Refer to the below questions and suggested answers. Rewrite the answer using your own words by explaining
Question:
Refer to the below questions and suggested answers.
Rewrite the answer using your own words by explaining and covering the points given, and providing an example for each. (Answers should be in paragraph form)
Question
YGL Berhad specialises in the communications sector with three main Cash Generating Units (CGUs). Goodwill was a significant component of total assets. In the year ended 31 December 2020, YGL has performed an impairment test of the CGUs. The cash flow projections were based on the most recent financial budgets approved by management. The realised cash flows for the CGUs were negative in 2020 and far below budgeted cash flows for that period. The directors had significantly raised cash flow forecasts for 2021 with little justification. The projected cash flows were calculated by adding back depreciation charges to the budgeted result for the period with expected changes in working capital and capital expenditure not taken into account.
Required: Discuss whether the action taken by the directors is appropriate. [15 marks]
Pls refer to MFRS 107 Statement of Cash Flows and MFRS 136 Impairment of Assets
- Suggested solutions It appears that the cash flow forecasts were not prepared based on the requirements of MFRS136. MFRS 136 states that cash flow projections used in measuring value in use shall be based on reasonable and supportable assumptions Management should ensure that the assumptions on which its current cash flow projections are based are consistent with past actual outcomes. There are serious doubts about YGL's ability to establish realistic budgets. According to MFRS 136, estimates of future cash flows should include: (i) projections of cash inflows from the continuing use of the asset; (ii) projections of cash outflows which are necessarily incurred to generate the cash inflows from continuing use of the asset; and (iii) net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life. MFRS 136 states that projected cash outflows should include those required for the day-to-day servicing of the asset which includes future cash outflows to maintain the level of economic benefits expected to arise from the asset in its current condition. It is highly unlikely that no investments in working capital or operating assets would need to be made to maintain the assets of the CGUs in their current condition. Therefore, the cash flow projections used by YGL are not in compliance with MFRS136.