Page 16 - MCS August Day 2 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

CHAPTER TEN
TASK 1 ASSET IMPAIRMENT AND INVENTORY VALUATION

From: Financial Manager
To: Production Director
Date: Today

Asset impairment:

IAS 36 Impairment of Assets (IAS 36) defines an asset as being impaired if its carrying amount in
the financial statements exceeds its recoverable amount. Recoverable amount is defined as the
higher of value‐in‐use and fair value less selling costs.

There is no requirement to perform an annual impairment review for all assets. The only
circumstances when an annual impairment review is required is for an item of PPE not
depreciated because its estimated useful life cannot be reliably determined for the purposes of
calculating an annual depreciation charge.

IAS 36 provides a number of indicators of impairment that should be considered to determine
whether an impairment review should be triggered. Internal indicators include:

 obsolescence or damage
 idle asset or asset‐held‐for‐sale

External indicators include:

 a fall in the fair value of the asset
 adverse changes in technology, legislation or market conditions
An entity should be aware that, if an asset may be impaired, then an impairment review should be
performed. Any impairment loss is then written off immediately to profit or loss. Possible
indicators of impairment of an asset is the asset not being fully utilised, or a significant fall in its
fair value less selling costs (i.e. net realisable value). It does not matter that the asset is in good
working order and that it may be fully utilised again at a later date.

In the context of Montel, specialised items of plant and equipment may be susceptible to the risk
of impairment if the products that manufacture suffer a substantial drop in demand. The fact that
they cannot easily be repurposed to manufacture another product is likely to restrict its estimated
realisable value. Its value‐in‐use will also suffer as it is then likely to be underutilised.

An item of plat and equipment that can easily be repurposed to switch from the manufacture of
one product to another is less likely to be susceptible to the risk of impairment. This is because it
will be able to create value for the business by producing products for which there is a higher
demand.

An impairment loss should be recognised as soon as it is suspected and confirmed by the
outcome of an impairment review. An asset impairment recognised in one accounting period can
subsequently be reversed in a later accounting period. For this to occur, the reason that triggered
recognition of the initial impairment must no longer apply. It cannot simply be because, for

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