Page 33 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Requirements of IAS 36 ‐ Impairment of assets
Impairment arises when the recoverable amount of an asset or cash generating unit falls below its
carrying amount. Recoverable amount is defined as the higher of value in use (what continued use
will generate for an entity) and fair value less selling costs (i.e. net realisable value). Any
impairment is written off to profit or loss to bring the asset down to its recoverable amount,
unless it relates to a revalued asset, in which case, impairment can first be offset against the
revaluation surplus for that asset.

Normally, it is necessary to conduct an impairment review only when there is an indication that
an asset may be impaired, such as obsolescence, damage, change to estimated useful life, change
to estimated residual value, change in market conditions etc.

Application to Crowncare
Crowncare may need review assets for possible impairment if there are any changes to the
underlying assumptions made when accounting for PPE. For example, if some items of dental
equipment are underutilised (based upon their estimated useful live and operational hours) this
could be an indication of impairment. Similarly, if the residual value of any asset has fallen
because it is relatively inefficient and/or no longer is of an appropriate standard for use in the
provision of dental services, an impairment review should be performed. There is no immediate
indication that this is the situation for Crowncare.

Requirements of IAS 38 ‐ Intangible assets
An intangible asset is an asset without physical substance. It is recognised initially at fair value
(normally cost of purchase) and then subsequently accounted for using either the cost model or
the valuation model. The criteria to apply the valuation model are very restrictive and so, to all
intents and purposes, the cost model is used .If an intangible asset has a finite life, it should be
written off to profit or loss on a systematic basis.

Application to Crowncare
Currently, there is no indication in the financial statements that Crowncare includes intangible
assets, other than goodwill on acquisition of other businesses. However, IAS 38 may have some
relevance or application to Crowncare in specific circumstances, depending upon its future
activities.

Although this would appear not be applicable in the current situation, it is possible that
Crowncare may need to apply for operating licences to dental practices. If so, the cost should be
capitalised and amortised over the licence term.

Another possibility is if Crowncare continued to use the brand and business name of a competitor
that it acquired. This would form part of the fair value of net assets acquired. The capitalisation of
a brand is permitted by IAS 38 if cost can be reliably measured. It would then be amortised on a
straight‐line basis if estimated useful life could be reliably estimated, or it would be subject to an
annual impairment review.

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