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Anyone who can attempt this question?
Goliath mining company bought some mining equipment 4 years ago for $112 million. The equipment has been depreciated using straight line method with a 15 year useful life and a 10% residual value. Goliaths operations have recently experienced significant disruptions due to breakdowns of the equipment. As a result, the company’s finance director had decided that the equipment be evaluated for possible impairment.
The management of Goliath estimates that the equipment has a remaining useful life of 6 years. Net cash inflows from the equipment will be $19.6 million per year. The fair value of the equipment is $33.6 million (based on market values of similar equipment at Barlow world limited).
a) In line with IAS 36, impairment of assets, define cash generating units
b) Assuming the discount rate is 5%, determine if an impairment loss should be recognised.Let me try to answer my very best. I hope I did not make any mistake.
a. Cash-Generating Units
Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]
If it is not possible to determine the recoverable amount (fair value less cost to sell and value in use) for the individual asset, then determine recoverable amount for the asset’s cash-generating unit (CGU). [IAS 36.66] The CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. [IAS 36.6]
b. Impairment occurs when the Carrying Value is higher than Recoverable Value.
Recoverable Value is the higher of
VALUE IN USE
or
FAIR VALUE less COST TO SELLlets calculate the Carrying Value
Cost ………………………………… 112 M
Residual value………10%………..11.2M
Total…………………………………..110.8M
Depreciated 4 years……………..( 26.88M)
Total Carrying Value…………….. 72.92MWe now need to compare the higher of Fair Value less cost to sell and the VIU.
FV – cost to sell = 33.6M – 0 = 33.6MVIU with discount rate of 5%=
Y1 = 19.6 / 1,05^1 = 18.67
Y2 = 19.6 / 1.05^2 = 17.78
Y3 = 19.6 / 1.05^3 = 16.93
Y4 = 19.6 / 1.05^4 = 16.12
Y5 = 19.6 / 1.05^5 = 15.36
Y6 = 19.6 / 1.05^6 = 14.63
total……………………..99.48SO now we are comparing 72.92M with 99.48M
The Recoverable Value is HIGHER than the Carrying Value
So the Equipment is NOT IMPAIRED.If you have the answer there with you, have I answered it correctly?
I don’t have the answer in front of me but, given the question, it looks to me that your answer is good.
hi,
I thought NBV after 4 years = cost – Acc dep amount
=112-26.88=85.12it seems they mentioned the useful life = 6years ( how about current year, than the NPV= NPV y0+ NPV Y1+……
NPV Y5( total 6 years)They didn’t mention if the assets scrap value has changed or not.
the remaining unamortized amount = 85.12- scrap value ( if any) /6 = New Dep.P.A
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