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Professional fileIAS 36L4 · Expert

Professional file: annual impairment review of an industrial group

15 documents18 tasks≈ 240 min
0 / 23 items completed
Standards
IAS 36 — Impairment of Assets
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Corvenne Industries (a fictitious group) manufactures fluid-handling equipment. The group closes its year on 31 December, applies the cost model to its non-current assets and monitors three activities: industrial pumps (unit A), valves (unit B) and maintenance services (unit C). In 20X3 it acquired Hydra Pompes: the goodwill and the Hydra brand, with an indefinite useful life, arising from that business combination are in the statement of financial position. A shared IT services centre serves the three units. You are in charge of the annual impairment review file at 31 December 20X5: indicator review, identification of units, recoverable amount, allocation of losses, reversal of a prior loss, entries, disclosure note, replies to the reviewer's notes and conclusion. The measurements made under IFRS 13, the measurement of goodwill under IFRS 3 and the treatment of any restructuring plan under IAS 37 are given data; deferred tax effects (IAS 12) are outside the scope of the file.

Your assignment

The file contains documents of varying nature and reliability, two of which have no bearing, three management proposals to assess, a draft disclosure note to correct and two missing pieces of information, one of which is obtained during the engagement. Identify the units and assets to be tested, determine the units and the allocation of goodwill and of the IT centre, calculate the recoverable amount of the Pumps unit, the loss and its allocation, the reversal relating to machining line M7, record the entries and measure their impact, then correct the disclosure note; document each judgement, reply to the reviewer's notes and conclude on the file.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Events

Chronology of the file

  1. January 1 20X1Acquisition date of line M7 · Dated fact of the file

    Document 12

  2. July 1 20X3Acquisition date of Hydra Pompes · Dated fact of the file

    Document 3

  3. December 31 20X3Date of the 20X3 test · Dated fact of the file

    Document 12

  4. December 15 20X5Date of approval of the budgets · Dated fact of the file

    Document 8

  5. December 31 20X5Date of the annual test · Dated fact of the file

    Document 1

Documents

File documents

15 documents: open each one to read it.

Document 1Memo

Internal engagement letter

Internal engagement letter: impairment review of the consolidated financial statements at 31 December 20X5. Cost model for property, plant and equipment and intangible assets. Units monitored: A Industrial pumps, B Valves, C Maintenance services, which correspond to the three operating segments of the group (IFRS 8, given). Units carrying goodwill and the Hydra brand are tested every year on 31 December. Impairment losses and reversals are presented in the Impairment losses line of the income statement. Deferred tax effects are dealt with in another file.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Date of the annual testDecember 31 20X5
Acquisition date of Hydra PompesJuly 1 20X3
Goodwill arising from the Hydra combination€1,400,000.00
Goodwill allocated to the Pumps unit€1,000,000.00
Goodwill allocated to the Services unit€400,000.00
Plant and equipment of the Pumps unit€7,200,000.00
Carrying amount of the Hydra brand€1,600,000.00
Assets of the Valves unit€1,650,000.00
Assets of the Services unit€2,750,000.00
IT services centre€1,200,000.00
Cost of line M7€1,200,000.00
Accumulated depreciation of line M7€520,000.00
Accumulated impairment of line M7€280,000.00
Budgeted 20X5 flows of the Pumps unit€820,000.00
Actual 20X5 flows of the Pumps unit€600,000.00
Market capitalisation of the group€26,000,000.00
Consolidated net assets€19,000,000.00
Management flow, year 1 (20X6)€814,000.00
Management flow, year 2 (20X7)€884,900.00
Management flow, year 3 (20X8)€888,530.00
Management flow, year 4 (20X9)€899,178.00
Management flow, year 5 (20X10)€928,460.00
Annual savings from the restructuring plan€50,000.00
Detailed horizon5 years
Growth rate beyond the horizon0%
Date of approval of the budgetsDecember 15 20X5
Pre-tax discount rate10%
Post-tax weighted average cost of capital7.8%
Incremental borrowing rate of the group4.5%
Pre-tax rate of the 20X4 test (Pumps unit)9.5%
Fair value of the Pumps unit€8,450,000.00
Costs of disposal€150,000.00
Fair value less costs of disposal of the brand€1,500,000.00
Decrease in value in use for an increase of 0.5 percentage point in the rate€410,000.00
Value in use of the Services unit€3,700,000.00
Decrease in value in use for an increase of one percentage point in the rate€380,000.00
Rate at which value in use equals the carrying amount10.8%
Acquisition date of line M7January 1 20X1
Initial useful life10 years
Date of the 20X3 testDecember 31 20X3
Accumulated depreciation at 31 December 20X3€360,000.00
Recoverable amount at 31 December 20X3€560,000.00
Remaining life in 20X37 years
Recoverable amount at 31 December 20X5€650,000.00
Remaining life in 20X55 years
Residual value€0.00
Discount rate of line M7 in 20X511%
Discount rate of line M7 in the 20X3 test12%
Goodwill of the Pumps unit shown in the draft€1,000,000.00
Discount rate shown in the draft7.8%
Net loss shown in the draft€1,760,000.00
Annual vehicle rent€96,000.00
Training budget 20X6€45,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort15

  • Internal engagement letter

  • Minutes of the executive committee

  • Allocation memo for the Hydra goodwill

  • Asset register

  • Internal reporting and market data

  • Memo on the IT services centre

  • Projections of the Pumps unit

  • Minutes of the board of directors

  • Rate study

  • Valuation report on the Pumps unit

  • Valuation report on the Services unit

  • Record of machining line M7

  • Draft disclosure note

  • Vehicle lease contract

  • Training budget

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Analyse the file: which accounting questions arise, which documents are useful and which information is missing?

      2. Task 2Professional judgement

        Which units and which assets must you test at 31 December 20X5?

      3. Task 3Professional judgement

        Which units do you retain and how is the Hydra goodwill allocated? Reply to management's proposal.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Which units do you retain and how is the Hydra goodwill allocated? Reply to management's proposal.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Goodwill tested with the Services unit

      4. Task 4Calculation

        Calculate the share of the IT services centre allocated to each unit.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the share of the IT services centre allocated to each unit.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Share of the centre, Services unit

      5. Task 5Calculation

        Calculate the carrying amount of the Pumps, Services and Valves units.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the carrying amount of the Pumps, Services and Valves units.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Carrying amount of the Valves unit, including its share of the centre

      6. Task 6Professional judgement

        Can the projections of the Pumps unit be used as they stand?

      7. Task 7Calculation

        Calculate the value in use of the Pumps unit.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the value in use of the Pumps unit.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €
        8. €
        9. €
        10. €
        11. €
        12. €

        Checks

        • 0 / 12 steps entered
        • Amounts readable

        Result: Value in use of the Pumps unit

      8. Task 8Professional judgement

        Which discount rate do you retain? Reply to management's proposal.

      9. Task 9Calculation

        Determine the recoverable amount of the Pumps unit.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Determine the recoverable amount of the Pumps unit.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Recoverable amount of the Pumps unit

      10. Task 10Calculation

        Calculate the impairment loss of the Pumps and Services units.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the impairment loss of the Pumps and Services units.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Impairment loss of the Services unit

      11. Task 11Calculation

        Allocate the loss of the Pumps unit.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Allocate the loss of the Pumps unit.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €

        Checks

        • 0 / 7 steps entered
        • Amounts readable

        Result: Goodwill of the Pumps unit after the test

      12. Task 12Calculation

        Calculate the reversal of the impairment loss of line M7 and its future depreciation.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the reversal of the impairment loss of line M7 and its future depreciation.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €
        8. €
        9. €

        Checks

        • 0 / 9 steps entered
        • Amounts readable

        Result: Annual depreciation from 20X6

      13. Task 13Journal entries

        Which entries do you record at 31 December 20X5?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      14. Task 14Effects on the financial statements

        What is the impact of the entries on the consolidated financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        5. Notes

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      15. Task 15Professional judgement

        Which information by class of assets and on the loss of the Pumps unit and the reversal on line M7 do you present? Calculate the loss of the property, plant and equipment class.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Which information by class of assets and on the loss of the Pumps unit and the reversal on line M7 do you present? Calculate the loss of the property, plant and equipment class.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      16. Task 16Professional judgement

        Which information on estimates and which sensitivity do you present for the Pumps and Services units?

      17. Task 17Analysis

        Correct the draft disclosure note and reply to the reviewer's notes.

      18. Task 18Conclusion

        Write the conclusion of the file.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedBlocking note: value in use includes savings from an uncommitted restructuring and a post-tax rate; to be corrected.
      • BlockingResolvedBlocking note: the draft disclosure note offsets loss and reversal, shows a wrong goodwill and rate, and omits the analysis by class, the events, the previous rate, the brand and the sensitivity.
      • Non-blockingOpenNon-blocking note: the IFRS 13 data underlying the fair value of the Pumps unit were not reviewed in this file.

      Information requests

      • ObtainedRequest to the board secretariat: date of approval of the 20X6 to 20X10 budgets of the Pumps unit.
      • Assumption documentedRequest to management control: past differences between budgets and actual results of the Pumps unit.

      Completion checklist

      • Workpapers completed and reconciled with the documents.Done
      • Entries proposed, balanced and reconciled with the workpapers.Done
      • Reviewer's blocking notes resolved.Done
      • Disclosure note corrected for the units carrying goodwill or the brand.Done
      • Normative references checked against the official text.To review
      • Notional gross-up of the goodwill of non-controlling interests (subsidiaries held at 100%).Not applicable

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 23).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 36 §9
      • IAS 36 §10
      • IAS 36 §12
      • IAS 36 §13
      • IAS 36 §14
      • IAS 36 §18
      • IAS 36 §33
      • IAS 36 §34
      • IAS 36 §35
      • IAS 36 §36
      • IAS 36
      • IAS 36 §55
      • IAS 36 §56
      • IAS 36 §A17
      • IAS 36 §A18
      • IAS 36 §A19
      • IAS 36 §A20
      • IAS 36 §59
      • IAS 36 §60
      • IAS 36 §66
      • IAS 36 §67
      • IAS 36 §68
      • IAS 36 §69
      • IAS 36 §80
      • IAS 36 §81
      • IAS 36 §90
      • IAS 36 §96
      • IAS 36 §100
      • IAS 36 §101
      • IAS 36 §102
      • IAS 36 §104
      • IAS 36 §105
      • IAS 36 §110
      • IAS 36 §111
      • IAS 36 §114
      • IAS 36 §115
      • IAS 36 §116
      • IAS 36 §117
      • IAS 36 §118
      • IAS 36 §119
      • IAS 36 §121
      • IAS 36 §126
      • IAS 36 §130
      • IAS 36 §134