ExpertMedium2 marksMultiple Choice
ACCA · Question 04 · Impairment of Assets
Section A
MetroWater, a public utility, operates a water treatment plant with a carrying amount of $5.2 million. Due to new environmental regulations, its capacity is restricted. The plant could be sold to a neighboring municipality for $4.5 million, with legal and transfer costs of $200,000. Alternatively, MetroWater can continue using it, generating discounted future cash flows of $4.6 million. What is the impairment loss to be recognized under IAS 36?
Section A
MetroWater, a public utility, operates a water treatment plant with a carrying amount of $5.2 million. Due to new environmental regulations, its capacity is restricted. The plant could be sold to a neighboring municipality for $4.5 million, with legal and transfer costs of $200,000. Alternatively, MetroWater can continue using it, generating discounted future cash flows of $4.6 million. What is the impairment loss to be recognized under IAS 36?
Answer options:
A.
$700,000
B.
$600,000
C.
$900,000
D.
$0
How to approach this question
Determine the Recoverable Amount (higher of Fair Value Less Costs of Disposal and Value in Use). Then compare it to the Carrying Amount.
Full Answer
B.$600,000✓ Correct
Under IAS 36, Recoverable Amount is the higher of Fair Value Less Costs of Disposal (FVLCOD) and Value in Use (VIU). FVLCOD = $4.5m - $0.2m = $4.3m. VIU = $4.6m. Therefore, Recoverable Amount = $4.6m. Impairment Loss = Carrying Amount ($5.2m) - Recoverable Amount ($4.6m) = $0.6m ($600,000).
Common mistakes
Selecting the lower of the two values for the recoverable amount, or forgetting to deduct the disposal costs from the fair value.
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