CAF 1 Supplements

2022
FINANCIAL ACCOUNTING
AND REPORTING I
Examinable Supplements
CAF-1
Certificate in Accounting and Finance
9
Financial accounting and reporting I
CHAPTER
IAS 36: Impairment of assets
Contents
1 Impairment of assets
2 Objective based questions and answers
* The student must refer original handbook of IFRS.
© Emile Woolf International 451 The Institute of Chartered Accountants of Pakistan

1 IMPAIRMENT OF ASSETS
Section overview
 Objective and scope

 Definitions
 Stages in accounting for an impairment loss
 Indications of impairment
 Measuring recoverable amount
 Recognition & Accounting for impairment
 Reversal of an impairment loss
 Summary of the approach
1.1 Objective and scope

An asset is said to be impaired when its recoverable amount is less than its carrying amount in the
statement of financial position. From time to time an asset may have a carrying value that is greater
than its fair value but this is not necessarily impairment as the situation might change in the future
as the reporting date approaches.
The objective of IAS 36 Impairment of assets is to ensure that assets are ‘carried’ (valued) in the
financial statements at no more than their recoverable amount.
Scope of IAS 36
IAS 36 applies to accounting for impairment of all assets except the following:
 IAS 2 Inventories
 IAS 12 Deferred tax assets
 IAS 19 Assets arising from employee benefits
 IAS 40 Investment property that is measured at fair value
 IAS 41 Biological assets related to agricultural activity
 IFRS 5 Non-current assets (or disposal groups) classified as held for sale
 IFRS 9 Financial Assets
 IFRS 15 Contract assets and assets arising from costs to obtain or fulfil a contract
 IFRS 17 Insurance Contracts
1.2 Definitions
The recoverable amount of an asset is defined as the higher of its fair value minus costs of disposal,
and its value in use.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
Value in use is the present value of future cash flows from using an asset, including its eventual
disposal.
Impairment loss is the amount by which the carrying amount of an asset (or a cash-generating unit)
exceeds its recoverable amount.
Costs of disposal are incremental costs directly attributable to the disposal of an asset excluding
finance costs and income tax expense.

Chapter 9: IAS 36: Impairment of assets
1.3 Stages in accounting for an impairment loss

There are various stages in accounting for an impairment loss:
Stage 1: Establish whether there is an indication of impairment.
Stage 2: If so, assess the recoverable amount.
Stage 3: Write down the affected asset (by the amount of the impairment) to its recoverable
amount.
Each of these stages will be considered in turn.
1.4 Indications of impairment

At the end of each reporting period, an entity should assess whether there is any indication that
impairment might have occurred. If such an indication exists, the entity must estimate the
recoverable amount of the asset, in order to establish whether impairment has occurred and if so,
the amount of the impairment.
The following are given by IAS 36 as possible indicators of impairment. These may be indicators
outside the entity itself (external indicators), such as market factors and changes in the market.
Alternatively, they may be internal indicators relating to the actual condition of the asset or the
conditions of the entity’s business operations.
When assessing whether there is an indication of impairment, IAS 36 requires that, at a minimum,
the following sources are considered:
External sources Internal sources
An unexpected decline in the asset’s market value. Evidence that the asset is damaged or no
longer of use to the entity.
Significant changes in technology, markets, There are plans to discontinue or

economic factors or laws and regulations that have restructure the operation for which the
an adverse effect on the company. asset is currently used.
An increase in interest rates, affecting the value in There is a significant reduction in the
use of the asset. asset’s expected remaining useful life.
The company’s net assets have a higher carrying There is evidence that the entity’s
value than the company’s market capitalisation expected performance is worse than
(Market Cap means Total market value of equity of expected.
the entity, usually computed as Market Value per
share x No. of shares).
Internal indicators for impairment are generally refers to items under control of management while
external indicators are outside the control of management.
If there is an indication that an asset is impaired then it is tested for impairment. This involves
calculating the recoverable amount of the item in question and comparing this to its carrying
amount.
1.5 Measuring recoverable amount

It has been explained that recoverable amount is the higher of an asset’s:
 fair value less costs of disposal; and
 its value in use.

It is not always necessary to determine both an asset’s fair value less costs of disposal and its
value in use. If either of these amounts is higher than the carrying value of the asset, there has
been no impairment.
IAS 36 sets out the requirements for measuring ‘fair value less costs of disposal’ and ‘value in use’.
In some cases, estimates, averages and computational short cuts may provide reasonable
approximations of the detailed computations illustrated in this Standard for determining fair value
less costs of disposal or value in use.
Measuring fair value less costs of disposal
Fair value of an asset at a particular date is normally its current market value. If no active market
exists, it may be possible to estimate the amount that the entity could obtain from the disposal.
Costs of disposal, other than those that have been recognised as liabilities, are deducted in
measuring fair value less costs of disposal. Direct selling costs normally include legal costs, taxes
and costs necessary to bring the asset into a condition to be sold. However, redundancy and similar
costs (for example, where a business is reorganized following the disposal of an asset) are not
direct selling costs.
Sometime it will not be possible to measure fair value less costs of disposal because there is no
basis for making a reliable estimate of the price at which an orderly transaction to sell the asset
would take place between market participants at the measurement date under current market
conditions. In this case, the entity may use the asset’s value in use as its recoverable amount.
Calculating value in use
Value in use represents the present value of the expected future cash flows from use of the asset,
discounted at a suitable discount rate or cost of capital.
The following elements should be reflected in the calculation of an asset’s value in use:
 An estimate of the future cash flows the entity expects to derive from the asset
 Expectations about possible variations in the amount or timing of those future cash flows
 The time value of money (represented by the current market risk-free rate of interest)
 The price for bearing the uncertainty inherent in the asset
 Other factors that market participants would reflect in pricing the future cash flows the entity
expects to derive from the asset.
The elements identified above can be reflected either as adjustments to the future cash flows or
as adjustments to the discount rate
Estimates of future cash flows should be based on reasonable and supportable assumptions that
represent management’s best estimate of the economic conditions that will exist over the remaining
useful life of the asset.
Estimates of future cash flows must include:
 cash inflows from the continuing use of the asset;
 cash outflows that will be necessarily incurred to generate the cash inflows from continuing
use of the asset; and
 net disposal proceeds at the end of the asset’s useful life.
Estimates of future cash flows must not include:
 cash inflows or outflows from financing activities; or
 income tax receipts or payments.

Also note that future cash flows are estimated for the asset in its current condition. Therefore, any
estimate of future cash flows should not include estimated future cash flows that are expected to
arise from:
 a future restructuring to which an entity is not yet committed; or
 improving or enhancing the asset’s performance.
When an entity becomes committed to a restructuring, some assets are likely to be affected by this
restructuring. Once the entity is committed to the restructuring:
 its estimates of future cash inflows and cash outflows for the purpose of determining value
in use reflect the cost savings and other benefits from the restructuring; and
 its estimates of future cash outflows for the restructuring
The discount rate must be a pre-tax rate that reflects current market assessments of:
 the time value of money; and
 the risks specific to the asset for which the future cash flow estimates have not been
adjusted.
Illustration 01: Measurement of recoverable amount

A company has a machine in its statement of financial position at a carrying amount of
Rs.300,000.
The machine is used to manufacture the company’s best-selling product range, but the entry of a
new competitor to the market has severely affected sales.
As a result, the company believes that the future sales of the product over the next three years will
be only Rs.150,000, Rs.100,000 and Rs.50,000. The asset will then be sold for Rs.25, 000.
An offer has been received to buy the machine immediately for Rs.240,000, but the company
would have to pay shipping costs of Rs.5, 000.The risk-free market rate of interest is 10%.
Market changes indicate that the asset may be impaired and so the recoverable amount for the
asset must be calculated.
Fair value less costs of disposal Rs.
Fair value 240,000
Costs of disposal (5,000)
235,000
Year Cash flow (Rs.000) Discount factor Present value
1 150,000 1/1.1 136,364
2 100,000 1/1.12 82,645
3 50,000 + 25,000 1/1.13 56,349
Value in use 275,358
The recoverable amount is the higher of Rs.235, 000 and Rs.275, 358, i.e. Rs.275, 358.
The asset must be valued at the lower of carrying value and recoverable amount.
The asset has a carrying value of Rs.300, 000, which is higher than the recoverable amount from
using the asset.
It must therefore be written down to the recoverable amount, and an impairment of Rs.24, 642
(Rs.300, 000 – Rs.275, 358) must be recognized.

1.6 Recognition & Accounting for impairment

The impairment loss is normally recognized immediately in profit or loss.

A company has a machine in its statement of financial position at a carrying amount of
Rs.300,000.
The machine has been tested for impairment and found to have recoverable amount of Rs.275,358
meaning that the company must recognize an impairment loss of Rs.24,642.
This is accounted for as follows:
Debit Credit
Statement of profit or loss 24,642
Accumulated impairment loss 24,642
(Property, plant and equipment would be presented net of the balance on this account on
the face of the statement of financial position).
Illustration 03:
On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful life of
20 years and an estimated zero residual value.
Depreciation is on a straight-line basis.
On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be
Rs.100,000 and its remaining useful life to be 10 years.
a) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).
The carrying amount of machinery on 31st December Year 3 immediately before the impairment
is calculated as under;
Carrying amount of the machine on 31 December Year 3 Rs.

Cost 240,000
Accumulated depreciation (3 × (240,000 ÷ 20 years)) (36,000)
Carrying amount 204,000
b) The impairment loss recognized in the year to 31 December Year 4 is calculated as under:
Impairment loss at the beginning of Year 4 of Rs.104,000 (Rs.204,000 – Rs.100,000). This

is charged to profit or loss.
c) The depreciation charge in the year to 31 December Year 4.is calculated as under:
Depreciation charge in Year 4 of Rs.10,000 (= Rs.100,000 ÷ 10). The depreciation charge

is based on the recoverable amount of the asset.

Assets having revaluation surplus

However, an impairment loss recognized in respect of an asset carried at a previously recognized
revaluation surplus is recognized in other comprehensive income to the extent that it is covered by
that surplus. Thus it is treated in the same way as a downward revaluation, reducing the revaluation
reserve balance relating to that asset.
Impairment not covered by a previously recognized surplus on the same asset is recognized in
profit or loss.

A company has a machine in its statement of financial position at a carrying amount of Rs.300,
000 including a previously recognized surplus of Rs.20,000.
The machine has been tested for impairment and found to have recoverable amount of
Rs.275,358 meaning that the company must recognize an impairment loss of Rs.24,642.
This is accounted for as follows:
Debit Credit
Statement of profit or loss 4,642
Other comprehensive income 20,000
Property, plant and equipment 24,642
Depreciation of impaired assets

After the recognition of the impairment, the future depreciation of the asset must be based on the
revised carrying amount, minus the residual value, over the remaining useful life.
Illustration 05:
On 1 January Year 1 Entity Q purchased for Rs.240, 000 a machine with an estimated useful life of
20 years and an estimated zero residual value.
Depreciation is on a straight-line basis.
The asset had been re-valued on 1 January Year 3 to Rs.250, 000, but with no change in useful life
at that date.
On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be Rs.100,
000 and its remaining useful life to be 10 years.
a) The carrying amount of the machine on 31 December Year 2 and hence the revaluation
surplus arising on 1 January Year 3 is calculated as under:
Carrying amount on Rs.

Cost 240,000
Accumulated depreciation at 1 January Year 3 (2 years × (240,000 ÷ 20)) (24,000)
Valuation at 1 January Year 3 250,000
Revaluation surplus 34,000
b) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment) is calculated as under:

When the asset is revalued on 1 January Year 3, depreciation is charged on the revalued
amount over its remaining expected useful life.
On 31 December Year 3 the machine was therefore stated at:
Rs.
Valuation at 1 January (re-valued amount) 250,000
Accumulated depreciation in Year 3 (= Rs.250,000 ÷ 18)) (13,889)
c) The impairment loss recognised in the year to 31 December Year 4 is calculated as under:
On 1 January Year 4 the impairment review shows an impairment loss of Rs.136,111
(Rs.236,111 – Rs.100,000).
An impairment loss of Rs.32,111 (Rs.34,000 Rs.1,889) will be taken to other comprehensive

income (reducing the revaluation surplus for the asset to zero).
The remaining impairment loss of Rs.104,000 (Rs.136,111 Rs.32,111) is recognised in the

statement of profit or loss for Year 4.
d) The depreciation charge in the year to 31 December Year 4 is calculated as under:
Year 4 depreciation charge is Rs.10,000 (Rs.100,000 ÷ 10 years).
1.7 Reversal of an impairment loss

A company must make an assessment at the end of each reporting period as to whether a
previously recognized impairment should be decreased or may no longer exist. If the loss no longer
exists, it is reversed subject to the following guidance.
Any reversal should not lead to a carrying amount in excess of what the carrying amount of the
asset would have been without the recognition of the original impairment loss.
In allocating a reversal of an impairment loss, the carrying amount of an asset must not be
increased above the lower of:
 its recoverable amount (if determinable); and
 the carrying amount that would have been determined (net of amortisation or depreciation)
had no impairment loss been recognised for the asset in prior periods.
A reversal should be:
 recognised immediately in profit or loss; unless
 the original impairment was charged to the revaluation surplus, in which case the reversal
should be credited to the revaluation surplus (and reported in the same way as a revaluation
in ‘other comprehensive income’ for the period).
 If the original impairment loss was charged to Revaluation Surplus and Profit or Loss
Account, the impairment loss charged to profit or loss shall be reversed first and remaining
amount shall go towards revaluation surplus. (See example [•])
Depreciation charges for future periods should be adjusted to allocate the asset’s revised carrying
amount, minus any residual value, over its remaining useful life.

Example: Reversal of impairment loss under Cost Model

1st January Year 1
An asset was purchased at a cost of Rs. 100,000 and is being depreciated over 10 years on a
straight-line basis. Depreciation is Rs. 10,000 per annum.
31st December Year 2
The asset has a carrying amount of Rs. 80,000 (Rs. 100,000 – (2 years Rs. 10,000).
There are indications that the asset is impaired and its recoverable amount is estimated at
Rs.64,000. The resultant impairment loss of Rs. 16,000 is recognised.
The carrying amount of the asset after the recognition of the impairment loss (Rs. 64,000) is written
off over the remaining useful life of 8 years resulting in an annual depreciation charge of Rs. 8,000.
The carrying amount of the asset is Rs. 48,000 (Rs. 64,000 – (2 years Rs. 8,000).
There are indications that the impairment loss might have decreased and the company estimates
the recoverable amount of the asset to be Rs. 70,000.
However, the carrying amount of the asset cannot be increased beyond the lower of:
(i) Carrying Amount today had there been no impairment i.e. Rs.60,000
(Rs. 100,000 – (4 years Rs. 10,000); and
(ii) Recoverable Amount today i.e. Rs.70,000
Hence, the reversal will be made to such extent that asset will be increased to Rs.60,000
Therefore, a reversal of Rs. 12,000 (Rs.60,000 – Rs.48,000) is recognized.
The carrying amount of the asset after the recognition of the reversal of the impairment loss
(Rs.60,000) is depreciated over the remaining useful life of 6 years resulting in an annual
depreciation charge of Rs. 10,000.
1st January Year 1
An asset was purchased at a cost of Rs. 100,000 and is being depreciated over 10 years on a
straight-line basis. Depreciation will be Rs. 10,000 per annum.
Assuming the asset is revalued to Rs. 121,500 from its historical cost carrying amount of Rs.90,000
(creating Rs.31,500 as Revaluation Surplus). Remaining useful life is 9 years and depreciation will
be Rs.13,500 per annum.
The asset has a carrying amount of Rs.94,500 (Rs. 121,500 – (2 years Rs. 13,500).
Carrying value of Revaluation Surplus is now Rs.24,500 (Rs.31,500 – (2 years x Rs.3,500
transferred to Retained Earnings).
There are indications that the asset is impaired and its recoverable amount is estimated at
Rs.65,100. The resultant impairment loss of Rs.29,400 is recognized out of which Rs.24,500 is
charged to available balance of Revaluation Surplus and remaining Rs.4,900 to Profit or Loss
Account.
The carrying amount of the asset after the recognition of the impairment loss is Rs.65,100 which is
depreciated over the remaining useful life of 7 years resulting in depreciation charge of Rs.9,300
per annum.


The carrying amount of the asset is Rs.46,500 (Rs.65,100 – (2 years Rs.9,300). There are
indications that the impairment loss might have reversed and the company estimates the
recoverable amount of the asset to be Rs.55,000.
The carrying amount of the asset cannot be increased beyond the lower of:
(i) Carrying Amount today had there been no impairment i.e. Rs.67,500
(Rs.94,500 – (2 years Rs.13,500); and
(ii) Recoverable Amount today i.e. Rs.55,000
Hence, the reversal will be made to such extent that asset will be increased to Rs.55,000
Therefore, a reversal of Rs.8,500 (Rs.55,000 – Rs.46,500) is recognized. This reversal of
impairment will first adjust the previous impairment loss recognized in Profit or Loss Account and
remaining amount (if any) will go to Revaluation Surplus.
Impact of Profit or Loss will be Rs. 3,500 (computed as under):
Carrying Amount of asset under COST MODEL had there been no impairment
(Rs.100,000 less 5 years x 10,000 dep per year) Rs.50,000
Less: Carrying Amount of asset before reversal of impairment Rs,46,500
Impact taken to Revaluation Surplus will be Rs.5,000 (computed as under):
Total Reversal of Impairment Rs.8,500
Less: Reversal of impairment taken to Profit or Loss Account Rs.3,500
1.8 Summary of the approach

Impairment of an asset should be identified and accounted for as follows:
(1) At the end of each reporting period, the entity should assess whether there are any
indications that an asset may be impaired.
(2) If there are such indications, the entity should estimate the asset’s recoverable amount.
(3) When the recoverable amount is less than the carrying value of the asset, the entity should
reduce the asset’s carrying value to its recoverable amount. The amount by which the value
of the asset is written down is an impairment loss.
(4) This impairment loss is recognized as a loss for the period.
(5) However, if the impairment loss relates to an asset that has previously been re-valued
upwards, it is first offset against any remaining revaluation surplus for that asset. When this
happens it is reported as other comprehensive income for the period (a negative value) and
not charged against profit.
(6) Depreciation charges for the impaired asset in future periods should be adjusted to allocate
the asset’s revised carrying amount, minus any residual value, over its remaining useful life
(revised if necessary).
(7) An impairment loss cannot be more than the carrying amount of an asset unless the excess
evidences existence of a present obligation.

EXAMPLE 01: ABA LIMITED

Question: Aba Limited conducts its activities from two properties, a head office in the city centre
and a property in the countryside where staff training is conducted. Both properties were acquired
on 1 April 20X3 and had estimated lives of 25 years with no residual value.
The company has a policy of carrying its land and buildings at current values. However, until
recently property prices had not changed for some years.
On 1 October 20X5 the properties were revalued by a firm of surveyors. Details of this and the
original costs are:
Land Buildings
Rs. Rs.
Head office – cost 1 April 20X3 500,000 1,200,000
– revalued 1 October 20X5 700,000 1,350,000
Training premises – cost 1 April 20X3 300,000 900,000
– revalued 1 October 20X5 350,000 600,000
The fall in the value of the training premises is due mainly to damage done by the use of heavy
equipment during training. The surveyors have also reported that the expected life of the training
property in its current use will only be a further 10 years from the date of valuation. The estimated
life of the head office remained unaltered.
Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on
the straight-line method from the date of purchase or subsequent revaluation.
Required:
Prepare extracts of the financial statements of Aba Limited in respect of the above properties for
the year to 31 March 20X6.
Answer:
ABA Limited
Extracts (Year to 31 March 20X6) Rs.
Statement of Profit or loss

Depreciation Expense [24,000 + 18,000 + 30,000 + 30,000] (102,000)
Impairment loss (210,000)
Other comprehensive income

Gain on revaluation [200,000 + 50,000 + 270,000] 520,000
Changes in equity
Revaluation surplus [30,000 – 24,000] (6,000)
Retained earnings 6,000
Statement of financial Position

Land 1,050,000
Building 1,890,000
Revaluation surplus [520,000 – 6,000] 514,000

Land Buildings
Total
Working 1 HO TP HO TP
Rs.
Cost 1 April 20X3 500,000 300,000 1,200,000 900,000 2,900,000
20X4 Depreciation (48,000) (36,000) (84,000)
20X5 Depreciation (48,000) (36,000) (84,000)
1 April 20X5 500,000 300,000 1,104,000 828,000 2,732,000
Depreciation (six months) (24,000) (18,000) (42,000)
1 October 20X5 (pre-revaluation) 500,000 300,000 1,080,000 810,000 2,690,000
Revaluation gain (loss) 200,000 50,000 270,000 (210,000) 310,000
1 October 20X5 (fair value) 700,000 350,000 1,350,000 600,000 3,000,000
Depreciation (six months) (30,000) (30,000) (60,000)
31 March 20X6 700,000 350,000 1,320,000 570,000 2,940,000
Depreciation (20X4)
Head office Rs. 1,200,000 / 25 years = Rs. 48,000
Training premises Rs. 900,000 / 25 years = Rs. 36,000
Depreciation (1 Apr 20X5 to 30 Sep 20X5)

Head office Rs. 48,000 x 6/12 = Rs. 24,000
Training premises Rs. 36,000 x 6/12 = Rs. 18,000
Depreciation (1 Oct 20X5 to 31 Mar 20X6)

Head office Rs. 1,350,000 / 22.5 years x 6/12 = Rs. 30,000
Training premises Rs. 600,000 / 10 years x 6/12 = Rs. 30,000
.
EXAMPLE 02: HUSSAIN ASSOCIATES LTD

Question: The assistant financial controller of the Hussain Associates Ltd group has identified the
matters below which she believes may indicate impairment of one or more assets:
Hussain Associates Ltd owns and operates an item of plant that cost Rs. 640,000 and had
accumulated depreciation of Rs. 400,000 at 1 October 20X5. It is being depreciated at 12½% on
cost.
On 1 April 20X6 (exactly half way through the year) the plant was damaged when a factory vehicle
collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant,
but it still operates, albeit at a reduced capacity. It is also expected that as a result of the damage
the remaining life of the plant from the date of the damage will be only two years.
Based on its reduced capacity, the estimated present value of the plant in use is Rs. 150,000. The
plant has a current disposal value of Rs. 20,000 (which will be nil in two years’ time), but Hussain
Associates Ltd has been offered a trade-in value of Rs. 180,000 against a replacement machine
which has a cost of Rs. 1 million (there would be no disposal costs for the replaced plant). Hussain
Associates Ltd is reluctant to replace the plant as it is worried about the long-term demand for the
product produced by the plant. The trade-in value is only available if the plant is replaced.

Required:
Prepare extracts from the statement of financial position and statement of profit or loss of Hussain
Associates Ltd in respect of the plant for the year ended 30 September 20X6. Your answer should
explain how you arrived at your figures.
Answer:
 The plant had a carrying amount of Rs. 240,000 on 1 October 20X5. The accident may have caused
impairment occurred on 1 April 20X6. However, as per IAS 36, the entity will do an impairment test
at the end of the reporting period, i.e., 30 September 20X6.
 The depreciation on the plant from 1 October 20X5 to 30 Sept 20X6 would be Rs. 80,000 (640,000
x 12.5% giving a carrying amount of Rs. 160,000 at the date of impairment. An impairment test
requires the plant’s carrying amount to be compared with its recoverable amount. The recoverable
amount of the plant is the higher of its value in use of Rs. 150,000 or its fair value less costs to sell.
 If Hussain Associates Ltd trades in the plant it would receive Rs. 180,000 by way of a part exchange,
but this is conditional on buying new plant which Hussain Associates Ltd. is reluctant to do. A more
realistic amount of the fair value of the plant is its current disposal value of only Rs. 20,000.
Thus the recoverable amount would be its value in use of Rs. 150,000 giving an impairment loss of
Rs. 10,000 (Rs. 160,000 – Rs. 150,000). Thus extracts from the financial statements for the year
ended 30 September 20X6 would be:
Statement of financial position

Non-current assets Rs.
Plant 150,000
Statement of profit or loss
Plant depreciation 80,000
Plant impairment loss 10,000
EXAMPLE 03: SKY-LINE LTD (SL)

Question: Sky-Line Limited (SL) operates a 4 Star Hotel facility in Murree. The hotel was
constructed at a cost of Rs.300 million, 5 years back and it is depreciated on a straight-line basis
(total useful life of 15 years and residual value of 20%). There are indications that the property is
not performing as expected due to;
(a) opening of a competing hotel nearby,

(b) a significant drop in number of tourists to the area because of terrorism.
There is a 40% probability that the hotel will generate net cash flows of Rs.40 million per annum
and 60% probability that the cash flows would only be Rs.20 million per annum.
The property’s net operating income is Rs.30 million which is at the rate of 15%. 5% of the
proceeds from sale would be expended in closing the deal.
Required:
Calculate the impairment loss if the appropriate discount rate is 10%.
Answer:
Carrying value of asset = Rs.300 million – [5 x (300 – 60) / 15 years]

= Rs.220 million

Recoverable amount is the higher of fair value less cost to sell and value is use
Fair value less cost to sell = Net operating income / capitalization rate (since no active market) x
(1 - disposal process)
= Rs.30 m / 15% =200 million
= Rs.200 million – 200 million (5%)=190 million
Value in use = Present value of net cash flows discounted at 10% for 10 years
= (Rs.40 m x 0.4 + Rs.20 m x 0.6) x [1- (1.10)-10]/ 10%]
= Rs.28 m x 6.145
= Rs.172 m
Recoverable amount = Rs.190 million
Impairment loss = Rs.30 million
EXAMPLE 04: PREMIER LIMITED (PL)

Question: Premier Limited (PL) owns a plant which has a carrying amount of Rs.248 million as at
1 April 20X9. It is being depreciated at 12½% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a decline in sales
due to obsolescence.
PL has estimated that the plant will be retired from use on 31 March 20Y3.
The estimated net cash flows from the use of the plant and their present values are:
Net cash Present
flows values
Rs. In million
Year to 31 March 20Y1 120 109.2
Year to 31 March 20Y2 80 66.4
Year to 31 March 20Y3 52 39
252 214.6
On 1 April 20Y0, PL had an alternative offer from the competitor to purchase the plant for Rs.200
million.
Required:
Calculate the impairment loss.
Answer:
At 31 March 20Y1
Recoverable amount is the higher of value in use [PV of future net cash flows (Rs.214.6 million)
and fair value less costs of disposal (Rs.200 million)].
Carrying amount = Rs.217 million [248 m – (248 m x 12·5%)]
Impairment loss = Carrying amount – Recoverable amount
= Rs.217 million – Rs.214.6 million
= Rs.2.4 million

EXAMPLE 05: NAVEED LIMITED

Question: Naveed Limited has an item of plant which has a carrying value of Rs.1,800,000 as at
the end of the year December 20Y0. It has undergone an impairment review and the following
estimates were produced:
Fair value of plant = Rs.1,400,000
Costs to sell 2% of selling price
Revenue and associated costs per annum for remaining useful life:
(assume all cash flows occur at the end of the year).
Revenue Costs
20Y1 Rs.960,000 Rs.240,000
20Y2 Rs.880,000 Rs.220,000
20Y3 Rs.700,000 Rs.290,000
The plant has an estimated residual value of Rs.50,000.
A discount rate of 10% is applicable to investments equivalent in risk to this plant.
Required:
Calculate the impairment loss if the appropriate discount rate is 10%.
Answer:
Cash flows 20Y1 20Y2 20Y3
--------------- Amount in Rs. --------------
Revenue 960,000 880,000 700,000
Costs (240,000) (220,000) (290,000)
Net Cash Inflow 720,000 660,000 410,000
Discount factor 0.909 0.826 0.751
Present Value 654,545 545,457 308,037
Residual Value (50,000 x 0.751) = 37,566

Value in use = 654,545 + 545,457 + 308,037 + 37,566 = Rs.1,545,605
Fair value less cost to sell = Rs.1,400,000 – 2% of Rs.1.4 million = Rs.1,372,000
Recoverable amount = Rs. 1,545,605
Carrying value = Rs.1,800,000
Impairment loss = Rs.254,395

Example 06: Indus Pharma Limited (IPL)

Question: On 1 July 20X4, Indus Pharma Limited (IPL) received a government grant of Rs. 280
million to setup a plant in an under-developed rural area. The grant is repayable in full if the
conditions attached to the grant are not met for a period of five years from the date of
commencement of the production. At the inception, it was highly probable that IPL would comply
with the conditions for the required period.
IPL incurred total cost of Rs. 630 million on plant and it started production on1 January 20X5.
Useful life of the plant was estimated at 7 years. IPL deducted government grant in arriving at the
carrying amount of the asset.
In January 20X9, IPL showed its inability to comply with the conditions attached to the grant and
regulatory authority issued a notice to IPL for repayment of the grant in full. Accordingly, the grant
was repaid by IPL.
In view of repayment of the grant, IPL carried out an impairment review of the plant on 31 December
20X9. Net annual cash inflows for the remaining life of the plant have been estimated at Rs. 90
million and Rs. 80 million for 20Y0 and 20Y1 respectively. These cash inflows are net of annual
interest and maintenance cost of Rs. 10 million and Rs. 6 million respectively for both years.
Applicable discount rate is 12%.
On the date of impairment review, the existing plant can be sold in the local market for Rs. 160
million. Estimated cost of disposal would be Rs. 5 million.
Required:
Prepare journal entries for the year ended 31 December 20X9 in respect of the above information.
(Show all necessary workings. Narrations are not required)
Answer:
Indus Pharma Limited
General Journal
Debit Credit
Date Description
Rs. in million
Jan. 20X9 Plant 280
Cash/Bank 280
Jan. 20X9/ Depreciation expense/Profit or loss 280÷7×4 160

31-12-20X9 Accumulated depreciation - Plant 160
31-12-20X9 Depreciation expense 630÷7 90

Accumulated depreciation - Plant 90
31-12-20X9 Impairment loss (W-1) 19

Accumulated impairment - Plant 19

W-1: Impairment review as on 31 December 20X9 Rs. in million

Year Net inflows Discounting at 12% Present value
20Y0 (90+10) 100 0.8929 89
20Y1 (80+10) 90 0.7972 72
Value in use 161
Fair value less cost to sell 160–5 155
Recoverable amount (Higher of both) 161
WDV of the plant as on 31 December 20X9 630÷7×2 180

Impairment loss 180–161 19
.
Example 07: Harappa Industries

Question: Following information pertain to property, plant and equipment of Harappa Industries
Limited (HIL) for the year ended 30 June 20Y0:
(i) Balance as on 30 June 20X9
Assets Cost/revalued Accumulated Revaluation Depreciation Useful
amount depreciation surplus method life/rate
----------- Rs. in '000 -----------

Land* 100,000 - - - Infinite
Buildings 70,000 14,000 16,000 Straight line 20 years
Plant 180,000 60,000 - Straight line 15 years
Vehicles 8,800 4,000 - Reducing balance 20%
*An amount of Rs. 12 million had been charged to profit or loss upon previous revaluation
(ii) On 30 June 20Y0, the revalued amounts of the land and buildings were assessed by
Smart Consultant at Rs. 120 million and Rs. 35 million respectively.
(iii) Setting up of a new plant was commenced on 1 July 20X9 and substantially completed
on 29 February 20Y0. The plant was available for use on 1 April 20Y0 and immediately
put into use. Useful life of the plant was estimated at 10 years. Details of the cost
incurred are as under:
Description Payment date Rs. in '000
1st payment 1 August 20X9 12,000
2nd payment 1 October 20X9 48,000
3rd payment 29 February 20Y0 48,000
4th payment 31 July 20Y0 12,000
120,000

The cost of the plant was financed through an existing running finance facility with a
limit of Rs. 200 million carrying mark-up of 12% per annum. A government grant of Rs.
20 million related to the plant was received on 1 January 20Y0. The grant amount was
used for repayment of the running facility.
(iv) One of the vehicles had an engine failure on 1 January 20Y0 and its engine had to be
sold as scrap for Rs. 0.1 million. The vehicle had been acquired on 1 January 20X8 at
a cost of Rs. 2.5 million. 40% of the cost is attributable to its engine. Though the engine
of similar capacity was available at a cost of Rs. 1.2 million, the old engine was replaced
on 1 January 20Y0 with a higher capacity engine at a cost of Rs. 1.8 million.
(v) HIL uses cost model for subsequent measurement of property, plant and equipment
except for land and buildings.
(vi) HIL accounts for revaluation on net replacement value method and transfers the
maximum possible amount from revaluation surplus to retained earnings on an annual
basis.
(vii) HIL deducts government grant in arriving at the carrying amount of the asset.
Required:
In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ for inclusion in
HIL’s financial statements for the year ended 30 June 20Y0. (Comparatives figures and column
for total are not required).
Answer:
Harappa Industries Limited
Notes to the financial statements for the year ended 30 June 20Y0
1 Property, plant and equipment:

Land Buildings Plant Vehicles
------------------ Rs. in '000 ------------------
Gross carrying amount - opening 100,000 70,000 180,000 8, 800
Accumulated depreciation - (14,000) (60,000) (4,000)
Opening carrying amount 100,000 56,000 120,000 4,800
(W-
Additions - - 1)102,840 1,800
Depreciation for the year - (3,500) (14,571) (1,068)
(70,000÷20) (W-2) (W-4)
Disposals - - - (W-3) (648)
Revaluation
- Surplus (Bal.) 8,000 (W-5) (15,000) - -
- P&L 12,000 (Bal.) (2,500) - -
Closing carrying amount 120,000 35,000 208,269 4,884
Gross carrying amount - closing 120,000 35,000 282,840 9,600

Accumulated depreciation - - (74,571) (4,716)
Closing carrying amount 120,000 35,000 208,269 4,884

1.1 Land Buildings Plant Vehicles

Cost Cost
Measurement base Revaluation Revaluation model model
15/10
Useful life /depreciation rate Infinite 15 Years years 20%
Straight Straight
Depreciation method - Reducing bal.
line line
1.2 The last revaluation was performed on 30 June 20Y0 by Smart Consultants, an independent
firm of valuers.
1.3 Had revaluations not made, the carrying value of the land and buildings as on 30 June 20Y0
would have been Rs. 112 million (100+12) and Rs. 37.5 million (35,000+2,500) respectively.
W-1: Cost - Plant Rs. in '000

Cost 120,000
Government grant (20,000)
Capitalisation of borrowing cost:
1 August - 1 October 20X9 12,000×12%×2÷12 240
1 October - 31 December 20X9 60,000×12%×3÷12 1,800
1 January - 29 February 20Y0 (60,000–20,000)×12%×2÷12 800
2,840
102,840
W-2: Depreciation – Plant Rs. in '000

On opening balance 180,000÷15 12,000
On the new plant 102,840(W-1)÷10×3÷12 2,571
14,571
W-3: Written down value - Engine disposed off Rs. in '000

Cost 2,500×40% 1,000
Accumulated depreciation:
For the six months ended 30 June 20X8 1,000×20%×6÷12 100
For 20X8-20X9 (1,000–100)×20% 180
(1,000–
For the six months ended 31 December 20X9 280)×20%×6÷12 72
352
648
W-4: Depreciation – Vehicles Rs. in '000

On disposal of old engine (W-3) 72
On remaining opening balance [(8,800–1,000)–(4,000–280)]×20% 816
On addition of new engine 1,800×20%×6÷12 180
1,068

W-5: Revaluation surplus – Buildings Rs. in '000

Opening balance 16,000
Incremental depreciation 16,000÷16[(56,000÷70,000)×20] (1,000)
15,000
.

2 OBJECTIVE BASED QUESTIONS

01. If the fair value less costs to sell cannot be determined
(a) The asset is not impaired.
(b) The recoverable amount is the value-in-use.
(c) The net realizable value is used.
(d) The carrying value of the asset remains the same.
02. Which TWO of the following could be an indication that an asset may be impaired according
to IAS 36 Impairment of Assets?
(a) Decrease in market interest rates
(b) Increase in market values for the asset
(c) Damage caused to the asset
(d) Management intention to reorganise the business
03. IAS 36 Impairment of Assets contains a number of examples of internal and external events
which may indicate the impairment of an asset.
In accordance with IAS 36, which of the following would definitely NOT be an indicator of the
potential impairment of an asset (or group of assets)?
(a) An unexpected fall in the market value of one or more assets

(b) Adverse changes in the economic performance of one or more assets
(c) A significant change in the technological environment in which an asset is employed
making its software effectively obsolete
(d) The carrying amount of an entity’s net assets being below the entity’s market
capitalisation
04. A fire at the factory on 1 October 20X6 damaged the machine, leaving it with a lower
operating capacity. The accountant considers that entity will need to recognise an impairment
loss in relation to this damage. The accountant has ascertained the following information at 1
October 20X6:
 The carrying amount of the machine is Rs.60,750.
 An equivalent new machine would cost Rs.90,000.
 The machine could be sold in its current condition for a gross amount of Rs.45,000.
Dismantling costs would amount to Rs.2,000.
 In its current condition, the machine could operate for three more years which gives it
a value in use figure of Rs.38,685.
What is the total impairment loss associated with the above machine at 1 October 20X6?
(a) Rs. Nil
(b) Rs.17,750
(c) Rs.22,065
(d) Rs.15,750

05. Which of the following is NOT an indicator of impairment?

(a) Advances in the technological environment in which an asset is employed have an
adverse impact on its future use.
(b) An increase in interest rates which increases the discount rate an entity uses.
(c) The carrying amount of an entity’s net assets is higher than the entity’s number of
shares in issue multiplied by its share price.
(d) The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount.
06. Cost of disposal are
(a) Incremental costs, directly attributable to the disposal of an asset, excluding finance
costs and income tax expense
(b) Incremental costs, directly attributable to the disposal of an asset, plus finance costs,
but excluding income tax expense
(c) Incremental costs, directly attributable to the disposal of an asset, plus finance costs
and income tax expense
(d) Incremental costs, directly attributable to the disposal of an asset, plus tax expense,
but excluding finance costs
07. An asset is impaired if:
(a) Its carrying amount equals the amount to be recovered through use (or sale) of the
asset
(b) Its carrying amount exceeds the amount to be recovered through use (or sale) of the
asset
(c) The amount to be recovered through use (or sale) of the asset exceeds its carrying
amount
(d) If it has been damaged
08. Value in use is:
(a) The market value
(b) The discounted present value of future cash flows arising from use of the asset and
from its disposal.
(c) The higher of an asset’s fair value less cost to sell and its market value.
(d) The amount at which an asset is recognized in the statement of financial position.
09. IAS 36 applied to which of the following assets:

(a) Inventories.
(b) Financial assets including property plant and equipment and intangible assets
(c) Assets held for sale.
(d) Property, plant, and equipment and intangible assets

10. In accordance with IAS 36 Impairment of Assets which of the following statements are true?
1. An impairment review must be carried out annually on all intangible assets.
2. If the fair value less costs to sell of an asset exceed the carrying amount there is no
need to calculate a value in use.
3. Impairment is charged to the statement of profit or loss unless it reverses a gain that
has been recognised in equity in which case it is offset against the revaluation
surplus.
(a) All three
(b) 1 and 2 only
(c) 1 and 3 only
(d) 2 & 3 only
11. What is the recoverable amount of an asset?
(a) Its current market value less costs of disposal
(b) The lower of carrying amount and value in use
(c) The higher of fair value less costs of disposal and value in use
(d) The higher of carrying amount and market value
12. A machine has a carrying amount of Rs. 850,000 at the year end of 31 March 20X9. Its market
value is Rs. 780,000 and costs of disposal are estimated at Rs. 25,000. A new machine would
cost Rs. 1,500,000. The company which owns the machine expects it to produce net cash flows
of Rs. 300,000 per annum for the next three years. The company has a cost of capital of 8%.
What is the impairment loss on the machine to be recognised in the financial statements at 31
March 20X9?
(a) Rs. 76,870
(b) Rs. 95,000
(c) Rs. 1,66,700
(d) Rs. 220,000
13. IAS 36 Impairment of Assets suggests how indications of impairment might be recognised.
Which TWO of the following would be external indicators that one or more of an entity's
assets may be impaired?
(a) An unusually significant fall in the market value of one or more assets
(b) Evidence of obsolescence of one or more assets
(c) A decline in the economic performance of one or more assets
(d) An increase in market interest rates used to calculate value in use of the assets

14. The following information relates to an item of plant.

 Its carrying amount in the statement of the financial position is Rs. 3 million.
 The company has received an offer of Rs. 2.7 million from a company in Karachi
interested in buying the plant.
 The present value of the estimated cash flows from continued use of the plant is Rs. 2.6
million.
 The estimated cost of transport the plant to Karachi is Rs. 50,000.
What is the amount of the impairment loss that should be recognised on the plant?
(a) Rs. 300,000
(b) Rs. 400,000
(c) Rs. 350,000
(d) Rs. 250,000
15. When calculating the estimates of the future cash flows, which of the following cash flows
should not be included?
(a) Cash flows from disposal.
(b) Income tax payments.
(c) Cash flows from the sale of assets produced by the asset.
(d) Cash outflows on the maintenance of the asset.
16. The following information relates to three assets held by a company:

Asset A Asset B Asset C
Rs. m Rs. m Rs. m
Carrying amount 200 100 80
Value in use 160 120 70
Fair value less cost to sell 180 130 60
What is the total impairment loss?
Rs. ___________
17. The following information relates to four assets held by the company:
A B C D
Rs. m Rs. m Rs. m Rs. m
Carrying amount 240 60 80 140
Value in use 160 140 160 40
Fair value less costs to sell 180 80 140 60
What is the total impairment loss?
Rs. ___________

18. A vehicle was involved in an accident exactly halfway through the year. The vehicle cost Rs.
10 million and had a remaining life of 10 years at the start of the year. Following the accident,
the expected present value of cash flows associated with the vehicle was Rs. 3.4 million and
the fair value less costs to sell was Rs. 6.5 million.
What is the recoverable amount of the vehicle following the accident?
Rs. ___________
19. Radium Limited (RL) acquired a non-current asset on 1 October 20X9 at a cost of Rs. 100
million which had a useful life of ten years and a nil residual value. The asset had been correctly
depreciated up to 30 September 2024.
At that date the asset was damaged and an impairment review was performed. On 30
September 2024, the fair value of the asset less costs to sell was Rs. 30 million and the
expected future cash flows were Rs. 8.5 million per annum for the next five years.
The current cost of capital is 10% and a five year annuity of Rs. 1 per annum at 10% would
have a present value of Rs. 3.79.
What amount would be charged to profit or loss for the impairment of this asset for the year
ended 30 September 2024?
Rs. ___________
20. Metal Limited (ML) owns an item of plant which has a carrying amount of Rs. 248 million as at
1 April 20X3. It is being depreciated at 12.5% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in
sales. ML has estimated that the plant will be retired from use on 31 March 2017.
The estimated net cash flows from the use of the plant and their present values are:
Net cash flows Present

values
Rs.000 Rs.000
Year to 31 March 20X5 120,000 109,200
Year to 31 March 20X6 80,000 66,400
Year to 31 March 2017 52,000 39,000
252,000 214,600
On 1 April 20X4, Metric had an offer from a rival to purchase the plant for Rs. 200 million
At what value should the plant appear in Metric’s statement of financial position as at 31
March 20X4?
Rs. ___________
21. Which of the following is covered by IAS 36 – Impairment?
(a) Non-current assets held for sale
(b) Investment property carried at cost
(c) Investment property carried at fair value
(d) Inventories

22. Which of the following is not covered by IAS 36 – Impairment?

(a) Goodwill
(b) Investment property carried at cost
(c) Investment property carried at fair value
(d) Intangible assets
23. When should an impairment loss be recognised?

(a) Immediately
(b) Over a number of accounting periods
(c) At management’s discretion
(d) When requested by the entity’s auditors
24. Value in use is?

(a) The undiscounted present value of future cash flows expected to arise from continuing
use of asset, and from its disposal at the end of its useful life.
(b) The undiscounted future value of present cash flows expected to arise from continuing
(c) The discounted present value of future cash flows expected to arise from continuing
(d) The discounted present value of historical cash flows expected to arise from
continuing use of asset, and from its disposal at the end of its useful life.
25. Which of the following element is not considered while computing value in use?
(a) expectations about possible variations in the amount or timing of those future cash
flows
(b) the time value of money, represented by the current market risk-free rate of interest
(c) the price for bearing the uncertainty inherent in the asset
(d) estimated future restructuring cost
26. In measuring value in use, the discount rate used for discounting the cash flows should be
the?
(a) Pre-tax rate that reflects the market assessment of time value of money and risks
specific to the asset
(b) Pre-tax rate that reflects the market assessment of time value of money and risks
specific to the entity’s competitors
(c) Post-tax rate that reflects the entity’s assessment of time value of money and risks
(d) Pre-tax rate that reflects the entity’s assessment of time value of money and risks

27. When the recoverable amount of an asset is less than its carrying value in the Statement of
Financial Position, the asset is?
(a) in a revaluation deficit
(b) Flawed
(c) In negative equity
(d) Impaired
28. Which of the following is an internal indication of impairment?
(a) Decline in market value
(b) Worse economic performance than expected
(c) Increase in market interest rates
(d) Technological obsolescence
29. Which of the following is an external indication of impairment?
(a) Physical damage
(b) Worse economic performance than expected
(c) Increase in market interest rates
(d) Asset is part of a restructuring program
30. Under IAS 36, what is the recoverable amount of an asset?
(a) The lower of its cost and net realisable value
(b) The higher of fair value less costs of disposal and value in use
(c) The lower of net present value and cost
(d) The higher of net present value and cost
31. Which of the following is not permitted as a cost to sell under IAS 36?
(a) Cost to dismantle machine
(b) Auctioneers fees
(c) Standard wages for employees
(d) Transport costs for machine

32. If the fair value less costs to sell for an asset cannot be determined, then recoverable amount
is equal to its?
(a) Market value
(b) Fair value
(c) Value in use
(d) Replacement value
33. Which of the following is the best evidence of an asset's fair value less costs to sell?
(a) The carrying value of the asset
(b) The price in a binding sale agreement
(c) The disposal value of the asset in an arm`s length transaction
(d) An asset that is traded in an active market
34. When calculating the estimates of future cash flows which of the following cash flows should
not be included?
(a) Cash out flows on the maintenance of the asset
(b) Cash flows from disposal
(c) Cash flows from the sale of inventory produced by the asset
(d) Benefits from future restructuring
35. Under IAS 36 Impairment of Assets, if the fair value less costs to sell of an asset cannot be
determined then:
(a) the asset is not impaired
(b) the recoverable amount is the value in use
(c) the net realizable value is used
(d) the carrying value of the asset remains the same
36. Which TWO of the following would be external indicators that one or more of an entity's assets
may be impaired?
(a) An unusually significant fall in the market value of one or more assets
(b) Evidence of obsolescence of one or more assets
(c) A decline in the economic performance of one or more assets
(d) An increase in market interest rates used to calculate value in use of the assets

37. Which of the following future cash flows should NOT be included in the calculation of value in
use of an asset?
(a) Cash flows from disposal
(b) Income tax payments
(c) Cash flows from the sale of inventory produced by the asset
(d) Cash outflows on the maintenance of the asset
38. A plant has a carrying amount of Rs. 1,500,000 as at 31 December 20X9. Its fair value is Rs.
900,000 and costs of disposal are estimated at Rs. 50,000. A new plant would cost Rs.
2,500,000. Cash flows from the plant for the next four years are estimated at Rs. 350,000 per
annum. Applicable discount rate is 10%.
What is the approximate impairment loss on the plant to be recognised in the financial
statements as at 31 December 20X9?
(a) Rs. 650,000
(b) Rs. 390,000
(c) Rs. 1,000,000
(d) Nil
39. In measuring value in use, the discount rate used for discounting the cash flows should be the:
(a) pre-tax rate that reflects the market assessment of time value of money and risks
(b) pre-tax rate that reflects the market assessment of time value of money and risks
specific to the entity
(c) post-tax rate that reflects the entity’s assessment of time value of money and risks
(d) pre-tax rate that reflects the entity’s assessment of time value of money and risks
40. Which of the following future cash flows should NOT be included in the calculation of value in
use of an asset?
(a) Cash flows on maintaining the asset’s performance
(b) Cash flows on enhancing the asset’s performance
(c) Cash flows from continuing use of the asset
(d) Cash flows from disposal of the asset

41. When an impairment review is carried out, an impaired asset is measured at:
(a) Fair value less cost to sell
(b) Value in use
(c) Cost
(d) Recoverable amount
42. Which of the following would be an external indicator that an asset of an entity may be impaired?
(a) Increase in central bank discount rates
(b) Decline in economic performance of an asset
(c) Physical obsolescence of an asset
(d) Future restructuring plan of an asset

2 OBJECTIVE BASED ANSWERS

01. (b) The recoverable amount is higher of value in use and fair value less cost
to sell and in case fair value cannot be measured reliably, the recoverable
amount is value in use.
02. (c) & (d) A decrease in interest rates would reduce the discount applied to future
cash flows in calculating the value in use, therefore increasing the value in
use. An increase in market values will lead to the asset value increasing
rather than being impaired.
03. (d) The entity’s market capitalisation would not be reflected within the values
on the statement of financial position.
04. (b) Value in use of Rs.38,685 is lower than fair value less costs to sell of
Rs.43,000, so recoverable amount is Rs.43,000 and impairment is
Rs.60,750 – Rs.43,000 = Rs.17,750.
05. (d) Although the estimated net realisable value is lower than it was (due to fire
damage), the entity will still make a profit on the inventory and thus it is not
an indicator of impairment.
06. (a) Tax and finance costs are not cost of disposal.
07. (b) Asset may not be impaired even after damage. Impairment loss is excess
of carrying amount over recoverable amount.
08. (b) This is definition of value in use
09. (d) (a), (b) and (c) are excluded from scope of IAS 36 as the prudence
mechanism is already incorporated in the relevant standards of these
items.
10. (d) Item 1 is untrue. An annual impairment review is only required for intangible
assets with an indefinite life.
11. (c) The higher of fair value less costs of disposal and value in use.
12. (a)
Fair value – costs of disposal

(780,000 – 25,000) Rs. 755,000
Value in use:
300,000 × 1 / 1.08 277,780
300,000 × 1 / 1.082 257,200
300,000 × 1 / 1.083 238,150
Rs. 773,130
Recoverable amount is Rs. 773,130 and carrying amount is Rs. 850,000,

so impairment is Rs. 76,870.

13. (a & d) The other options are internal indicators of impairment.
14. (c)
Rs.
Fair value less costs of disposal (2.7m – 50,000) 2,650,000
Value in use 2,600,000
Recoverable amount is therefore: 2,650,000
Impairment loss (balancing figure) 350,000
Carrying amount 3,000,000
15. (b) Cash flows related to taxations are ignored while calculating value in use.
16. Rs. 30 million 20 + Nil + 10 = Rs. 30 million
17. Rs. 140 million 60 + Nil + Nil +80 = Rs. 140 million
18. Rs. 6.5 million The recoverable amount of an asset is the higher of its value in use
(being the present value of future cash flows) and fair value less costs to
sell. Therefore the recoverable amount is Rs. 6.5 million.
19. Rs. 17.785

million Rs. m
Cost 1 October 20X9 100
Depreciation (100 /10 x 5 years) (50)
Carrying amount 50
The recoverable amount is the higher of fair value less costs to sell (Rs.
30 million) and the value in use (Rs. 8.,5 x 3.79 = Rs. 32.215).
Recoverable amount is therefore Rs. 32.215.
Rs. m
Carrying amount 50
Recoverable amount (32.215)
Impairment to statement of profit or loss 17.785
20. Rs. Is the lower of its carrying amount (Rs. 217 million) and recoverable
214,600,000 amount (Rs. 214.6 million) at 31 March 20X5.
Recoverable amount is the higher of value in use (Rs. 214.6 million) and
fair value less costs to (Rs. 200 million).
Carrying amount = Rs. 217 million (248 million – (248 million × 12.5%))
Value in use is based on present values = Rs. 214.6 million
21. (b)

22. (c)
23. (a)
24. (c)
25. (d)
26. (a)
27. (d)
28. (b)
29. (c)
30. (b)
31. (c)
32. (c)
33. (b)
34. (d)
35. (b) the recoverable amount is the value in use
36. (a) & (d) An unusually significant fall in the market value of one or more assets & An
increase in market interest rates used to calculate value in use of the
assets
37. (b) Income tax payments
38. (b) Rs. 390,000
39. (a) pre-tax rate that reflects the market assessment of time value of money
and risks specific to the asset
40 (b) Cash flows on enhancing the asset’s performance
41 (d) Recoverable amount
42 (a) Increase in central bank discount rates


Head Office-Karachi: Chartered Accountants Avenue, Clifton, Karachi-75600
Phone: (92-21) 99251636-39, UAN: 111-000-422, Fax: (92-21) 99251626
Hyderabad Office: Ground Floor, State Life Building, Thandi Sarak, Near Giddu Chowk,
Hyderabad, Sindh.
Phone: (022) 2730161, e-mail: hyderabad@icap.org.pk
Sukkur Office: Admin Block Sukkur IBA, Airport Road, Sukkur
Phone: (92-71) 5804421, e-mail: sukkur@icap.org.pk
Quetta Office: Civic Business Center, Hali Road, Quetta Cantt
Phone: (92-81) 2865533, e-mail: quetta@icap.org.pk
Regional Office-Lahore: 155-156, West Wood Colony, Thokar Niaz Baig, Raiwind Road, Lahore
Phone: (92-42) 37515910-12, UAN: 111-000-422, e-mail: lahore@icap.org.pk
Islamabad Office: Sector G-10/4, Mauve Area, Islamabad
UAN: 111-000-422, Fax: (92-51) 9106095, e-mail: islamabad@icap.org.pk
Faisalabad Office: P- 3/33 East Canal road, Muhammadi Colony, Near Govt. College of Commerce Abdullahpur,
Opposite Nusrat Fateh Ali Khan under pass, Faisalabad
Phone: (92-41) 8531028, Fax: (92-41) 8712626, e-mail: faisalabad@icap.org.pk
Multan Office: 3rd Floor, Parklane Tower, Officers’ Colony, Near Eid Gaah Chowk, Khanewal Road, Multan.
Phone: (92-61) 6510511-6510611, Fax: (92-61) 6510411, e-mail: multan@icap.org.pk
Peshawar Office: House No. 30, Old Jamrud Road, University Town, Peshawar
Phone: (92-91) 5851648, Fax: (92-91) 5851649, e-mail: peshawar@icap.org.pk
Gujranwala Office: 2nd Floor, Gujranwala Business Center, Opp. Chamber of Commerce, Main G.T. Road, Gujranwala.
Phone: (92-55) 3252710, e-mail: gujranwala@icap.org.pk
Mirpur AJK Office: Basic Health Unit (BHU) Building Sector D, New City Mirpur, Azad Jammu and Kashmir
Phone: 05827-487170, e-mail: mirpur@icap.org.pk
Abbottabad Office: Yusef Jammal Plaza, Mansehra Road, Abbottabad
Phone: 0992-405515, e-mail: abbottabad@icap.org.pk
2022
FINANCIAL ACCOUNTING
AND REPORTING I
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2 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 451 The Institute of Chartered Accountants of Pakistan

 Objective and scope

1.1 Objective and scope

© Emile Woolf International 452 The Institute of Chartered Accountants of Pakistan

1.3 Stages in accounting for an impairment loss

1.4 Indications of impairment

External sources Internal sources

Significant changes in technology, markets, There are plans to discontinue or

1.5 Measuring recoverable amount

© Emile Woolf International 453 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 454 The Institute of Chartered Accountants of Pakistan

Illustration 01: Measurement of recoverable amount

© Emile Woolf International 455 The Institute of Chartered Accountants of Pakistan

1.6 Recognition & Accounting for impairment

Illustration 02: Measurement of recoverable amount

Statement of profit or loss 24,642

Accumulated impairment loss 24,642

Carrying amount of the machine on 31 December Year 3 Rs.

Impairment loss at the beginning of Year 4 of Rs.104,000 (Rs.204,000 – Rs.100,000). This

Depreciation charge in Year 4 of Rs.10,000 (= Rs.100,000 ÷ 10). The depreciation charge

© Emile Woolf International 456 The Institute of Chartered Accountants of Pakistan

Assets having revaluation surplus

Illustration 04: Measurement of recoverable amount

This is accounted for as follows:

Depreciation of impaired assets

Carrying amount on Rs.

© Emile Woolf International 457 The Institute of Chartered Accountants of Pakistan

An impairment loss of Rs.32,111 (Rs.34,000 Rs.1,889) will be taken to other comprehensive

The remaining impairment loss of Rs.104,000 (Rs.136,111 Rs.32,111) is recognised in the

1.7 Reversal of an impairment loss

© Emile Woolf International 458 The Institute of Chartered Accountants of Pakistan

Example: Reversal of impairment loss under Cost Model

© Emile Woolf International 459 The Institute of Chartered Accountants of Pakistan

31st December Year 5

1.8 Summary of the approach

© Emile Woolf International 460 The Institute of Chartered Accountants of Pakistan

EXAMPLE 01: ABA LIMITED

Statement of Profit or loss

Other comprehensive income

Statement of financial Position

Revaluation surplus [520,000 – 6,000] 514,000

© Emile Woolf International 461 The Institute of Chartered Accountants of Pakistan

Depreciation (1 Apr 20X5 to 30 Sep 20X5)

Depreciation (1 Oct 20X5 to 31 Mar 20X6)

EXAMPLE 02: HUSSAIN ASSOCIATES LTD

© Emile Woolf International 462 The Institute of Chartered Accountants of Pakistan

Statement of financial position

EXAMPLE 03: SKY-LINE LTD (SL)

(a) opening of a competing hotel nearby,

Carrying value of asset = Rs.300 million – [5 x (300 – 60) / 15 years]

© Emile Woolf International 463 The Institute of Chartered Accountants of Pakistan

EXAMPLE 04: PREMIER LIMITED (PL)

Carrying amount = Rs.217 million [248 m – (248 m x 12·5%)]

Impairment loss = Carrying amount – Recoverable amount

= Rs.217 million – Rs.214.6 million