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I reproduce the part of the question relevant to my query (bear in mind that I have no problem with the numerical elements in this question). So here it is:
(b) There are specific assets on which the company wishes to seek advice. The company holds certain non-current assets, which are in a development area and carried at cost less depreciation. These assets cost $3 million on 1 June 2008 and are depreciated on the straight-line basis over their useful life of five years. An impairment review was carried out on 31 May 2009 and the projected cash flows relating to these assets were as follows:
Year to 31 May 2010 31 May 2011 31 May 2012 31 May 2013
Cash flows ($000) 280 450 500 550
The company used a discount rate of 5%. At 30 November 2009, the directors used the same cash flow projections and noticed that the resultant value in use was above the carrying amount of the assets and wished to reverse any impairment loss calculated at 31 May 2009. The government has indicated that it may compensate the company for any loss in value of the assets up to 20% of the impairment loss.Now regarding the government providing the compensation to the impairment, isn’t this government grants covered under IAS 20, well I thought so, until I read the examiner’s answer only to find out that it is IAS 37 that dominates this government compensation thing. My first query is how do you know which standard applies (as the examiner often keep this hidden). How can you get the precision like the examiner and know which standard the examiner is getting at (without looking at the examiner’s answer and knowing what he is getting at).
The other query I had was regard to this line ” the directors used the same cash flow projections and noticed that the resultant value in use was above the carrying amount of the assets and wished to reverse any impairment loss” now in the answer the examiner talks about the fact that we can’t allow this reversal because the effect is due to “In this case, the increase in value is due to the unwinding of the discount as the same cash flows have been used in the calculation” So I don’t understand this whole thing of unwinding of the discount and have never understood (even in F7 I just memorized it’s treatment) so could you please explain to me this whole thing of unwinding and why it’s the reason of rejecting the impairment reversal, what’s the link and logic between the two?
Why is it believed that an increase in value in use is just due to an unwinding discount. How? All this is so confusing and if value in use is greater than carrying value, then why not allow the reversal?
Thanks,
Gabriel
“Now regarding the government providing the compensation to the impairment, isn’t this government grants covered under IAS 20, well I thought so, until I read the examiner’s answer only to find out that it is IAS 37 that dominates this government compensation thing. My first query is how do you know which standard applies (as the examiner often keep this hidden). How can you get the precision like the examiner and know which standard the examiner is getting at (without looking at the examiner’s answer and knowing what he is getting at).”
Hi Gabriel. I think this is a question of practice – not practice at answering questions as such but more practicing the idea of opening your mind to the possibility that there are wider implications to this examiner’s questions. It’s not unusual for one of his answers to include 3, 4 and sometimes 5 different IAS / IFRS in an answer
re the reversal of the impairment – if you apply numbers to the problem I believe that you will find that the value of the unwinding discount in this first year after impairing exceeds the value of the depreciation charged on those assets. Now, on first considering the impairment, the company made predictions about future cash flows and those predictions have not changed. So, if the asset was to be impaired based on those predictions, and the predictions haven’t changed, then how can we justify reversing the impairment where the status quo is the same as it was when we impair reviewed?
In addition, without going too deeply into it, I imagine that the fact that the smallest projected cash flow now half relates to 6 months that have passed also has an affect – but I can’t raise the enthusiasm to do the appropriate calculations! Doesn’t the answer go into that detail?
Hi Gabriel,
About the first issue: the examiner considers IAS 36. 116 : An asset’s value in use may become greater than the asset’s carrying amount simply because the present value of future cash inflows increases as they become closer. However, the service potential of the asset has not increased. Therefore, an impairment loss is not reversed just because of the passage of time (sometimes called the ‘unwinding’ of the discount), even if the recoverable amount of the asset becomes higher than its carrying amount.
In this question neither the discount rate nor the cash flow has change, therefore – no reversal of impairment. Unlikely ( in my opinion) for normal people to have known this rule ( of course I do not know if there is an explicit example in BPP’s or Kaplan’s book).
The second: IAS 37. 53: Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the
provision.So, I really do not understand why IAS 37. It is an impairment loss and NO LIABILITY. I would have answered: no recognition of an asset as the criteria for recognition according to IAS 20 is not fulfilled with. The only link with IAS 37 is that it may be considered a contingent asset ( which the promise from the Government is actually)
Advice: Practice also the questions for DipIFR https://www.accaglobal.com/gb/en/student/dipifr/dipifr-resources/past-exam-papers.html
Hi Mike,
You said “– if you apply numbers to the problem I believe that you will find that the value of the unwinding discount in this first year after impairing exceeds the value of the depreciation charged on those assets”. I’m not so sure if I’m understanding what you’re getting at here.
You see depreciation till 31.May.2009 was (3M/5) = 600k and so the carrying value at 31.May.2009 was 3M – 600k = 2.4M and at this time the value in use discounting gives us a value of 1.558M so there is an impairment of 842,000 Doing the value in use calculation at 30.Nov.2009 (based on the same cash flows) will be as follows:
(280*0.5*0.9524, I’ve used half the amount of 280 here as half the year has now gone at 30.Nov.2009) + (0.9070*450) + (500*0.8638) + (0.8227*550) = 1.425871M
and the carrying value (based on the impaired amount) at 30.Nov.2009 is 842000/3.5 (as 1.5 years have now gone from June 2008 so the life reduces from 5 years to 3.5 years) so the carrying value will be 842000- depreciation of 240,571 = 601,429
So yes value in use is higher by 0.827M at 30.Nov.2009.
So was this wanted you wanted to say in your comments above? And how does this calculation show that discounting is the reason for the apparent increase in value in use.
Also, how do you find mirelutza advice above? Is it worth it doing DipFR in terms of time and effort? I thought P2 was the hardest ACCA accounting paper so wouldn’t DipFR have “easier” and “lower caliber” questions than P2 and will doing these DIPFR question really benefit me in P2? Are they relevant to the P2 exam in terms of style and content and similarity?
Thanks,
Gabriel
Hi
Yes! The fact that we are 6 months closer to these higher projected incomes means they are not discounted by such a large factor and therefore the greater benefits are that much more pronounced
If the only matter that has changed in the calculations is the time scale , then you cannot reverse an impairment simply because the projected flows are worth more because of lower discounting effect.
The dates and values of the flows are the same – only the distance into the future of realisation is different. As Mirelutza says, it’s unlikely if any but the very best prepared student would have known and certainly there’s no benefit in remembering neither the names of the IFRSs nor the paragraph numbers!
“Is it worth it doing DipFR in terms of time and effort?”
Mirelutza does not recommend that you do DipIFRS. What IS recommended is that you attempt some DipIFRS questions. They are set at the level part way between F7 and P2. I have never recommended such a step before but I see no harm in it and potentially it’s a smoother way in to P2
As for style content and similarity, they seem close to F7 than P2
OK?
Hi Mike,
Thank you very much for your reply. I have finally understood the answer. I meant to ask “Is it worth it doing DipFR PAST PAPERS in terms of time and effort?”
If you say they correspond more towards F7 (which I’ve already cleared) then would they really help in P2? Isn’t it sufficient enough to just answer P2 past exams (as these are already so many in number from Dec 2007 to June 2014, ghosh it’s a lot work!) so wouldn’t P2 papers itself seal the deal?
Yes, they would. But you may find that the P2 questions are so over-whelmingly difficult that it could be a good idea to go back a step and restore your confidence with something a little lighter.
I’m not suggesting that you back-track to F3, but one or two from DipIFRS may help.
As I said in the previous post, I have never ever suggested that before (at least, I don’t remember doing so) but it may help
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