Active World (Pty) Ltd is a sporting equipment manufacturer and distributor with a financial year-end of 31 December 2023..

At the end of the current financial year, Active World (Pty) Ltd noted that its tennis racket division, which manufactures traditional tennis rackets, has not performed that well compared to previous years due to the popularity of Padel tennis. A Padel tennis racket has a solid impact surface filled with holes to allow an easy swing.

As a part of the annual financial statements, Miss Fletcher is required to perform an impairment test on the tennis racket division for compliance with International Financial Reporting Standards (IFRS)

You are an IFRS specialist at a medium-sized auditing firm, and Miss Fletcher has reached out to you to assist with the determination of the recoverable amount of the tennis racket division.

The fair market value was readily determinable as there is an active market for tennis rackets. The fair value less costs of disposal was determined to amount to R15 450 000.

The value in use, however, seems to be more difficult to estimate. The following information is available, and Miss Fletcher is unsure what items to include in the value in use computation:

Miss Fletcher has correctly determined that a pre-tax discount rate of 12% is appropriate.

REQUIRED:

3.1) Briefly outline what cash flows should be included in the value in use calculation. (5 marks)

3.2) Calculate the value in use of the tennis racket division at the financial year ended 31 December 2023, briefly explaining why each of the abovementioned line items will be included or excluded from the calculation.

Marks will be awarded as follows:

• Discussion of inclusion/exclusion from the calculation (9 marks)
• Calculation of value in use (6 marks)

3.3) Calculate the recoverable amount of the tennis racket division for the year ended 31 December 2023. (3 marks)