ADVANCED FINANCIAL ACCOUNTING 260
1. When should an entity conduct an impairment test? (2 Marks)
The following assets require an impairment test every year:
• Intangible assets with indefinite useful lives
• Intangible assets not yet available for use
• Goodwill acquired in a business combination
The impairment test is undertaken when there is indication that an asset may be impaired. This means that, at the end of each reporting period, an entity has to test for the probability that an asset has been impaired. An entity, therefore, has to determine after analysing certain sources of information whether there is sufficient ...view middle of the document...
5. What is an impairment loss? (1 Mark)
An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
6. What is a cash-generating unit? (1 Mark)
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.
7. How are corporate assets tested for impairment? (2 Marks)
Step 1: If corporate assets can be reasonably and consistently allocated to CGUs, then this is done.
Step 2: If corporate assets cannot be reasonably allocated to CGUs, the entity needs to identify the smallest and largest CGUs and allocate any impairment loss across individual assets including corporate assets in accordance with Para 102 of IAS 36.
8. Supersatumas grows citrus fruit on a number of orchards in the Perth Hills. This fruit is then processed into fruit juice and other products at their cannery. These products are then sold to the public via their chain of Jucymarket stores. How many cash generating units would the company have? Why? (2 Marks)
Two, The key to identify CGU is to determine the ‘smallest identifiable group of assets’ and this group must create ‘independent cash flows’ from continuing use. this fruit is then processed into fruit juice and other products at their cannery. The operation of the two seperate processes are independent. Therefore, it is likely that individual process generate cash infows that are largely independent of each other and that each process is a separate cash-generating unit. So there are two CGUs of the company.
9. In allocating an impairment loss for a cash generating unit which of the following assets would not be given a portion of the loss – land; machinery; inventory; manufacturing licence; receivables? Why? (1 Mark)
Inventory--- It is measured at the lower of cost and net realisable value. As net realisable value is defined in terms of estimated price, the measurement of inventory has an in-built impairment test requiring inventory to be written down when the cost is effectively greater than the recoverable amount.
Receivables--- It is recorded at fair value which reflects recoverability of benefits from the asset.
10. In allocating an impairment loss for a CGU the carrying amount of any individual asset must not be reduced below what figure? (1 Mark)
The carrying amount cannot be reduced below...