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Sir, I took my time to draft this question so that you can see where i am going wrong, Since you have closed the first questions to replies.
If the recoverable amount was $4million and total carrying value is $5,180,000. CGU is impaired by $1,180,000 .
Recoverable amount is the higher of FV less costs to sell and value in use .
Yes it is true that no asset should be written down below the recoverable amount .
In the pro rata total including Building will have $4,050,000. And after applying goodwill impaired of 700,000, what is left was $480,000 which will be allocated to plant, intangibles and Building.
In this case, are we writing down the asset below its recoverable amouth? If yes how, because I am confused here.
Similar examples was giving though not with similar figures but recoverable amount was $85m While the total CGU was $155m which gives an impairment of $65m after removing worthless technology of $5m and there after removing the goodwill $20m from this impairement amount of $65m remaining $45m.
This $45m was then allocated to pro rata across land , Building and Brands excluding the other net asset which was reasonably represented of the realisable value.
Brands = 10/90* 45= 5
Land = 50/90* 45 = 25
Buildings = 30/90* 45 = 15In this pro rata based on the CA total of Brands, Lands, and Building was total $90million . But I wonder why it was applicable to the other questions closed to replies.
My question is So, what is the difference here between these 2 questions??
Here is the questions below , of which I just calculated aboved eventh they are different in figures but is same logic and approach.
Question:
A company runs a unit that suffers massive drop in income due to the failure of its technology on 1 Jan 20X8. The following carrying amouts were recorded in the books immediately prior to the impairment:
Goodwill = $2m
Technology = $5m
Brands = $10m
Land = $50m
Buildings = $30m
Other net assets = $40mThe recoverable value of the unit is estimated at $85 million . The technology is worthless , following its complete failure.
The other net asset include inventory , receivables and payables. It is considered that the carrying amount of other net asset is a reasonable representation of its net realizable value.Show the impact of the impairment on 1 Jan 20X8.
“In the pro rata total including Building will have $4,050,000. And after applying goodwill impaired of 700,000, what is left was $480,000 which will be allocated to plant, intangibles and Building”
No! What is left is $480,000 and that is allocated on a pro-rata basis to Plant and Intangibles. The building doesn’t feature in this allocation because we know that the building recoverable amount is $2,500,000
“In this case, are we writing down the asset below its recoverable amouth? If yes how, because I am confused here”
No wonder you’re confused … we are NOT writing anything off the building. The impairment is set against only the Plant and the Intangibles
“In this pro rata based on the CA total of Brands, Lands, and Building was total $90million . But I wonder why it was applicable to the other questions closed to replies.”
Very simply, because the other questions probably didn’t give you a figure for the building recoverable amount
In the second example that you have given (where there is $5m of worthless technology) … I don’t see anywhere a figure for the building market value BUT WE DID HAVE THAT INFORMATION IN THE EARLIER QUESTION!
OK?
Thank you sir for your reply.
So from the information given, the building is not impaired since the recoverable amount is not below the carrying value.
Was that why in the solution provided, there was no inclusion of the building to total value of the CGU value when applying pro rata in allocating the remaining impairment loss of $480,000?
Since the building has a recoverable amount of $2,500,000 so we do not feature it.
So for future calculations, you mean any asset given the recoverable amount should not featured in the context of (CGU) impairment ?
“So for future calculations, you mean any asset given the recoverable amount should not featured in the context of (CGU) impairment ?”
That is correct … unless the recoverable amount that is given is less than the carrying value but greater than the value down to which it would be impaired if it suffered pro-rata impairment
Say we have:
Building $500,000
Plant $300,000
Intangibles $200,000We are told that the building has a market value of $460,000 and we need an impairment of $100,000
Reduce building by $40,000 and that leaves $60,000 more to impair
Allocate that $60,000 across the plant and intangibles in the ratio 3:2
So plant is impaired by 3/5 * $60,000 down to $264,000 and Intangibles impaired by 2/5 *$60,000 down to $176,000
OK?
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