You work in the finance department of Zobac Industrial plc (Zobac), a UK-listed company. You are preparing the financial statements for the year ended 31 October 2022, in accordance with International Financial Reporting Standards (IFRS). The financial controller has asked you to look at the carrying amount of some of Zobacs assets as at 31 October 2022 as the company is facing a number of challenges, including significant supplier price increases.

Firstly, Zobac intends to sell a piece of production equipment from its UK factory that is no longer required. Relevant information relating to the equipment is in Appendix 1.

Secondly, Zobac has a production site in Eastern Europe that has faced some recent financial difficulties. An impairment review has been carried out on the assets at that site and information from the review is in Appendix 2.

Finally, Zobac also holds a number of financial assets which may be impaired. Details are in Appendix 3.

QUESTIONS:

For the production equipment in Appendix 1:

analyse, with explanations and showing all workings, the options for measuring the fair value of the production equipment in accordance with IFRS 13 Fair Value Measurement and select which is the most appropriate;

calculate, with explanations, the amount the equipment should be measured at in the financial statements of Zobac at 31 October 2022; and

prepare any journal entries necessary.

(8 marks)

For the Eastern European production site in Appendix 2:

calculate, showing all workings, and any impairment occurring in respect of the year ended 31 October 2022;

prepare any journal entries necessary.

(7 marks)

For the financial assets in Appendix 3:

calculate, showing all workings, any impairment occurring in respect of the year ended 31 October 2022; and

prepare any journal entries necessary.

(5 marks)

APPENDIX 3 (SECTION 3)

Information related to the potential impairment of financial assets

At 31 October 2022, Zobac had two loans outstanding which it had made to Frusty Ltd (Frusty) and Scomp plc (Scomp) and which are measured using the amortised cost method. Finance income and any interest received have been accounted for correctly during the year ended 31 October 2022. No adjustment has been made to the allowance for 12-month expected credit losses.

	Frusty	Scomp
	000	000
Gross carrying amount at 31 October 2022	9,027	15,265
Allowance for 12-month expected credit losses as at 31 October 2021	(24)	(165)
Carrying amount	9,003	15,100

Frusty

On 1 November 2020, Zobac had made an 8 million loan to Frusty, bearing interest at 6% per annum and Frusty must repay 10 million to Zobac on 31 October 2025. There were initial transaction costs associated with the loan of 500,000. Interest is received annually in arrears. The effective rate of interest on this loan is 8.62%.

At 31 October 2022, there has been no significant increase in credit risk since initial recognition. It is estimated that there is a 3% chance that Frusty might breach the loan covenants within the next 12 months. If this was to happen, Zobac estimates that only 60% of the remaining interest payments would be received on their due dates, with a final repayment of capital of 8 million on 31 October 2025.

Scomp

Zobac made a 15 million loan to Scomp on 1 November 2019 which is repayable on 31 October 2024. Interest at 7.2% per annum is payable annually in arrears. There were initial costs associated with the loan of 600,000. The effective rate of interest on this loan is 6.25%.

During the year ended 31 October 2022, Scomp has had financial difficulties and, although Scomp did make the expected interest payment on 31 October 2022, it has breached the loan covenants on several occasions during the year.

The directors believe the loan is now credit impaired and that there is a significant chance that Zobac may not receive all of the future interest and capital repayments. At 31 October 2022, Zobac estimates that the probability of receiving interest and capital repayments is as follows:

Probability	Interest payments	Capital repayment
70%	nil	9 million, on due date
30%	as expected, on due dates	as expected, on due date