Question

Peter, an analyst is studying the long-lived assets, non-current liabilities and earnings quality of “Storage and Logistics” (S&L), a company based in Luxembourg that follows IFRS. Concerning PPE assets, he gathers the following data from financial statements and other relevant disclosures in 2014. The Fair value is 33 million Euros; Costs to Sell are 0.8 million Euros; Value in Use is 30 million Euros; Net Carrying Amount is 39 million Euros (before current year impairment). Peter uses these values to check he understands the impairment loss appearing on the income statement in the current year.

Concerning non-current liabilities, S&L issued 2,000 five-year debentures with a coupon rate of 8.0 percent paid semi-annually and a face value of 1,000 Euros. At the time of issuance the market interest rate is 9.0 percent. Investors paid 960.44 Euros for each debenture. There were no issuance costs.

Required:

(a)   What would be the amount of the impairment loss on S&L’s income statement related to its PPE assets in the current year? (7.5 marks)

(b)  Determine the carrying value of the bonds using the effective interest rate method of amortization after 18 months. (7.5 marks)

Answer 1

a.

Carrying amount - recoverable amount = Impairment loss

* Recoverable amount = Higher of

1.Fair value less cost to sell or

2. value in use

particulars	amount (million Euro)
Carrying amount (A)	39
FAIR VALUE (B)	33
Cost to sell (C)	0.8
Fair value less cost to sell (D) (B-C)	32.2
Value in use (E)	30
Recoverable amount (Higher of D & E) (F)	32.2
Impairmet loss to be charged to P/L (A-F)	=39-32.2 =6.8 MILLION EURO

Journal entry-

Impairment Loss Dr.------------------6.8

To PPE ------------------------------------6.8

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B.

Calculation of effective rate.

Effective rates is the interest rate at which PV of the cash outflow is equals with pv of cash inflow

PV of cash inflow due to issue of bonds = 2000*960.44 EURO = 1920880 Euro

lets late the effective rate as 4% semiannually. then the PV of cash outflow

=(Euro 80000* PVF @4% for 10 periods) + (Euro 2000000* PVF @4% at 10th period)

=(Euro 80000* 8.110896 ) + (Euro 2000000*0.675564)= Euro 2000000 which is not equal to pv of cash inflow

Lets further take effective rate as 4.5% semiannually. Then PV of cash outflow

=(Euro 80000* PVF @4.5% for 10periods) + (Euro 2000000*PVF @4.5% for 10th period)

=(Euro 80000* 7.912718) + (Euro 2000000* 0.643928) = Euro 1920880 which is equal to pv of cash inflow

hence effective rate is 4.5% semiannully i.e. 9% per annum.

Note= total period will be 10 as the interest is semiannually paid.

value of bond after 18 months

Period	opening bond liability	interest @4.5% (effective rate)	payment	closing
First 6 months	1920880	86440	80000	1927320
second 6 months	1927320	86729	80000	1934049
third 6 months	1934049	87032	80000	1941081

hence bond liability after 18 months is Euro 1941081