Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Impairment

- This topic has 1 reply, 2 voices, and was last updated 3 months ago by P2-D2.

- AuthorPosts
- February 9, 2024 at 11:39 am #699995
Doubt Q] Riley Co. acquires a non-current asset on1 October 20W9 (ten years before 20X9) at a cost of $100,000 which had a useful life of ten years and a nil residual value. The asset had correctly depreciated up to 30 September 20X4. At that date the asset was damaged and an impairment review was performed. On 30 September 20X4, the fair value of the asset less cost of disposal was $30,000 and the expected future cash flows were $8,500 per annum for the next five years. The current cost of capital is 10% and a five-year annuity of $1 per annum at 10% would have a present value of $3.79. What amount would be charged to profit or loss for the impairment of this asset for the year ended 30 September 20X4?

My Doubt] When calculating Value in use do we not have to calculate the sum of present values of all the five years, similar to what we would do for this question-

‘Lichen Co. owns a machine that has a carrying amount of $85,000 at the year end of 31 March 20X9. Its market value is $78,000 and cost of disposal are estimated $2,500. A new machine would cost $150,000. Lichen Co. expects it to produce net cash flow of $30,000 per annum for the next three years. The cost of capital of Lichen Co. is 8%. What is the impairment loss on the machine to be recognised in the financial statements at 31 March 20X9? (Answer to the nearest whole $)’

=> The answer given uses only 1 year’s future cash flow and uses the present value annuity cash flow.

Please explain how the question is to be done. Also, pls explain what this sentence actually means and its significance in this question (The current cost of capital is 10% and a five-year annuity of $1 per annum at 10% would have a present value of $3.79.)Thank you, and sorry for the long question

February 15, 2024 at 4:31 pm #700434Yes, you could multiply the 8,500 by a discount factor for each of the five years but that is a lengthy calculation to be performing in the exam.

It is far simpler to treat the 8,500 as an annuity (a constant annual cash flow) and multiply it by an annuity factor for the 5 years (3.79).

On doing this you have the value in use of the asset that can then be compared to the fair value less costs to sell to get the recoverable amount (the higher of the two values).

This recoverable amount is then compared to the carrying value and if lower is showing that the asset is impaired by the difference between the two. The asset’s carrying value is then adjusted accordingly.

Thanks

- AuthorPosts

- You must be logged in to reply to this topic.