Hello Sir,
In qusetion BISMUTH (MAR/JUN 2021) in Kaplan in Exam ki 2025-2026
As you you now the recoverable amount should the higher of value in use and fare value less cost to sell
.In the moder answer of this qusetion the just added the value in use and fare value of the components of the asset and they compare the value to the carrying amount.They added the 20m of the sale value of the assets
In the time they should compare the higher value of the value in use and the fare value less cost to sell.
why is that ?
Question
BISMUTH (MAR/JUN 2021) Walk in the footsteps of a top tutor
Background
Bismuth Co is a mining company. Investors in Bismuth Co receive earnings from mining
projects as a return on their investment. The year end is 31 December 20X7.
Impairment testing of mines
At 31 December 20X7, Bismuth Co owns mines which have a carrying amount of $200 million.
The company has committed itself to decommissioning its mines at the end of their useful
life (five years or less) and has created a decommissioning provision of $53 million. However,
the directors are unsure how the decommissioning provision will impact on the impairment
testing of the mines. At the end of the useful life of a mine, its reusable components will be
dismantled and sold.
The following information relates to the decommissioning of the mines at 31 December 20X7:
$million
Carrying amount of decommissioning provision 53
Present value of future cash inflows from:
– sale of reusable components at decommission date (inflows) 20
– sale of mining output from 31 December 20X7 to decommission date
(inflows) 203
– operating costs from 31 December 20X7 to decommission date (outflows) 48
Required:
(a) Discuss, with suitable calculations, whether Bismuth Co should recognise an
impairment loss for the mines.
Model ANSWER
At 31 December 20X7 $m
Present value of future cash inflows from the sale of components for re-use 20
Present value of future cash inflows from sale of mining output 203
Present value of future cash outflows from operating the mines (48)
Carrying amount of decommissioning provision (53)
––––
Recoverable amount (NPV of cash flows) 122
––––
Carrying amount of the mines 200
Carrying amount of decommissioning provision (53)
––––
Net carrying amount of mines 147
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