QUESTION $4($IAS $36$ and IAS $38$: Impairment of intangible assets$)$

On $2$ Jan $2010,$ E$2$E Corporation Ltd$.,$ a technology hardware company, capitalized $$40$ million of

development expenditures as an asset on its balance sheet. All of these expenditures relate to the

development of a prototype technological product and qualify for capitalization as an intangible asset

under IAS $38($Intangible Assets$)$ as they are expected to generate future economic benefits to the

company approximately equally each year over the next $8$ years with zero salvage value.

The company adopts cost model to account for intangible asset and the policy of amortizing the

costs of intangible assets on a straight$-$line basis over the asset's useful life.

Since the completion of the development project, however, the outlook for demand of the product had

deteriorated substantially.

E$2$E estimated that the value$-$in$-$use, calculated on the basis of the present value of future operating

cash flow, of the intangible asset would be $$21$ million on $31$Dec$2010.$ A study by an international

technology$-$research consultant commissioned by E$2$E had reported a potential fair market value less

disposal cost of the intangible to be $$20$ million on the same date.

Required:

$($a$)$ Determine:

the amount $($if any$)$ of impairment loss on the intangible asset that E$2$E would have to

recognize in its income statement for the year ended $31$ Dec $2010,$

the carrying amount of the intangible asset on the balance sheet as at $31$ Dec $2010,$

in accordance with IAS $36($Impairment of Assets$).$ Show all relevant workings.

$($b$)$ In $2011,$ the demand outlook for the product began to improve. As a result, by $31$ Dec $2011,$

E$2$E estimated that the value$-$in$-$use, calculated on the basis of the present value of future

operating cash flow, of the intangible asset would be $$26$ million. A second study by an

international technology$-$research consultant commissioned by E$2$E reported a potential fair

market value less disposal cost of the intangible asset to be $$28$ million on the same date.

Determine:

the amount $($if any$)$ of impairment loss, or reversal of impairment loss, on the intangible

asset that E$2$E would have to recognize in its income statement for the year ended $31$

Dec $2011,$

the carrying amount of the intangible asset on the balance sheet as at $31$ Dec $2011,$ in

accordance with IAS $36($Impairment of Assets$).$ Show all relevant workings.