OSIER (Mar / Jun 17) – Kaplan Question 25, page 80

Hi,
I’m doing the Kaplan question kit and I have come across this question which I can’t understand why its material.

“At 31 March 20X7 the carrying
amount of the assets directly attributable to the retail outlets totalled
$137 million, this includes both tangible assets and goodwill.
During the year management received a number of offers from parties
interested in purchasing the retail outlets for an average of $125 million. They
also estimated the disposal costs to be $1.5 million, based upon their experience
of corporate acquisitions and disposals. Management estimated the value in use
to be $128 million.
Consequently the retail outlets were impaired by $9 million to restate them to
their estimated recoverable amount of $128 million”

Till there I’m fine, the impairment is $9m.

Then in question b, it says “As a result of your review you have concluded that the retail outlets are overvalued
due to the assumptions used in management’s assessment of value in use being too
optimistic. Your calculation of the value in use is $9 million lower than management’s
estimate. ”

So, the Value in use is $128m less $9m = $119m and the FVLCTS is $125m less $1.5m = $123.5m. The FVLCTS is higher, so impairment is based on it.

The impairment should increase by $4.5m. Why does this make it material? Its an extra 4.2% of PBT and 0.4% of revenue.

In the answer the FVLCTS is not taken into consideration! Why is that?

Thanks