GRANGE 12-09

Here’s an extract from the question:

On 30 November 2009, Grange disposed of 60% of the equity of Sitin when its identifiable net assets were $36 million. Of the increase in net assets, $3 million had been reported in profit or loss and $1 million had been reported in comprehensive income as profit on an available-for-sale asset. The sale proceeds were $23 million and the remaining equity interest was fair valued at $13 million. Grange could still exert significant influence after the disposal of the interest. The only accounting entry made in Grange’s financial statements was to increase cash and reduce the cost of the investment in Sitin.

On the Statement of financial position, at 30.Nov.2009, we have the following line:

Investment in Sitin 16 ––––––

Now I get that there is an impairment at 30.Nov.2009 as the fair value at this date was $13 million and on the balance sheet it is shown as 16 million.

But the problem is the revision kit answer is what I don’t understand:

They’ve haven’t shown this impairment of $3 million in the retained earnings as a deduction! Why is this? Aren’t impairments supposed to reduce retained earnings?

This is the working of retained earnings of Grange:

Grange:
Balance at 30 November 2009 410
Associate profits Sitin (post acquisition profit 3 x 100%) 3
Loss on disposal of Sitin (6 )
Impairment (28)
Investment property – gain 2
Provision for legal claims (7 )
Post acquisition reserves: Park (60% x (year end retained
earnings 170 – acquisition profit 115 – franchise amortisation 3) 31·2
Fence (100% x (year end retained earnings 65 – acquisition
retained earnings 73 + conversion of contingent liability to provision
and reduction 5 – FV PPE depreciation 0·53)) (3·53 )
–––––––
401·67 total

Notice impairment is (28) and this relates to last note in the question, which is written like this:

(vii) Grange has prepared a plan for reorganising the parent company’s own operations. The board of directors has discussed the plan but further work has to be carried out before they can approve it. However, Grange has made a public announcement as regards the reorganisation and wishes to make a reorganisation provision at 30 November 2009 of $30 million. The plan will generate cost savings.The directors have calculated the value in use of the net assets (total equity) of the parent company as being $870 million if the reorganisation takes place and $830 million if the reorganisation does not take place. Grange is concerned that the parent company’s property, plant and equipment have lost value during the period because of a decline in property prices in the region and feel that any impairment charge would relate to these assets. There is no reserve within other equity relating to prior revaluation of these non-current assets.

So if you look at the answer to this note you will see the, $ 3 million impairment (referred to above) is actually included here but it reduces the total impairment charge rather than increasing it, as if we didn’t include the $3 million impairment charge then the total impairment would be $31 million and not $28 million as in the question. The answer to this note is as follows:

Restructuring
No provision should be recognised for the restructuring because there is no constructive obligation.
A constructive obligation arises when an entity:
(i) Has a formal plan, and
(ii) Makes an announcement of the plan to those affected. There is insufficient detail to recognise
a constructive obligation. However, there is evidence that Grange’s property, plant and
equipment (and Grange itself) is impaired. An impairment test should be performed on
Grange.
$m
Net assets per question 862
Revaluation of investment property (W8) 2
Provision (W9) (7)
Revaluation of property (W10) 4
Impairment of Sitin (W3) (3)
858 (figure after doing all adjustment above to the original 862)
Value in use at y/e if not restructured (830)
Impairment loss 28 (858 above – 830)
All the loss of $28m is taken to profit or loss for the year (in retained earnings) as none of it relates to previously revalued assets

If the other elements above, like provisions, revaluation of investment property are also shown in the retained earnings working separately, then why is the 3 million impairment now shown there? It can’t be part of the 28 million can it? As the 3 million actually reduces the impairment charge, as stated above. I don’t get this. In F7, the associate’s impairment (it has turned an associate at the year end, due to the full disposal of Sitin) was always shown as a reduction in the parent’s retained earnings, so why not here? What’s so special here?

Maybe this would help you, it’s also part of the answer to this question

Investment in associate
$m
Cost = fair value at date control lost 13*
Share of post ‘acquisition’ profits 0**
13 (total) and the supporting notes say:

* The associate is held at $16m in the SOFP of Grange, therefore the effect of the part disposal and fair value exercise has been to impair the investment by $16m – $13m = $3m.
** The disposal was made at the year end so no post ‘acquisition’ reserves have arisen since it became an associate.

Thanks.