ifrs 5 june 14 3(d)

Hi Karen

First things first, I found it strange to be depreciating an asset at $300,000 per annum where the asset cost an amount that is not a multiple of 300!

Still, we are depreciating at $300,000 per annum and at the start of the current year, the asset had a carrying value of $3m. So it has a remaining estimated useful life of 10 years (3,000,000 / 300,000)

But it needs to be impaired by 350,000 so revised carrying value at the start of this year is now 2,650,000

One third of the way into the current year, the asset is to be reclassified as held-for-sale and should therefore be valued on a fair value basis with effect from 1 October ie 4 months into the current year. Depreciation for that 4 months is 1/3 * 10% * 2,650,000 = 88,000 so the net book value at 1 October is $2,562,000 (the examiner’s answer is rounded to $2.55 — notice the difference between his answer and mine is $12,000)

Fair value / impairment review shows that as at 1 October, the value in use is down at 2,400,000 so an impairment is required at 1 October to bring the asset down to recoverable amount (viu) and the value of that impairment is cv 2,562,000 – recov amt 2,400,000 = 162,000. That figure is charged to profit or loss.

At 1st December, the recoverable amount has improved by 120,000 to 2,520,000. Where there is a reversal of an impairment, the amount involved should be credited to wherever the impairment itself was debited. In our case, the 350,000 +162,000 = 512,000 impairments were charged to profit or loss, so the reversal of that impairment should be credited to profit or loss.

There is however a limitation on the amount that can be credited to profit or loss – that limitation is the amount that has previously been charged – so we cannot credit profit or loss by more than 350,000 + 162,000 = 512,000.

Well, that’s ok, we didn’t want to. We only have a 120,000 to reverse

But come the year end and the reversal is even more dramatic! From a revised fair value at 1 December of 2,520,000, by the end of the year the fair value has increased to 2,950,000 further reversing the impairment by 430,000.

It’s tempting to credit all that amount to profit or loss but we can’t. There is a restriction! We originally impaired by 350,000 + 162,000 = 512,000; we reversed that by 120,000 and now we want to reverse some more. But we’re only allowed to credit profit or loss with the remainder of the original impairment 512,000 – 120,000 = 392,000. We still want to credit somewhere with 430,000 – 392,000 = 38,000 and that amount has to go to comprehensive income

The gain of 50,000 is in next year. The carrying value at the end of this year is 2,950,000

You don’t know where 380,000 comes from. Without rounding, the figure should have been 392,000 as explained above – there’s the difference of $12,000 that I pointed out earlier

You don’t know where 2,900,000 comes from. Nor do I! According to the question, it should be 2,950,000

It’s difficult when the examiner gives you figures that require more than 1 decimal point. In the case of $2.95m, how or why he has rounded that to $2.9 I simply do not know

Is that any better?

You’re welcome