Question

Problem 1 The Faris Corporation has determined that there may be indicators of impairment for one of their assets - an office building that is currently leased out and a cash generating unit (CGU) representing a business unit. Data for the building and CGU follow. The year end is December 31, 20x4. Building Carrying value (20 years remaining, $500,000 residual value) Fair value Costs to sell Future cash flows generated by building (each year to the end of its useful life) $2,800,000 2,100,000 6% of fair value $170,000 CGU Fair Value less Costs to Sell $1,650,000 1,700,000 550,000 Carrying Value $1,000,000 2,400,000 900,000 1,000,000 $5,300,000 Land Building Equipment Goodwill $3,900,000 The CGU's cash flows are expected to be equal to $500,000 for the next five years with a residual value of $2,500,000 at the end of five years. Assume a discount rate of 5%. Required – a) Calculate the amount of impairment loss (if any) for the building and CGU under the assumption that Faris is: i) a publicly accountable entity. Allocate the impairment loss (if any) to the assets of the CGU.

Answer 1

impairment review of building

carrying value = 2800000

fair value less cost of sales= 1974000 (2100000-2100000*6%)

cash flow = 1837617 (170000* annuty factor 5%)

impairment of building= 826000 (2800000-1974000)

IMPAIRMENT REVIEW OF CGU

total carrying value of CUG=5300000

fair value less cost =3900000

cash flow for next 5 years = 2164500 (5000000*4.329)

impairment of CUG= 1400000(5300000-3900000)

total impairment = 826000+1400000=2226000

ALLOCATION OF IMPAIRMENT

total impairment 2226000

less goodwill =(1000000)

balance to allocate=1226000

carrying value impairment carrying value after imparement

land 1000000 285116 (1226000*1000000/4300000) 714884

building 2400000 684279 (1226000*2400000/4300000) 1715721

equipment 900000 256605 (1226000*900000/4300000) 643395

total 4300000 1226000 3074000