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IAS 36 Impairment of assets was issued in June 1998 and subsequently amended in March 2004.

Its main objective is to

prescribe the procedures that should ensure that an entity's assets are included in its statement of financial position at no
more than their recoverable amounts. Where an asset is carried at an amount in excess of its recoverable amount, it is said
to be impaired and IAS 36 requires an impairment loss to be recognised.

Define an impairment loss explaining the relevance of fair value less costs to sell and value in use;
and state how frequently assets should be tested for impairment;
(6 marks)

Note: your answer should NOT describe the possible indicators of an impairment.

Explain how an impairment loss is accounted for after it has been calculated.

(5 marks)

The assistant financial controller of the Wilderness group, a public listed company, has identified the matters
below which she believes may indicate an impairment to one or more assets:

Wilderness owns and operates an item of plant that cost $640,000 and had accumulated depreciation of
$400,000 at 1 October 20X4. It is being depreciated at 121% on cost. On 1 April 20X5 (exactly half way
through the year) the plant was damaged when a factory vehicle collided into it. Due to the unavailability
of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced
capacity. Also it is expected that as a result of the damage the remaining life of the plant from the date
of the damage will be only two years. Based on its reduced capacity, the estimated present value of the
plant in use if $150,000. The plant has a current disposal value of $20,000 (which will be nil in two
years' time), but Wilderness has been offered a tradein value of $180,000 against a replacement
machine which has a cost of $1 million (there would be no disposal costs for the replaced plant).
Wilderness is reluctant to replace the plant as it is worried about the longterm demand for the produce
produced by the plant. The tradein value is only available if the plant is replaced.
Prepare extracts from the statement of financial position and income statement of Wilderness in
respect of the plant for the year ended 30 September 20X5. Your answer should explain how you
arrived at your figures.
(7 marks)


On 1 April 20X4 Wilderness acquired 100% of the share capital of Mossel, whose only activity is the
extraction and sale of spa water. Mossel had been profitable since its acquisition, but bad publicity
resulting from several consumers becoming ill due to a contamination of the spa water supply in
April 20X5 has led to unexpected losses in the last six months. The carrying amounts of Mossel's
assets at 30 September 20X5 are:
Brand (Quencher see below)
Land containing spa
Purifying and bottling plant
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of 'Quencher', but because of
the contamination it has rebranded its bottled water as 'Phoenix'. After a large advertising campaign,
sales are now starting to recover and are approaching previous levels. The value of the brand in the
statement of financial position is the depreciated amount of the original brand name of 'Quencher'.
The directors have acknowledged that $1.5 million will have to be spent in the first three months of
the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old 'Quencher' bottled water at a cost of $2 million; the remaining
inventories are labeled with the new brand 'Phoenix'. Samples of all the bottled water have been
tested by the health authority and have been passed as fit to sell. The old bottled water will have to be
relabelled at a cost of $250,000, but is then expected to be sold at the normal selling price of
(normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of
Mossel at 30 September 20X5, calculated according to the guidance in IAS 36, is $20 million.
There is no reliable estimate of the fair value less costs to sell of Mossel.

Calculate the amounts at which the assets of Mossel should appear in the consolidated statement of
financial position of Wilderness at 30 September 20X5. Your answer should explain how you arrive at
your figures.
(7 marks)