Question

Impairment of assets

Fresh Ltd has two retail businesses that represent separate cash generating units, ‘Fresh Juice Bar’ and ‘Fresh Salads’.  At 30 June 2019, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:

Fresh Juice Bar

Fresh Salads

$

$

Cash

18,000

14,000

Inventory

4,000

3,000

Fixtures and fittings

50,000

65,000

Accumulated depreciation – fixtures and fittings

(45,000)

(15,000)

Equipment

65,000

90,000

Accumulated depreciation – equipment

(30,000)

(30,000)

Motor vehicles 

25,000

26,000

Accumulated depreciation – motor vehicles

(13,000)

(8,000)

Goodwill 

  10,000

  20,000

Total 

84,000

165,000

The inventory is recorded at the lower of cost and net realisable value. The motor vehicles of ‘Fresh Juice Bar’  have a fair value less costs to sell of $11,000, and motor vehicles of ‘Fresh Salads’ have a fair value less costs to sell of $14,000.

On 30 June 2019, the directors of Fresh Ltd estimate that the fair value less cost to sell for ‘Fresh Juice Bar’ and ‘Fresh Salads’ amount to $50,000 and $140,000 respectively. The value in use of ‘Fresh Juice Bar’ and ‘Fresh Salads’ are estimated at $58,000 and $180,000 respectively.

Required:

Prepare a letter to the directors of Fresh Ltd, explaining how to calculate impairment losses for cash generating units, and how impairment losses are to be allocated between assets of the cash generating unit.  Provide references to key paragraphs in AASB 136 to support your discussion.  

In your letter, calculate the impairment loss to be recognised by Fresh Ltd for each of its cash generating units as at 30 June 2019, and determine how the impairment loss is to be allocated.  Provide explanations throughout your calculations and workings, so that the directors understand how you are applying the requirements of AASB 136.  Prepare the journal entries to recognise any impairment losses.  

As you complete the letter, you also need to explain whether it is possible to reverse impairment losses in future periods.  The directors believe that the fair value of both businesses is going to increase significantly in the next two years, as the shopping mall that the two outlets are in is expanding, which will attract a lot more business in the long run.  Can any/all of the impairment losses recognised on 30 June 2019 be reversed in the future?  Explain, with reference to key paragraphs in AASB 136.

Answer 1

A)

Impairment loss is calculated when Recoverable amount of an asset or cash generating unit is less than its cost.

Impairment loss = Cost- recoverable amount

Recoverable amount is lower of below two,

a) Fair value less cost of sales of an asset or cash generating unit

b) Value in use of an asset or cash generating unit

If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit).

The recoverable amount of an individual asset cannot be determined if:

(a) the asset’s value in use cannot be estimated to be close to its fair value less costs to sell (for example, when the future cash flows from continuing use of the asset cannot be estimated to be negligible); and

(b) the asset does not generate cash inflows that are largely independent of those from other assets. In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset’s cash-generating unit

In this case we can identify recoverable amounts of individuals assets i.e, for vehicles of each cash generating unit.

Impariment loss on Vehicles
Particulars	Fresh Juice	Fresh salad
Vehicles	25,000	26,000
Acc depn	(13,000)	(8,000)
Carrying amount	12,000	18,000
Recoverable amount	11000	14000
Imprairment loss	1,000	4,000

Impariment loss calculation to cash generating unit
Particulars	Juice	Salad
Carrying amount	83,000	1,61,000
Recoverable amount (lower of two)
Fair value	50,000	1,40,000
Value in use	58,000	1,80,000
lower of two is RA	50,000	1,40,000
Impariment loss	33,000	21,000

As per AASB136, impariment loss first to be allocated to goodwill and then to assets on proportionate basis.

Apportionment of Impairment loss
Goodwil		10,000	20000
Other assets
Furniture		2,255	403
Equipment		15,784	484
Vehicles		4,961	113
Total		33,000	21,000

Journal entries

	Fresh juice		Fresh salad
Impairment loss	1000		4000
Vehicles		1000		4000

	Fresh juice		Fresh salad
Impairment loss	33000		21000
Goodwill		10000		20000
Furniture		2255		403
Equipment		15784		484
Vehicles		4961		113

B)

Working

Particulars	Fresh Juice	Fresh salad
Cash	18,000	14,000
Inventory	4,000	3,000
F&F net of depn	5,000	50,000
Equipment net of depn	35,000	60,000
Vehicles net of depn	12,000	18,000
Goodwill	10,000	20,000
Total cost	84,000	1,65,000
Carryingn amount of CGU after impariment loss on vehicles
Impariment loss	1,000	4,000
Carrying amount	83,000	1,61,000

Calucation of % of each aset
Fresh Juice		Fresh salad
Value	%	Value	%
5,000	10%	50,000	40%
35,000	69%	60,000	48%
11,000	22%	14,000	11%
51,000	100%	1,24,000	100%

B)

Reversal of impairment loss to an individual and as well cash generating unit is possible.

A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with ASB136.

A reversal of an impairment loss reflects an increase in the estimated service potential of an asset, either from use or from sale, since the date when an entity last recognised an impairment loss for that asset.

The reversal should not be more than the initial impairment amount recognized. examples for such changes in estimates are

(a) a change in the basis for recoverable amount (ie whether recoverable amount is based on fair value less costs to sell or value in use);

(b) if recoverable amount was based on value in use, a change in the amount or timing of estimated future cash flows or in the discount rate; or

(c) if recoverable amount was based on fair value less costs to sell, a change in estimate of the components of fair value less costs to sell.

Reversal of impairment to goodwill is not permitted.