this is a june 2008 question
Question :Ribby has a building which it purchased on 1 June 2007 for 40 million dinars and which is located overseas.
The building is carried at cost and has been depreciated on the straight-line basis over its useful life of 20 years.
At 31 May 2008, as a result of an impairment review, the recoverable amount of the building was estimated to
be 36 million dinars.
The following exchange rates are relevant to the preparation of the group financial statements:
Dinars to $
1 June 2006 11
1 June 2007 10
31 May 2008 12
Average for year to 31 May 2008 10·5
Carrying value at 31 May 2008 3·8
(40 million dinars ÷ 10 = $4 million)
(Depreciation $0·2 million)
Value after impairment review (36 million dinars ÷ 12) (3)
Impairment loss 0·8
My question is why do we take the opening rate to calculate the depreciation? shouldn’t we be taking the average rate. by the way the subsidiary is autonomous..
ok this is what i think
the building was carried in the parents books at 40/10 = $4m before depreciation
so depreciation will be based on this amount making the carrying value $4m – $4m/20years = $3.8M
and depreciation will therefore be 0.2m.
the building is already in the parents books so there is no change on consolidation
the only change therefore is with the impairment
we should take 10 exchange rate because the plant was purchased in 1 june 2007. when we purchased the pant immediately we recognise it. so that we use 10 exchange rate…..
It’s the parent that owns the foreign asset not the subsidiary (average rate is only applicable for consolidateing foreign subsidiary’s profit). So this part of the question relies on your knowledge of forign currency transactions in individual (not consolidated) accounts.
As this is a non-monetary asset is is converted at the hisroric rate (i.e. rate at purcahse date) and is not subsequently re-tranlated.
When the asset is tested for impairment the recoverable amount is the amount the asset would currently generate (cashflows from use or sale) so we use current exchange rates (i..e. rate at date of the impaiment review) to calculate the recoverable amount.
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