Question

(v) Magic plc has a retail business which is treated as a separate cash generating unit and which has suffered badly during the recession. The carrying amounts of the assets comprising the retail business are:

$'000

Building 900

Plant and equipment 300

Inventory 70

Other current assets 130

Goodwill 40

On 31 December 2017, an impairment review has suggested that the recoverable amount of the cash generating unit is estimated at MUR 1.3m.

Required

i. What will be the carrying amount of the inventory after the impairment loss in (iii) has been accounted for?

j. What will be the carrying amount of the building after the impairment loss has been accounted for?

HOW THE $140 IS BEING DISTRIBUTED FOR IMPAIRMENT? WHETHER INVENTORY AND OTHER ASSETS BE IMPAIRED TOO OR ONLY FIXED ASSETS?

Answer 1

Total carrying value of the cash generating unit = Carrying value of all assets

= $900 + $300 + $70 + $130 +$40

= $1.44 m or $1440000

Recoverable amount of the cash generating unit = $1.3 m or $1300000

Impairment loss = Carrying amount - Recoverable amount

= $1440000 - $1300000

=$140000 or $140 k

Now, Out of the total impairment loss of $140000 (or $140k), we will first deduct the carrying value of goodwill.And from the remaining amount, we will distribute it among the remaining assets.

So, Impairment loss to be distributed among assets other than goodwill = Impairment loss - Goodwill

= $140000 - $40000

= $100000 or $100K

Now, we will distribute the $100000 impairment loss to the remaining assets in the ratio or proportion of the original carrying amounts of the assets.

Original ratio = Ratio or proportion of original carrying amounts of the assets excluding goodwill

= 900 : 300 : 70 :130

= 90:30:7:13

(total of 90 + 30 +7 +13 is 140, which will be the denominator)

Now, the remaining impairment loss of $100000 will be distributed to the assets as per below:

Buildings : $100000 * 90/140 = $64286

Plant & equipment : $100000 * 30 / 140 = $21429

Inventory $100000 * 7/140 = $5000

Other current assets : $100000 * 13/140 = $9285

Now the given table shows the carrying amounts of all assets before and after impairment.

Assets Carrying value before impairment Impairment loss Carrying value after impairment

Goodwill $40000 $40000 --

Building $900000 $64286 $835714

Plant & equip $300000 $21429 $278571

Inventory $70000 $5000 $65000

Other CA $130000 $9285 $120715

Total $1400000 $100000 $1300000

So, we can see that all the assets are impaired whether inventory or fixed assets or any other assets because, all these assets constitute a cash generating unit, and if cash generating unit is impaired then all its assets will be subjected to impairment.