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Dear Tutor, I am very confused this question: I just make an example which its amount may be illogical , just an illustration of the question.
A company has several CGUs (Retail shops), it leased a property for one of retail shop, each shop is a CGU.
On Y/E 31 August 2024, company’s revenue has decreased significantly and it is going to perform impairment review.
On 31 August 2024, Carrying amount :
right of use assets £1500, fixtures and fittings: £1000, allocated central assets £500, Lease liability £1000, contractual annual lease payment £100 /annual. interest rate implicit in the lease 4%
When calculation of VIU: 5 years cashflows project(discount rate 5%). It has some Cash inflows items: revenue from P/L and following determined assumption next 5 years.
My questions: (1) On the cash outflow section: In this situation, do I need to put annual lease payments £100 into this VIU cash flow project at each year?
(2) How to calculate CGU’s carrying amount at y/e 31/08/2024 for impairment review use?
(3) If this shop’s property was purchased by owner and liability is not for lease , it is normal non current liability £1000. In this situation How to calculate CGU’s carrying amount at y/e 31/08/2024 for impairment review use?
In the ACCA Study Hub: Impairment testing of a CGU said that “Liabilities are included in fair value less costs of disposal (and so in value in use and carrying amount) of a CGU where a prospective purchaser would be required to assume the liabilities.”
In the answer about this question it said that “ In accordance with IAS 36, it may be necessary to consider liabilities to determine the recoverable amount of a CGU. This can occur if the disposal of a CGU requires the buyer to assume the liability. If this is the case, the carrying amount of the liability is deducted from both the CGU’s VIU and its carrying amount.Please can you confirm which ACCA question this. I am confused because I would only expect minimal calculations. You would probably be given carrying amount and value in use.
Thank you.
This was SBR-INT March/June 2024 past paper , question 3:
Jobon Co is a lessee. It leases a number of commercial properties which it uses as retail stores. As a result of an increase in customer online shopping, Jobon Co’s revenue from these retail stores has halved. Each retail store is a cash-generating unit (CGU) and comprises right-of-use assets, fixtures and fittings and allocated central assets.Jobon Co calculated that a total impairment loss of $50 million should be recognised in relation to the retail store CGUs.Jobon Co deducted the lease liabilities when calculating the net carrying amount of the CGUs for impairment purposes. Jobon Co assessed value in use (VIU) to be the recoverable amount. Instead of deducting the lease liabilities from VIU, Jobon Co included contractual lease payments within the future estimated net cash flows of the CGU.The future estimated net cash flows used to calculate VIU were determined using internal management forecasts covering the next 10 years. These future estimated net cash flows also included costs of $5 million to install advertising technology in the properties to enhance the CGU’s performance.The future estimated net cash flows were discounted at 5%. This is the weighted average cost of capital (WACC) of another company in the retail sector which purchased rather than leased its commercial properties. The interest rate implicit in the lease was 4%.
Requirements:
• explain why the cash-generating units should have been tested for impairment; and• discuss whether the methods used to calculate the value in use and discount rate are acceptable.
I just comfused about its answer’s some explaining:
1. “Value in useThe lease payment outflows have been discounted at 5% for value in use (VIU) purposes whereas the interest rate implicit in the lease is 4%. Thus, the lease payment outflows would be stated at a lesser amount than the lease liabilities. This would therefore mean that the VIU is higher using Jobon Co’s method which could mean that the asset is under impaired.”
2. “In accordance with IAS 36, it may be necessary to consider liabilities to determine the recoverable amount of a CGU. This can occur if the disposal of a CGU requires the buyer to assume the liability. If this is the case, the carrying amount of the liability is deducted from both the CGU’s VIU and its carrying amount. Jobon Co has deducted the lease liabilities from the carrying amount of the CGU but has not deducted the same amount from the VIU of the CGU. Therefore, the lease payment outflows should be excluded from the determination of VIU and the carrying amount of the lease liabilities should be deducted instead.”
I promise I will get back to you in about a week. I’m on holiday so haven’t got my files.
🙂
1. IAS 36 requires that we use a discount rate which reflects RISK IN ASSETS. So go for 5% if that’s what is given.
2. Grant Thornton have some helpful comments about your second question – please refer to:You must be happy with point 1 but point 2 is quite obscure – so don’t get terribly excited about it.
🙂
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