition of asset is less than its carrying value, the asset is impaired. Otherwise asset is not impaired

Step 2 : If impairment exists ,the asset is written down to it's fair value.and write down is recorded as an impairment loss

Now we can apply this to our scenario

Here impairment test is performed on 31-03-2015

carrying value of the asset as on 31.03.2015

Carrying value of asset on 1.04.2014 = 2,480,000

Depreciation for the period = 12.5%* 2480000 = 310000

carrying value of the asset as on3.2015 = 2480000 - 310000 = 2,170,000

now we can compute sum of undiscounted future net cashflows

Year	Undiscounted Future net cash flows
31.03.2016	1,200,000
31.03.2017	800,000
31.03.2018	520000
Sum of undisounted future net cash flow	2,520,000

Here sum of undiscounted future net cash flows greater than asset carrying value so there is no impairment exists

So carrying value of the asset Should be shown in Financial position statement as on 31.03.2015

That is 2,170,000