ACCA P2一日一练
(a) Key, a public limited company, is concerned about the reduction in the general availability of credit and the sudden
tightening of the conditions required to obtain a loan from banks. There has been a reduction in credit availability and a rise in interest rates. It seems as though there has ceased to be a clear relationship between interest rates and credit availability, and lenders and investors are seeking less risky investments. The directors are trying to determine the practical implications for the fi nancial statements particularly because of large write downs of assets in the banking sector, tightening of credit conditions, and falling sales and asset prices. They are particularly concerned about the impairment of assets and the market inputs to be used in impairment testing. They are afraid that they may experience signifi cant impairment charges in the coming fi nancial year. They are unsure as to how they should test for impairment and any considerations which should be taken into account. Required: Discuss the main considerations that the company should take into account when impairment testing non-current assets in the above economic climate. (8 marks) Professional marks will be awarded in part (a) for clarity and expression. (2 marks) (b) There are specifi c assets on which the company wishes to seek advice. The company holds certain non-current assets, which are in a development area and carried at cost less depreciation. These assets cost $3 million on 1 June 2008 and are depreciated on the straight-line basis over their useful life of fi ve years. An impairment review was carried out on 31 May 2009 and the projected cash fl ows relating to these assets were as follows: Year to 31 May 2010 31 May 2011 31 May 2012 31 May 2013 Cash fl ows ($000) 280 450 500 550 The company used a discount rate of 5%. At 30 November 2009, the directors used the same cash fl ow projections and noticed that the resultant value in use was above the carrying amount of the assets and wished to reverse any impairment loss calculated at 31 May 2009. The government has indicated that it may compensate the company for any loss in value of the assets up to 20% of the impairment loss. Key holds a non-current asset, which was purchased for $10 million on 1 December 2006 with an expected useful life of 10 years. On 1 December 2008, it was revalued to $8·8 million. At 30 November 2009, the asset was reviewed for impairment and written down to its recoverable amount of $5·5 million. Key committed itself at the beginning of the fi nancial year to selling a property that is being under-utilised following the economic downturn. As a result of the economic downturn, the property was not sold by the end of the year. The asset was actively marketed but there were no reasonable offers to purchase the asset. Key is hoping that the economic downturn will change in the future and therefore has not reduced the price of the asset. Required: Discuss with suitable computations, how to account for any potential impairment of the above non-current assets in the fi nancial statements for the year ended 30 November 2009. (15 marks) Note: The following discount factors may be relevant Year 1 0·9524 Year 2 0·9070 Year 3 0·8638 Year 4 0·8227 |
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