(a) IAS 36, Impairment of Assets, was issued in June 1998 and subsequently amended in
March 2004. Its main objective is to prescribe the procedures that should ensure that an entity's assets are included in its balance sheet at no more than their recoverable amounts. Where an asset is carried at an amount in excess of its recoverable amount, it is said to be impaired and IAS 36 requires an impairment loss to be recognized.
Required:
(i) Define an impairment loss explaining the relevance of fair value less costs to sell and value in use; and state how frequently assets should be tested for impairment; Note: your answer should NOT describe the possible indicators of an impairment.
(ii) Explain how an impairment loss is accounted for after it has been calculated.
(b) The assistant financial controller of the Wilderness group, a public listed company, has identified the matters below which she believes may indicate an impairment to one or more assets:
(i) Wilderness owns and operates an item of plant that cost $640 000 and had accumulated depreciation of $400 000 at 1 October 2004. It is being depreciated at 121/2% on cost. On 1 April 2005 (exactly halfway through the year), the plant was damaged when a factory vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity. Also, it is expected that as a result of the damage the remaining life of the plant from the date of the damage will be only two years. Based on its reduced capacity, the estimated present value of the plant in use is $150 000. The plant has a current disposal value of $20 000 (which will be nil in two years' time), but Wilderness has been offered a trade-in value of $180 000 against a replacement machine which has a cost of $1 million (there would be no disposal costs for the replaced plant). Wilderness is reluctant to replace the plant as it is worried about the long-term demand for the product produced by the plant. The trade-in value is only available if the plant is replaced.
Required:
Prepare extracts from the balance sheet and income statement of Wilderness in respect of the plant for the year ended 30 September 2005. Your answer should explain how you arrived at your figures.
(ii) On 1 April 2004 Wilderness acquired 100% of the share capital of Mossel, whose only activity is the extraction and sale of spa water. Mossel had been profitable since its acquisition, but bad publicity resulting from several consumers becoming ill due to a contamination of the spa water supply in April 2005 has led to unexpected losses in the last six months. The carrying amounts of Mossel's assets at 30 September 2005 are:
$000
Brand (Quencher - see below).................7 000
Land containing spa...........................12 000
Purifying and bottling plant....................8 000
Inventories........................................5 000
32 000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of 'Quencher', but because of the contamination it has rebranded its bottled water as 'Phoenix'. After a large advertising campaign, sales are now starting to recover and are approaching previous levels. The value of the brand in the balance sheet is the depreciated amount of the original brand name of 'Quencher'.
The directors have acknowledged that $1.5 million will have to be spent in the first three months of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old 'Quencher' bottled water at a cost of $2 million; the remaining inventories are labelled with the new brand 'Phoenix'. Samples of all the bottled water have been tested by the health authority and have been passed as fit to sell. The old bottled water will have to be relabelled at a cost of $250 000, but is then expected to be sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of Mossel at 30 September 2005, calculated according to the guidance in IAS 36, is $20 million. There is no reliable estimate of the fair value less cost to sell of Mossel.
Required:
Calculate the amounts at which the assets of Mossel should appear in the consolidated balance sheet of Wilderness at 30 September 2005. Your answer should explain how you arrive at your figures.