## Ind AS 36, Impairment of Assets, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams

Question  1 –

Himalaya Ltd. which is in a business of manufacturing and export of its product. Sometimes, back in 20X4, the Government put restriction on export of goods exported by Himalaya Ltd. and due to that restriction Himalaya Ltd. impaired its assets. Himalaya Ltd. acquired identifiable assets worth of Rs. 4,000 lakhs for Rs. 6,000 lakh at the end of the year 20X0. The difference is treated as goodwill. The useful life of identifiable assets  is 15 years and depreciated on straight line basis. When Government put the restriction at the end of 20X4, the company recognised the impairment loss by determining the recoverable amount of assets for Rs. 2,720 lakh. In 20X6 Government lifted the restriction imposed on the export and due to this favourable change, Himalaya Ltd. re-estimate recoverable amount, which was estimated at Rs. 3,420 lakh.

Required

(i) Calculation and allocation of impairment loss in 20X4.

(ii) Reversal of impairment loss and its allocation as per AS 28 in 20X6.

Solution –

i. Calculation and allocation of impairment loss in 20X4 (Amount in Rs. lakhs)

 Goodwill Identifiable assets Total Historical cost 2,000 4,000 6,000 Accumulated depreciation/amortisation (4 yrs.) (1,600) (1,067) (2,667) Carrying amount before impairment 400 2,933 3,333 Impairment loss* (400) (213) (613) Carrying amount after impairment loss 0 2,720 2,720

* Notes:

1. As per para 87 of AS 28, an impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the following order:

(a) first, to goodwill allocated to the cash-generating unit (if any); and

(b) then, to the other assets of the unit on a pro-rata basis based on  the carrying amount of each asset in the unit.

Hence, first goodwill is impaired at full value and then identifiable assets are impaired to arrive at recoverable value.

2. Since the goodwill has arisen on acquisition of assets, AS 14 comes into the picture. As per para 19 of AS 14, goodwill shall amortise over a period not exceeding five years unless a somewhat longer period can be justified. Therefore, the amortization period of goodwill is considered as 5 years.

ii. Carrying amount of the assets at the end of 20X6 (Amount in Rs. lakhs)

 End of 20X6 Goodwill Identifiable assets Total Carrying amount in 20X6 0 2,225 2,225 Add: Reversal of impairment loss (W.N.2) – 175 175 Carrying amount after reversal of impairment loss – 2,400 2,400

Working Note:

1. Calculation of depreciation after impairment till 20X6 and  reversal  of  impairment  loss in 20X6

 (Amount in Rs. lakhs) Goodwill Identifiable Assets Total Carrying amount after impairment loss in 20X4 0 2,720 2,720 Additional depreciation (i.e. (2,720/11) x 2) – (495) (495) Carrying amount 0 2,225 2,225 Recoverable amount 3,420 Excess of recoverable amount over carrying amount 1,195

Note: It is assumed that the restriction by  the  Government  has  been  lifted at  the end of the year 20X6.

2. Determination of the amount to be impaired by calculating  depreciated historical cost of the identifiable assets without impairment at the end of 20X6

(Amount in Rs. lakhs)

 End of 20X6 Identifiable assets Historical cost 4,000 Accumulated depreciation (266.67 x 6 years) = (1,600) Depreciated historical cost 2,400 Carrying amount (in W.N. 1) 2,225 Amount of reversal of impairment loss 175

Notes:

1. As per para 107 of AS 28, in allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of an asset should not be increased above the lower of:

a. its recoverable amount (if determinable); and

b. the carrying amount that would have  been  determined  (net  of amortisation or depreciation) had no impairment loss been recognised for the asset in prior accounting periods.

Hence impairment loss reversal is restricted to Rs. 175 lakhs only.

2. The reversal of impairment loss took place in the 6th year. However, goodwill is amortised in 5 years. Therefore, there would be no balance in the goodwill account in the 6th year even without impairment loss. Hence in W.N. 2 above there is no column for recalculation of goodwill.

Question 2 –

A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. 80% of Y’s final production is sold to customers outside of the entity.

60% of X’s final production is sold to Y and the remaining 40% is sold to customers outside of the entity. For each of the following cases, what are the cash-generating units for X and Y?

(a) If X could sell the products it sells to Y in an active market and internal transfer prices  are higher than market prices, what are the cash-generating units for X and Y?

(b) If there is no active market for the products X sells to Y, what are the cash-generating units for X and Y?

Solution –

(a) Cash-generating unit for X: X could sell its products in an active market and, so, generate  cash inflows that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a separate cash-generating unit, although part of its production is used by Y.

Cash-generating unit for Y: It is likely that Y is also a separate cash-generating unit. Y sells 80% of its products to customers outside of the entity. Therefore, its cash inflows can  be regarded as largely independent.

Effect of internal transfer pricing: Internal transfer prices do not reflect market prices for X’s output. Therefore, in determining value in use of both X and Y, the entity adjusts financial budgets/forecasts to reflect management’s best estimate of future prices that could be achieved in arm’s length transactions for those of X’s products that are used internally.

(b) Cash-generating units for X and Y: It is likely that the recoverable amount of each plant cannot be assessed independently of the recoverable amount of the other plant because:

(i) the majority of X’s production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y’s products. Therefore, X cannot be considered to generate cash inflows that are largely independent of those of Y.

(ii) the two plants are managed together.

As a consequence, it is likely that X and Y together are the smallest group of assets that generates cash inflows that are largely independent.

Question 3 –

Parent acquires an 80% ownership interest in Subsidiary for Rs. 2,100 on 1st April, 20X1. At that date, Subsidiary’s net identifiable assets have a fair value of Rs. 1,500. Parent chooses to measure the non-controlling interests as the proportionate interest of Subsidiary’s net identifiable assets. The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Since other cash-generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of Rs. 500 related to those synergies has been allocated to other cash-generating units within Parent. On 31st  March,  20X2,  Parent  determines that the recoverable amount of cash-generating unit Subsidiary is Rs. 1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs. 1,350. Allocate the impairment loss on 31st March, 20X2.

Solution –

Non-controlling interests is measured as the proportionate interest of Subsidiary’s net  identifiable assets, i.e., Rs. 300 (20% of Rs. 1,500). Goodwill is the difference between the aggregate of the  consideration  transferred  and  the  amount  of  the  non-controlling  interests (Rs. 2,100 + Rs. 300) and the net identifiable assets (Rs. 1,500), i.e., Rs. 900.

Since, the assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets, therefore, Subsidiary is a cash-generating unit.  Since  other  cash-generating units  of  Parent are expected to benefit from the synergies of the combination, the goodwill of Rs. 500 related to those synergies has been allocated to other cash-generating units within Parent. Because the cash-generating unit comprising Subsidiary includes goodwill within its carrying amount,  it should be tested for impairment annually, or more frequently if there is an indication that it may be impaired.

Testing Subsidiary (cash-generating unit) for impairment

Goodwill attributable to non-controlling interests is included in Subsidiary’s recoverable amount of Rs. 1,000 but has not been recognised in Parent’s consolidated financial  statements.  Therefore, the carrying amount of Subsidiary should be grossed up to include goodwill attributable to the non-controlling interests, before being compared with  the  recoverable  amount of Rs. 1,000. Goodwill attributable to Parent’s 80% interest in Subsidiary at  the acquisition date is Rs. 400 after allocating Rs. 500 to other cash-generating units within Parent. Therefore, goodwill attributable to the 20% non-controlling interests in Subsidiary at the acquisition date is Rs. 100.

Testing subsidiary for impairment on 31st March, 20X2

 On 31st March, 20X2 Goodwill of subsidiary (Rs.) Net identifiable assets (Rs.) Total (Rs.) Carrying amount 400 1,350 1,750 Unrecognised non-controlling interests 100 – 100 Adjusted carrying amount 500 1,350 1,850 Recoverable amount 1,000 Impairment loss 850

Allocating the impairment loss

The impairment loss of Rs. 850 should be allocated to the assets in the unit by first reducing the carrying amount of goodwill.

Therefore, Rs. 500 of the Rs. 850 impairment loss for the unit is allocated to the goodwill. If the partially-owned subsidiary is itself a cash-generating unit, the goodwill impairment loss should be allocated to the controlling and non-controlling interests on the same basis as that on which profit or loss is allocated. In this case, profit or loss is allocated on the basis of  relative ownership interests. Because the goodwill is recognised only to the extent of Parent’s 80% ownership interest in Subsidiary, Parent recognises only 80% of that goodwill impairment loss (i.e., Rs. 400).

The remaining impairment loss of Rs. 350 is recognised by reducing the carrying amounts of Subsidiary’s identifiable assets.

Allocation of the impairment loss for Subsidiary on 31st March, 20X2

 On 31st March, 20X2 Goodwill of subsidiary (Rs.) Net identifiable assets (Rs.) Total (Rs.) Carrying amount 400 1,350 1,750 Impairment loss (400) (350) (750) Carrying amount after impairment loss – 1,000 1,000

Question 4 –

M Ltd. has three cash-generating units: A, B and C. Due to adverse changes in the technological environment, M Ltd. conducted impairment tests of each of its cash – generating units. On 31st March, 2018, the carrying amounts of A, B and C are Rs. 100 lakhs, Rs. 150 lakhs and Rs. 200 lakhs respectively.

The operations are conducted from a headquarter. The carrying amount of the headquarter assets is Rs. 200 lakhs: a headquarter building of Rs. 150 lakhs and a research centre of Rs. 50 lakhs. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the head -quarter building devoted to each cash-generating unit. The carrying amount of the  research  centre  cannot be allocated on a reasonable basis to the individual cash-generating units.

Following is the remaining estimated useful life of:

 A B C Head quarter assets Remaining estimated useful life 10 20 20 20

The headquarter assets are depreciated on a straight-line basis.

The recoverable amount of each cash generating unit is based on its value in use since net selling price for each CGU cannot be calculated. Therefore, Value in use is equal to

 A B C M Ltd. as a whole Recoverable amount 199 164 271 720*

*The research centre generates additional future cash flows for the enterprise as a whole. Therefore, the sum of the value in use of each individual CGU is less than the value in use   of the business as a whole. The additional cash flows are not attributable to the headquarter building.

Calculate and show allocation of impairment loss as per AS 28. Ignore tax effects.

Solution –

1. Identification of Corporate Assets of M Ltd.

Here, the corporate assets are the headquarter building and the research centre.

For corporate building

Since, the carrying amount of the headquarter building can be allocated on a reasonable and consistent basis to the cash-generating units  under  review.  Therefore, only a ‘bottom-up’ test is necessary.

For research centre

Since the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual CGU under review. Therefore, a ‘top-down’ test will be applied in addition to the ‘bottom-up’ test.

2. Allocation of Corporate Assets

Since the estimated remaining useful life of A’s CGU is 10 years, whereas the estimated remaining useful lives of B and C’s CGU are 20 years, the carrying amount  of the headquarter building is allocated to the carrying amount of each individual cash-generating unit on weight basis.

3. Calculation of a weighted allocation of the carrying amount of the headquarter building

(Amount in Rs. lakhs rounded off)

 On 31st March, 2018 A B C Total Carrying amount (A) 100 150 200 450 Useful life 10 years 20 years 20 years Weighting based on useful life 1 2 2 Carrying amount after weighting 100 300 400 800 Pro-rata allocation of the building 12.5% 37.5% 50% 100% Allocation of the carrying amount of the building (based on pro-rata above) (B) (100/800) (300/800) (400/800) 19 56 75 150 Carrying amount (after allocation of the building) 119 206 275 600

4. Calculation of Impairment Losses

i. Application of ‘bottom-up’ test

 (Amount in Rs. lakhs) 31st March, 2018 A B C Carrying amount (after allocation of the building) (Refer Point 3 above) 119 206 275 Recoverable amount (given in the question) 199 164 271 Impairment loss 0 (42) (4)

ii. Allocation of the impairment losses for cash-generating units B and C

(Amount in Rs. lakhs)

 Cash-generating unit B C To headquarter building (12) (42*56/206) (1) (4*75/275) To assets in cash-generating unit (30) (42*150/206) (3) (4*200/275) (42) (4)

Since the research centre could not be allocated on a reasonable and consistent basis to A, B and C’s CGU, M Ltd. compares the carrying amount of the smallest CGU to which the carrying amount of the research centre can be allocated (i.e.,  M as a whole) to its recoverable amount, in accordance with the ‘top-down’ test.

iii. Application of the ‘top-down’ test

(Amount in Rs. lakhs)

 31st March, 2018 A B C Building Research centre M Ltd. Carrying amount 100 150 200 150 50 650 Impairment loss arising from the ‘bottom-up’ test – (30) (3) (13) – (46) Carrying amount after the ‘bottom- up’ test 100 120 197 137 50 604 Recoverable amount 720

Since recoverable amount is more than the carrying amount of M Ltd., no additional impairment loss has been resulted from the application of the ‘top – down’ test. Only an impairment loss of  Rs. 46 lakhs will be recognized as a result of the application of the ‘bottom-up’ test.

Question 5 –

A machine was acquired by ABC Ltd. 15 years ago at a cost of Rs. 20 crore. Its accumulated depreciation as at 31st March, 2018 was Rs. 16.60 crore. Depreciation estimated for the financial year 2018-19 is Rs. 1 crore.  Estimated  Net  Selling  Price  of  the  machine  as  on 31st March, 2018 was Rs. 1.20  crore,  which  is expected to  decline by 20 per cent by the end of the next financial year.

Its value in use has been computed at Rs. 1.40 crore as on 1st April, 2018, which  is expected  to decrease by 30 per cent by the end of the financial year. Assuming that  other conditions  of relevant Accounting Standard for applicability of the impairment are satisfied:

(i) What should be the carrying amount of this machine as at 31st March, 2019?

(ii) How much will be the amount of write off (impairment loss) for the financial year ended 31st March, 2019?

(iii) If the machine had been revalued ten years ago and the current revaluation reserves against this plant were to be Rs. 48 lakh, how would you answer to questions (i) and (ii) above?

(iv) If the value in use was zero and the company was required to incur a cost of  8 lakh  to dispose of the plant, what would be your response to questions (i) and (ii) above?

Solution –

As  per the requirement of the question,  the following solution has been drawn on the basis  of AS 28

 Rs. in crore (i) Carrying amount of plant (before impairment) as on 31st March, 2019 2.4 Carrying amount of plant (after impairment) as on 31st March, 2019 0.98 (ii) Amount of impairment loss for the financial year ended 31st March, 2019 (2.4 Cr.- 0.98 Cr) 1.42 (iii) If the plant had been revalued ten years ago Debit to revaluation reserve 0.48 Amount charged to profit and loss (1.42 – 0.48) 0.94 (iv) If Value in use was zero Value in use (a) Nil Net selling price (b) -0.08 Recoverable amount [higher of (a) and (b)] Nil Carrying amount (closing book value) Nil Amount of write off (impairment loss) (Rs.2.4 Cr – Nil) 2.4 Entire book value of plant will be written off and charged to profit and loss account.

Working Notes:

(1) Calculation of Closing Book Value, as at 31st March, 2019

 Rs. in crore Opening book value as on 1.4.2018 (Rs.20 crore -16.60 crore) 3.40 Less: Depreciation for financial year 2018–2019 (1.00) Closing book value as on 31.3.2019 (before impairment) 2.40

(2) Calculation of Estimated Net Selling Price on 31st March, 2019

 Rs. in crore Estimated net selling price as on 1.4.2018 1.20 Less: Estimated decrease during the year (20% of Rs. 1.20 Cr.) (0.24) Estimated net selling price as on 31.3.2019 0.96

(3) Calculation of Estimated Value in Use of Plant on 31st March, 2019

 Rs. in crore Estimated value in use as on 1.4.2018 1.40 Less: Estimated decrease during the year (30% of Rs.1.40 Cr.) (0.42) Estimated value in use as on 31.3.2019 0.98

(4) Recoverable amount as on 31.3.2019 is equal to higher of Net selling price and value in use

 Rs. in crore Net selling price 0.96 Value in use 0.98 Recoverable amount 0.98 Impairment Loss [Carrying amount – Recoverable amount ie. (2.40 Cr. – 0.98 Cr)] 1.42 Revised carrying amount on 31.3.2019 is equal to Recoverable amount (after impairment) 0.98

Note: Since question requires computation of Impairment Loss on 31.3.2019, hence impairment probability on 31.3.2018 has been ignored.  However,  since  there  is impairment probability at the beginning of the year as well,  one may calculate the carrying amount at the beginning of the year after impairment and then calculate the impairment possibilities at the end of the year. Accordingly the solution will be as follows:

 Rs. in crore Carrying amount before impairment on 1.4.2018 (20 – 16.60) 3.40 Recoverable amount ie. higher of NSP (1.20 cr) and Value in use (1.40 cr) 1.40 Impairment loss 2.00 Revised carrying amount after impairment as on 1.4.2018 1.40 Less: Depreciation for 2018-2019 (as given in the question) (1.00) Carrying amount as on 31.3.2019 0.40 Recoverable amount as on 31.3.2019 (Refer W.N. 2, 3 and 4 above) 0.98 Impairment Loss as on 31.3.2019 (since carrying amount is less than recoverable amount) NIL

Question 6 –

On 1st April 20X1, Venus Ltd acquired 100% of Saturn Ltd for Rs. 4,00,000. The fair value of the  net identifiable assets of Saturn Ltd was Rs. 3,20,000 and goodwill was  Rs. 80,000.  Saturn Ltd is in coal mining business. On 31st March, 20X3,  the government  has cancelled licenses given   to it in few states.

As a result Saturn’s Ltd revenue is estimated to get reduce by 30%. The adverse change in market place and regulatory conditions is an indicator of impairment. As a result, Venus  Ltd  has  to  estimate  the  recoverable  amount  of  goodwill and  net  assets of Saturn Ltd on  31st March, 20X3.

Venus Ltd uses straight line depreciation. The useful life of  Saturn’s Ltd  assets is estimated to  be 20 years with no residual value. No independent cash inflows can be identified to any  individual assets. So the entire operation of Saturn Ltd is to be treated as a CGU. Due to the regulatory entangle it is not possible to determine the selling price of Saturn Ltd as a CGU. Its value in use is estimated by the management at Rs. 2,12,000.

Suppose by 31st March, 20X5 the government reinstates the licenses of Saturn Ltd. The management expects a favourable change in net cash flows. This is an indicator that an impairment loss may have reversed. The recoverable amount of Saturn’s Ltd net asset is re- estimated. The value in use is expected to be Rs. 3,04,000 and fair value less cost to disposal is expected to be Rs. 2,90,000.

Solution –

Since the fair value less costs of disposal is not determinable the recoverable amount of the  CGU is its value in use.  The carrying amount of the assets  of the CGU on 31st March, 20X3 is  as follows:

Calculation of Impairment loss

 Rs. Goodwill Other assets Total Historical Cost 80,000 3,20,000 4,00,000 Accumulated Depreciation (3,20,000/20) x 2 – (32,000) (32,000) Carrying Amount 80,000 2,88,000 3,68,000 Impairment Loss (80,000) (76,000) (1,56,000)

Revised Carrying Amount

• Impairment Loss = Carrying Amount – Recoverable Amount (Rs. 3,68,000 – Rs. 2,12,000) = Rs. 1,56,000  is  charged  in  statement  of   profit   and   loss   for   the   period   ending  31st March, 20X3 as impairment loss.
• Impairment loss is allocated first to goodwill Rs. 80,000 and remaining  loss  of  76,000 (Rs. 1,56,000 – Rs. 80,000) is allocated to the other assets.

Reversal of Impairment loss

Reversal of impairment loss is recognised subject to:-

• The impairment loss on goodwill cannot be reversed.
• The increased carrying amount of an asset after reversal of an impairment loss not to exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years.

Calculation of carrying amount of identifiable assets had no impairment loss is  recognized

 Rs. Historical Cost 3,20,000 Accumulated Depreciation for 4 years (3,20,000/20) x 4 (64,000) Carrying amount had no impairment loss is recognised on 31st March, 20X5 2,56,000

Carrying amount of other assets after recognition of impairment loss

 Rs. Carrying amount on 31st March, 20X3 2,12,000 Accumulated Depreciation for 2 years (2,12,000/18) x 2 [ rounded off to nearest thousand for ease of calculation] (24,000) Carrying amount on 31st March, 20X5 1,88,000
• The impairment loss recognised previously can be reversed only to the extent of lower of re-estimated recoverable amount is Rs. 2,56,000 (higher of fair value less costs of disposal Rs. 2,90,000 and value in use Rs. 3,04,000)
• Impairment loss reversal will be Rs. 68,000 i.e. (Rs. 2,56,000 – Rs. 1,88,000). This amount is recognised as  income  in  the  statement  of   profit  and   loss   for   the   year  ended   31st March, 20X5.
• The carrying amount of other assets at 31st March, 20X5 after reversal of impairment loss will be Rs. 2,56,000.
• From 1st April, 20X5 the depreciation charge will be Rs. 16,000 i.e. (Rs. 2,56,000/16).

Question 7 –

XYZ Limited has three cash-generating units – X, Y  and Z, the carrying  amounts  of which as on 31st March, 2018 are as follows:

 Cash Generating Units Carrying Amount (Rs. in lakh) Remaining useful life in years X 800 20 Y 1000 10 Z 1200 20

XYZ Limited also has corporate assets having a remaining useful life of 20 years as given below:

 Corporate Assets Carrying amount (Rs. in lakh) Remarks AU 800 The carrying amount of AU can be allocated on a reasonable basis to the individual cash generating units. BU 400 The carrying amount of BU cannot be allocated on a reasonable basis to the individual cash-generating units.

Recoverable amounts as on 31st March, 2018 are as follows:

 Cash-generating units Recoverable amount (Rs. in lakh) X 1000 Y 1200 Z 1400 XYZ Limited 3900

Calculate the impairment loss if any of XYZ Ltd. Ignore decimals.

Solution –

(i) Allocation of corporate assets to CGU

The carrying amount of AU is allocated to the carrying amount of each individual cash- generating unit. A weighted allocation basis is used because the estimated remaining useful life of Y’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of X and Z’s cash-generating units are 20 years.

 (Rs. in lakh) Particulars X Y Z Total (a) Carrying amount 800 1000 1,200 3,000 (b) Useful life 20 years 10 years 20 years (c) Weight based on useful life 2 1 2 (d) Carrying amount (after assigning weight) (a x c) 1,600 1,000 2,400 5,000 (e) Pro-rata allocation of AU 32% (1,600/5,000) 20% (1,000/5,000) 48% (2,400/5,000) 100% (f) Allocation    of carrying amount of AU (32: 20: 48) 256 160 384 800 (g) Carrying amount (after allocation of AU) (a+f) 1,056 1,160 1,584 3,800

(ii) Calculation of impairment loss

Step 1: Impairment losses for individual cash-generating units and its allocation

(a) Impairment loss of each cash-generating units

 (Rs. in lakh) Particulars X Y Z Carrying amount (after allocation of AU) 1,056 1,160 1,584 Recoverable amount 1,000 1,200 1,400 Impairment loss 56 Nil 184

(b) Allocation of the impairment loss (after rounding off)

 (Rs. in lakh) Allocation to X Z AU 14 (56×256/1,056) 45 (184×384/1,584) Other assets in cash- generating units 42 (56×800/1056) 139 (184×1,200/ 1,584) Impairment loss 56 184

Step 2: Impairment loss for the larger cash-generating unit, i.e., XYZ Ltd. as a whole

 (Rs. in lakh) Particulars X Y Z AU BU XYZ Ltd. Carrying amount 800 1,000 1,200 800 400 4,200 Impairment loss (Step I) (42) – (139) (59)* – (240) Carrying amount (after Step I) 758 1,000 1,061 741 400 3,960 Recoverable amount 3,900 Impairment loss for the ‘larger’ cash-generating unit 60

*Rs. 14 lakh + Rs. 45 lakh = Rs. 59 lakh.

Question 8 –

Elia limited is a manufacturing company which deals in to manufacturing of cold drinks  and beverages. It is having various plants across India. There is a Machinery A in the Baroda plant which is used for the purpose of bottling. There is one  more machinery  which is Machinery B clubbed with Machinery A. Machinery A can individually have an output and also sold independently in the open market. Machinery B cannot be sold in isolation and without clubbing with Machine A it cannot produce output as well. The Company considers this group of assets as a Cash Generating Unit and an Inventory amounting to Rs. 2 Lakh and Goodwill amounting to Rs. 1.50 Lakhs is included in such CGU.

Machinery A was purchased on 1st April 2013 for Rs. 10 Lakhs and residual value is Rs. 50 thousands. Machinery B was purchased on 1st April, 2015 for Rs. 5 Lakhs with no residual value. The useful life of both Machine A and B is 10  years. The Company expects following cash flows in the next 5 years pertaining to Machinery A. The incremental borrowing rate of the company is 10%.

 Year Cash Flows from Machinery A 1 1,50,000 2 1,00,000 3 1,00,000 4 1,50,000 5 1,00,000 (excluding Residual Value) Total 6,00,000

On 31st March, 2018, the professional valuers have estimated that the current market value of Machinery A is Rs. 7 lakhs. The valuation fee was Rs. 1 lakh. There is a need to dismantle the machinery before delivering it to the buyer. Dismantling cost is Rs. 1.50 lakhs. Specialised packaging cost would be Rs. 25 thousand and legal fees would  be Rs. 75 thousand.

The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU is Rs. 10 Lakh as on 31st March, 2018. In the next year, the company has done the assessment of recoverability of the CGU and found that the value of such CGU is Rs. 11 Lakhs ie on 31st March, 2019. The Recoverable value of Machine A is  Rs. 4,50,000 and combined Machine A and B is Rs. 7,60,000 as on 31st March, 2019.

Required:

a) Compute the impairment loss on CGU and carrying value of each asset after charging impairment loss for the year ending 31st March, 2018 by providing all the relevant working notes to arrive at such calculation .

b) Compute the prospective depreciation for the year 2018-2019 on the above assets.

c) Compute the carrying value of CGU as at 31st March, 2019.

Solution –

a) Computation of impairment loss and carrying value of each of the asset in CGU after impairment loss

(i) Calculation of carrying value of Machinery A and B before impairment

 Machinery A Cost                                              (A) Rs. 10,00,000 Residual Value Rs. 50,000 Useful life 10 years Useful life already elapsed 5 years Yearly depreciation                         (B) Rs. 95,000 WDV as at 31st March, 2018 [A- (B x 5)] Rs. 5,25,000 Machinery B Cost                                              (C) Rs. 5,00,000 Residual Value – Useful life 10 years Useful life already elapsed 3 years Yearly depreciation                         (D) Rs. 50,000 WDV as at 31st March, 2018 [C- (D x 3)] Rs. 3,50,000

(ii) Calculation of Value-in-use of Machinery A

 Period Cash Flows (Rs.) PVF PV 1 1,50,000 0.909 1,36,350 2 1,00,000 0.826 82,600 3 1,00,000 0.751 75,100 4 1,50,000 0.683 1,02,450 5 1,00,000 0.621 62,100 5 50,000 0.621 31,050 Value in use 4,89,650

(iii) Calculation of Fair Value less cost of disposal of Machinery A

 Rs. Fair Value 7,00,000 Less: Dismantling cost (1,50,000) Packaging cost (25,000) Legal Fees (75,000) Fair value less cost of disposal 4,50,000

(iv) Calculation of Impairment loss on Machinery A

 Rs. Carrying Value 5,25,000 Less: Recoverable Value ie higher of Value-in-use and Fair value less cost of disposal 4,89,650 Impairment Loss 35,350

(v) Calculation of Impairment loss of CGU

1. First goodwill will be impaired fully and then the remaining impairment loss of Rs. 75,000 will be allocated to Machinery A and B.
2. If we allocate remaining impairment loss to Machinery A and B on pro – rata basis, it would come to Rs. 45,000 on Machinery A. However, the impairment loss of Machinery A cannot exceed Rs. 35,350. Hence, impairment to CGU will be as follows:
 Carrying value before impairment loss Impairment loss Carrying value after impairment loss Rs. Rs. Rs. Machinery A 5,25,000 35,350 4,89,650 Machinery B 3,50,000 39,650* 3,10,350 Inventory 2,00,000 – 2,00,000 Goodwill 1,50,000 1,50,000 – Total 12,25,000 2,25,000 10,00,000

* Balancing figure.

(b) Carrying value after adjustment of depreciation

 Rs. Machinery A [4,89,650 – {(4,89,650-50,000)/5}] 4,01,720 Machinery B [3,10,350 – (3,10,350/7)] 2,66,014 Inventory 2,00,000 Goodwill – Total 8,67,734

(c) Calculation of carrying value of CGU as on 31st March, 2019

The revised value of CGU is Rs. 11 Lakh. However, impaired goodwill cannot be reversed. Further, the individual assets cannot be increased by lower of recoverable value or Carrying Value as if the assets were never impaired.

Accordingly, the carrying value as on 31st March, 2019 assuming that the  impairment loss had never incurred, will be:

 Carrying Value Recoverable Value Final CV as at 31st Mar 2019 Machinery A 4,30,000 4,50,000 4,30,000 Machinery B 3,00,000 (7,60,000 – 4,50,000) 3,10,000 3,00,000 Inventory 2,00,000 2,00,000 2,00,000 Goodwill – Total 9,30,000 9,60,000 9,30,000

Hence the  impairment loss  to   be   reversed   will  be   limited   to   Rs.  62,266  only (Rs. 9,30,000 – Rs. 8,67,734).

Question 9 –

Sun Ltd is an entity with various subsidiaries. The entity closes its books of account at every year ended on 31st March. On 1st July, 20X1, Sun Ltd acquired an 80% interest in Pluto Ltd. Details of the acquisition were as follows:

• Sun ltd acquired 800,000 shares in Pluto Ltd by issuing two equity shares for every five acquired. The fair value of Sun Ltd’s share on 1st July, 20X1 was Rs. 4 per share and the fair value of a Pluto’s share was Rs. 1.40 per share. The costs of issue were 5% per share.
• Sun Ltd incurred further legal and professional costs of Rs. 100,000 that directly related to the acquisition.
• The fair values of the identifiable net assets of Pluto Ltd at 1st July, 20X1 were measured at Rs. 1.3 million. Sun Ltd initially measured the non-controlling interest in Pluto Ltd at fair value. They used the market value of a Pluto Ltd share for this purpose. No impairment of goodwill arising on the acquisition of Pluto Ltd was required at 31st March, 20X2 or 20X3.

Pluto Ltd comprises three cash generating units A, B and C. When Pluto Ltd was acquired the directors of Sun Ltd estimated that the goodwill arising on acquisition could reasonably be  allocated to units A:B:C on a 2:2:1 basis. The carrying values of the assets in these cash  generating units and their recoverable amounts are as follows:

 Unit Carrying value (before goodwill allocation) Recoverable amount Rs. ’000 Rs. ’000 A 600 740 B 550 650 C 450 400

Required:

(i) Compute the carrying value of the goodwill arising on acquisition of Pluto Ltd in the consolidated Balance Sheet of Sun ltd at 31st March, 20X4 following the impairment review.

(ii) Compute the total impairment loss arising as a result of the impairment review, identifying how much of this loss would be allocated to the non-controlling interests in Pluto ltd.

Solution –

Computation of goodwill on acquisition

 Particular Amount (Rs. ‘000) Cost of investment (8,00,000 x 2/5 x Rs. 4) 1,280 Fair value of non-controlling interest (2,00,000 x Rs. 1·4) 280 Fair value of identifiable net assets at date of acquisition (1,300) So goodwill equals 260

Acquisition costs are not included as part of the fair value of the consideration given under Ind AS 103, Business Combination.

Calculation of impairment loss

 Unit Carrying value Recoverable Amount Impairment Loss Before Allocation Allocation of goodwill (2:2:1) After Allocation A 600 104 704 740 Nil B 550 104 654 650 4 C 400* 52 452 400 52

* After writing down assets in the individual CGU to recoverable amount.

Calculation of closing goodwill

 Goodwill arising on acquisition (W1) 260 Impairment loss (W2) (56) So closing goodwill equals 204

Calculation of overall impairment loss

 on goodwill (W3) 56 on assets in unit C (450 – 400) 50 So total loss equals 106

Rs. 21.2 (20%) of the above is allocated to the NCI with the balance allocated to the shareholders of Sun ltd.

Question 10 –

East Ltd. (East) owns a machine used in the manufacture of steering wheels, which are sold directly to major car manufacturers.

• The machine was purchased on 1st April, 20X1 at a cost of Rs. 500 000 through a vendor financing arrangement on which interest is being charged at the rate of 10 per cent per annum.
• During the year ended 31st March, 20X3, East sold 10 000 steering wheels at a selling price of Rs. 190 per wheel.
• The most recent financial budget approved by East’s managem ent, covering the period 1st April, 20X3 – 31st March, 20X8, including that the company  expects  to sell each  steering wheel  for  200 during 20X3-X4, the price rising in later years in line with a forecast inflation of 3 per cent per annum.
• During the year ended 31st March, 20X4, East expects to sell 10 000 steering wheels. The  number  is  forecast  to  increase  by  5   per  cent  each   year  until 31st March, 20X8.
• East estimates that each steering wheel costs Rs. 160 to manufacture, which includes Rs. 110 variable costs, Rs. 30 share of fixed overheads and Rs. 20 transport costs.
• Costs are expected to rise by 1 per cent during 20X4-X5, and then by 2  per cent per annum until 31st March, 20X8.
• During 20X5-X6, the machine will be subject to regular maintenance costing
• 50,000.
• In 20X3-X4, East expects to invest in new technology costing Rs. 100 000. This technology will reduce the variable costs of manufacturing each steering wheel  from Rs. 110 to Rs. 100 and the share of fixed overheads from  30 to Rs. 15 (subject to the availability of technology, which is still under development).
• East is depreciating the machine using the straight line  method  over  the  machine’s 10 year estimated useful life. The current estimate (based on similar assets that have reached the end of  their useful lives) of the disposal  proceeds from selling the machine is Rs. 80 000 net of disposal    East  expects  to dispose of the machine at the end of March, 20X8.
• East has determined a pre-tax discount rate of 8 per cent, which reflects the market’s assessment of the time value of money and the risks associated with this asset.

Assume a tax rate of 30%. What  is  the  value in  use of  the machine in accordance  with Ind AS 36?

Solution –

Calculation of the value in use of the machine owned by East Ltd. (East) includes the projected cash inflow (i.e. sales income) from the continued use of the machine and projected cash outflows that are necessarily incurred to  generate  those cash  inflows (i.e cost of goods sold). Additionally, projected cash inflows include Rs. 80,000 from the disposal of the asset in March, 20X8. Cash outflows include  routing capital expenditures of Rs. 50,000 in 20X5-X6

As per Ind AS 36, estimates of future cash flows shall not include:

• Cash inflows from receivable
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring  to  which  an  entity is not yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s performance
• Cash inflows or outflows from financing activities
• Income tax receipts or payments.

Hence in this case, cash flows do not include financing interest (i.e. 10%), tax (i.e. 30%) and capital expenditures to which East has not yet committed (i.e.  Rs. 100 000).  They also  do not include any savings in cash outflows from these capital expenditure, as required by Ind AS 36.

The cash flows (inflows and outflows) are presented below  in  nominal  terms.  They  include an increase of 3% per annum to the forecast price per unit (B),  in  line  with  forecast inflation. The cash flows are discounted by applying a discount rate (8%) that is  also adjusted for inflation.

Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.

 Year ended 20X3-X4 20X4-X5 20X5-20X6 20X6-X7 20X7-X8 Value in use Quantity (A) 10,000 10,500 11,025 11,576 12,155 Price per unit(B) Rs. 200 Rs. 206 Rs. 212 Rs. 219 Rs. 225 Estimated   cash inflows (C=A x B) Rs. 20,00,000 Rs. 21,63,000 Rs. 23,37,300 Rs. 25,35,144 Rs. 27,34,875 Misc. cash inflow disposal  proceeds (D) Rs. 80 000 Total estimated cash              inflows (E=C+D) Rs. 20,00,000 Rs. 21,63,000 Rs. 23,37,300 Rs. 25,35,144 Rs. 28,14,875 Cost per unit (F) Rs. 160 Rs. 162 Rs. 165 Rs. 168 Rs. 171 Estimated cash outflows (G = A  x F) (Rs. 16,00,000) (Rs. 17,01,000) (Rs. 18,19,125) (Rs. 19,44,768) (Rs. 20,78,505) Misc. cash outflow: maintenance costs (H) (Rs. 50,000) Total estimated cash outflows (I=G+H) (Rs. 16,00,000) (Rs. 17,01,000) (Rs. 18,69,125) (Rs. 19,44,768) (Rs. 20,78,505) Net cash flows (J=E-I) Rs. 4,00,000 Rs. 4,62,000 Rs. 4,68,175 Rs. 5,90,376 Rs. 7,36,370 Discount factor 8% (K) 0.9259 0.8573 0.7938 0.7350 0.6806 Discounted future cash flows (L=J x K) Rs. 3,70,360 Rs. 3,96,073 Rs. 3,71,637 Rs. 4,33,926 Rs. 5,01,173 Rs. 20,73,169

Question 11 –

PQR Ltd. is the company which has performed well in the past but one of its major assets,  an item of equipment, suffered a significant and unexpected deterioration in performance. Management expects to use the machine for a  further four  years after 31 st  March 20X6,  but at a reduced level. The equipment will be scrapped after four years. The financial accountant for PQR Ltd. has produced a set of cash-flow projections for the equipment for the next four years, ranging from optimistic to pessimistic. CFO thought that the projections were too conservative,  and he intended to use the highest figures each year.  These were  as follows:

 Rs. ʼ000 Year ended 31st March 20X7 276 Year ended 31st March 20X8 192 Year ended 31st March 20X9 120 Year ended 31st March 20Y0 114

The above cash inflows should be assumed to occur on the last day of each financial year. The pre-tax discount rate is 9%.  The  machine  could have  been sold  at 31st  March 20X6 for Rs. 6,00,000 and related selling expenses in this regard could have been Rs. 96,000. The machine had been re valued previously, and at 31st March 20X6  an amount of  Rs. 36,000  was held in revaluation surplus in respect of the asset. The carrying value of the asset at 31st March 20X6 was Rs. 660,000. The Indian government has indicated that it may compensate the company for any loss in value of the assets up to its recoverable amount.

Calculate impairment loss, if any and revised depreciation of asset. Also suggest how Impairment loss, if any would be set off and how compensation fr om government be accounted for?

Solution –

Carrying amount of asset on 31st March 20X6 = Rs. 6,60,000

Calculation of Value in Use:

 Year ended Cash flow Rs. Discount  factor @ 9% Amount Rs. 31st March, 20X7 2,76,000 0.9174 2,53,202 31st March, 20X8 1,92,000 0.8417 1,61,606 31st March, 20X9 1,20,000 0.7722 92,664 31st March, 20Y0 1,14,000 0.7084 80,758 Total (Value in Use) 5,88,230

Calculation of Recoverable amount:

 Particulars Amount (Rs.) Value in use 5,88,230 Fair value less costs of disposal (6,00,000 – 96,000) 5,04,000 Recoverable amount (Higher of value in use and fair value less costs of disposal) 5,88,230

Calculation of Impairment loss:

 Particulars Amount (Rs.) Carrying amount 6,60,000 Less: Recoverable amount (5,88,230) Impairment loss 71,770

Calculation of Revised carrying amount:

 Particulars Amount (Rs.) Carrying amount 6,60,000 Less: Impairment loss (71,770) Revised carrying amount 5,88,230

Calculation of Revised Depreciation:

Revised carrying amount – Residual value

Remaining life = (5,88,230 – 0) / 4 = Rs. 1,47,058 per annum

Set off of Impairment loss:

The impairment loss of Rs. 71,770 must first be set off against any revaluation surplus in relation to the same asset. Therefore, the revaluation surplus of Rs. 36,000 is eliminated against impairment loss, and the remainder of the impairment loss Rs. 35,770 (Rs. 71,770 – Rs. 36,000) is charged to profit and loss.

Treatment of Government compensation:

Any compensation by government would be accounted for as such when it becomes receivable. At this time, the government has only stated that it may reimburse the company and therefore credit should not be taken for any potential government receipt.

Question 12 –

A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence. A provision for the costs to replace the overburden was recognised as soon as the overburden was removed. The amount provided was recognised as part of the cost of the mine and is being depreciated over the mine’s useful life. The carrying amount of the provision for restoration costs is Rs. 500, which is equal to the present value of the restoration costs.

The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around Rs. 800. This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately Rs. 1,200, excluding restoration costs. The carrying amount of the mine is Rs. 1,000.

Solution –

The cash-generating unit’s fair value less costs of disposal is Rs. 800. This amount considers restoration costs that have already been provided for. As a consequence, the value in use for the cash-generating unit is determined after consideration of the restoration costs and is estimated to be Rs. 700 (Rs. 1,200 less Rs. 500). The carrying amount of the cash-generating unit is Rs. 500, which is the carrying amount of the mine (Rs. 1,000) less the carrying amount of the provision for restoration costs (Rs. 500). Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount.