Asset in its current condition

Learning objectives

• Determine whether the cash flows of a future restructuring or enhancement are excluded (not committed) or included (committed: savings taken into account, costs covered by the IAS 37 provision).L2, L3
• Justify the treatment of enhancement and maintenance expenditure in a value in use calculation.L3, L4

Normative references

• IAS 36 §44Cash flows are estimated for the asset in its current condition, excluding those arising from a future restructuring to which the entity is not yet committed and those from investments that would improve or enhance its performance.
• IAS 36 §45Consequence of paragraph 44: value in use reflects neither the outflows nor the related savings (for example, reductions in staff costs) of a restructuring to which the entity is not yet committed, nor expenditure to enhance performance and the inflows it would generate.
• IAS 36 §46Notes that a restructuring is a programme planned and controlled by management that materially changes the scope of the business or the manner in which it is conducted, and refers to IAS 37 to determine when the entity is committed to it.
• IAS 36 §47Once the entity is committed to a restructuring, the estimate of cash flows for value in use reflects the expected cost savings and other benefits, based on the most recent budgets approved by management, while the cash outflows for the restructuring are covered by the provision recognised under IAS 37 (Illustrative Example 5).
• IAS 36 §48Until enhancement expenditure has been incurred, the additional inflows it would generate are excluded (Illustrative Example 6).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

12 questions

• True or false? The board of Orvalis is studying a reorganisation plan for its plant but has not committed to it at the year-end. The staff cost savings expected from this plan must be included in the cash flows used for the plant's value in use.L2
• True or false? When an entity is committed to a restructuring within the meaning of IAS 37, the cash flows used for value in use include the savings expected from that restructuring, based on the most recent budgets approved by management.L2
• True or false? Since value in use relates to the asset in its current condition, the future maintenance expenditure needed to keep the level of benefits that an industrial furnace provides today must be excluded from the projected cash outflows.L3
• Brenvale is estimating the value in use of a bottling line in its current condition. Which of the following cash flows must be included in the projections?L2
• Before the year-end, Calmeyre committed, within the meaning of IAS 37, to closing a workshop of its textile division and recognised a restructuring provision. How are the cash flows of this restructuring treated in the division's value in use?L3
• At 31 December 20X1, Ternavia plans to invest 2,000,000 in 20X3 to increase the capacity of a logistics platform; the budget approved by management accordingly forecasts additional revenue from 20X4. No expenditure has yet been incurred. How should these items be treated in value in use at 31 December 20X1?L3
• Halvero is preparing the value in use of its foundry unit at 31 December 20X1. It is not committed to any restructuring and has incurred no enhancement expenditure. Which of the following cash flows must be excluded from the projections?L3
• The controller of Pélagor is justifying the value in use projections of a cash-generating unit made up of a vessel and deck equipment with a shorter useful life. Which of the controller's statements are correct?L4
• At 31 December 20X1, Vestrame is testing the value in use of its packaging division. In November 20X1, it finalised and announced to its employees a plan to merge two sites; its legal department concludes that it is committed to the plan within the meaning of IAS 37, and a provision of 900,000 has been recognised. The most recent budget approved by management forecasts annual savings of 300,000 in rent and staff costs from 20X2. The controller proposes two other plans that are only under study: outsourcing maintenance (estimated savings of 120,000 a year) and an additional printing line. Which construction of the cash flows is correct?L3
• Aubelune operates a four-star hotel, tested as a cash-generating unit at 31 December 20X1. Every year, it refreshes rooms (paint, bedding) to keep its current standard. Management has also approved a project to upgrade to five stars, with works planned in 20X3 and higher room rates afterwards; no works had been incurred at the year-end. Which projections comply with IAS 36?L4
• Néridia, a network operator, is testing the cash-generating unit of its regional fixed network at 31 December 20X1. The budget approved by management includes a fibre upgrade programme, not yet started, that would cost 40,000,000 and sharply increase revenue per subscriber. Without this programme, value in use would be below the carrying amount; with it, value in use exceeds it. The budget also provides for the regular replacement of the network's active equipment, whose useful life is shorter than that of the infrastructure. The finance director argues that, since the budget is approved, all its lines must be used. Write a judgement memo on how the cash flows should be built.L4
• Corvelle is testing the value in use of its distribution division at 31 December 20X1. In December 20X1, the board approved in principle a reduction in warehouse staff, but the detailed plan has not been finalised and nothing has been communicated to those affected; the announcement is planned for March 20X2. The legal department concludes that, under IAS 37, the entity is not committed at the year-end. Management nevertheless wants to include the expected salary savings, which would be enough to avoid an impairment loss. Write a judgement memo.L3