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
January 1 20X1Acquisition date of line M7 · Dated fact of the file
Document 12
July 1 20X3Acquisition date of Hydra Pompes · Dated fact of the file
Document 3
December 31 20X3Date of the 20X3 test · Dated fact of the file
Document 12
December 15 20X5Date of approval of the budgets · Dated fact of the file
Document 8
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.
Item
Value
Found in
Date of the annual test
December 31 20X5
Acquisition date of Hydra Pompes
July 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 horizon
5 years
Growth rate beyond the horizon
0%
Date of approval of the budgets
December 15 20X5
Pre-tax discount rate
10%
Post-tax weighted average cost of capital
7.8%
Incremental borrowing rate of the group
4.5%
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 amount
10.8%
Acquisition date of line M7
January 1 20X1
Initial useful life
10 years
Date of the 20X3 test
December 31 20X3
Accumulated depreciation at 31 December 20X3
€360,000.00
Recoverable amount at 31 December 20X3
€560,000.00
Remaining life in 20X3
7 years
Recoverable amount at 31 December 20X5
€650,000.00
Remaining life in 20X5
5 years
Residual value
€0.00
Discount rate of line M7 in 20X5
11%
Discount rate of line M7 in the 20X3 test
12%
Goodwill of the Pumps unit shown in the draft
€1,000,000.00
Discount rate shown in the draft
7.8%
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.
1
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.
Task 1Analysis
Analyse the file: which accounting questions arise, which documents are useful and which information is missing?
Task 2Professional judgement
Which units and which assets must you test at 31 December 20X5?
Task 3Professional judgement
Which units do you retain and how is the Hydra goodwill allocated? Reply to management's proposal.
1
Part 1 · Calculation
Which units do you retain and how is the Hydra goodwill allocated? Reply to management's proposal.
€
€
Checks
0 / 2 steps entered
Amounts readable
Result: Goodwill tested with the Services unit
Task 4Calculation
Calculate the share of the IT services centre allocated to each unit.
1
Part 1 · Calculation
Calculate the share of the IT services centre allocated to each unit.
€
€
€
€
Checks
0 / 4 steps entered
Amounts readable
Result: Share of the centre, Services unit
Task 5Calculation
Calculate the carrying amount of the Pumps, Services and Valves units.
1
Part 1 · Calculation
Calculate the carrying amount of the Pumps, Services and Valves units.
€
€
€
Checks
0 / 3 steps entered
Amounts readable
Result: Carrying amount of the Valves unit, including its share of the centre
Task 6Professional judgement
Can the projections of the Pumps unit be used as they stand?
Task 7Calculation
Calculate the value in use of the Pumps unit.
1
Part 1 · Calculation
Calculate the value in use of the Pumps unit.
€
€
€
€
€
€
€
€
€
€
€
€
Checks
0 / 12 steps entered
Amounts readable
Result: Value in use of the Pumps unit
Task 8Professional judgement
Which discount rate do you retain? Reply to management's proposal.
Task 9Calculation
Determine the recoverable amount of the Pumps unit.
1
Part 1 · Calculation
Determine the recoverable amount of the Pumps unit.
€
€
Checks
0 / 2 steps entered
Amounts readable
Result: Recoverable amount of the Pumps unit
Task 10Calculation
Calculate the impairment loss of the Pumps and Services units.
1
Part 1 · Calculation
Calculate the impairment loss of the Pumps and Services units.
€
€
€
Checks
0 / 3 steps entered
Amounts readable
Result: Impairment loss of the Services unit
Task 11Calculation
Allocate the loss of the Pumps unit.
1
Part 1 · Calculation
Allocate the loss of the Pumps unit.
€
€
€
€
€
€
€
Checks
0 / 7 steps entered
Amounts readable
Result: Goodwill of the Pumps unit after the test
Task 12Calculation
Calculate the reversal of the impairment loss of line M7 and its future depreciation.
1
Part 1 · Calculation
Calculate the reversal of the impairment loss of line M7 and its future depreciation.
€
€
€
€
€
€
€
€
€
Checks
0 / 9 steps entered
Amounts readable
Result: Annual depreciation from 20X6
Task 13Journal entries
Which entries do you record at 31 December 20X5?
1
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.
AccountDescriptionDebitCredit
Line 1
Debit
Credit
Line 2
Debit
Credit
Line 3
Debit
Credit
TotalsDebit0Credit0
2
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.
AccountDescriptionDebitCredit
Line 1
Debit
Credit
Line 2
Debit
Credit
TotalsDebit0Credit0
Task 14Effects on the financial statements
What is the impact of the entries on the consolidated financial statements?
1
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
ItemIncreaseDecreaseNo effect
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Notes
2
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
€
€
€
Checks
0 / 3 steps entered
Amounts readable
Result: Amount of the effect — Equity
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.
1
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.
€
Checks
0 / 1 step entered
Amounts readable
Task 16Professional judgement
Which information on estimates and which sensitivity do you present for the Pumps and Services units?
Task 17Analysis
Correct the draft disclosure note and reply to the reviewer's notes.
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.