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Appendix 1 Compliance with International Accounting Standards As at the date of issue of this Standard, compliance with this Standard will ensure conformity in all material respects with International Accounting Standard IAS 36, Impairment of Assets. Appendix 2 Illustrative Examples The appendix is illustrative only and does not form part of the standards. The purpose of the appendix is to illustrate the application of the standards to assist in clarifying their meaning. All the examples in this appendix assume the enterprises concerned have no transactions other than those described. Example 1 - Identification of Cash-Generating Units The purpose of this example is: to give an indication of how cash-generating units are identified in various situations; and to highlight certain factors that an enterprise may consider in identifying the cash-generating unit to which an asset belongs.
A - Retail Store Chain Background Store X belongs to a retail store chain M. X makes all its retail purchases through M's purchasing centre. Pricing, marketing, advertising and human resources policies (except for hiring X's cashiers and salesmen) are decided by M. M also owns 5 other stores in the same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in the same way as X. X and 4 other stores were purchased 5 years ago and goodwill was recognised. What is the cash-generating unit for X (X's cash-generating unit)?
Analysis In identifying X's cash-generating unit, an enterprise considers whether, for example: internal management reporting is organised to measure performance on a store-by-store basis; and the business is run on a store-by-store profit basis or on a region/city basis.
All M's stores are in different neighbourhoods and probably have different customer bases. So, although X is managed at a corporate level, X generates cash inflows that are largely independent from those of M's other stores. Therefore, it is likely that X is a cash-generating unit. If the carrying amount of the goodwill can be allocated on a reasonable and consistent basis to X's cash-generating unit, M applies the 'bottom up' test described in paragraph 82 of FRS 1362004. If the carrying amount of the goodwill cannot be allocated on a reasonable and consistent basis to X's cash-generating unit, M applies the 'bottom-up' and 'top-down' tests.
B - Plant for an Intermediate Step in a Production Process Background A significant raw material used for plant Y's final production is an intermediate product bought from plant X of the same enterprise. X's products are sold to Y at a transfer price that passes all margins to X. 80% of Y's final production is sold to customers outside of the reporting enterprise. 60% of X's final production is sold to Y and the remaining 40% is sold to customers outside of the reporting enterprise. For each of the following cases, what are the cash-generating units for X and Y?
Case 1: | X could sell the products it sells to Y in an active market. | | Internal transfer prices are higher than market prices. | Case 2: | There is no active market for the products X sells to Y. |
Analysis
Case 1 X could sell its products on an active market and, so, generate cash inflows from continuing use that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a separate cash-generating unit, although part of its production is used by Y (see paragraph 71 of FRS 1362004). It is likely that Y is also a separate cash-generating unit, Y sells 80% of its products to customers outside of the reporting enterprise. Therefore, its cash inflows from continuing use can be considered to be largely independent. Internal transfer prices do not reflect market prices for X's output. Therefore, in determining value in use of both X and Y, the enterprise adjusts financial budgets/forecasts to reflect management's best estimate of future market prices for those of X's products that are used internally (see paragraph 71 of FRS 1362004).
Case 2 It is likely that the recoverable amount of each plant cannot be assessed independently from the recoverable amount of the other plant because: the majority of X's production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y's products. Therefore, X cannot be considered to generate cash inflows that are largely independent from those of Y; and the two plants are managed together.
As a consequence, it is likely that X and Y together is the smallest group of assets that generates cash inflows from continuing use that arc largely independent.
C - Single Product Enterprise Background Enterprise M produces a single product and owns plants A, B and C. Each plant is located in a different continent. A produces a component that is assembled in either B or C. The combined capacity of B and C is not fully utilised. M's products are sold world-wide from either B or C. For example, B's production can be sold in Cs continent if the products can be delivered faster from B than from C. Utilisation levels of B and C depend on the allocation of sales between the two sites. For each of the following cases, what are the cash-generating units for A, B and C? Case 1: There is an active market for A's products. Case 2: There is no active market for A's products.
Analysis Case 1 It is likely that A is a separate cash-generating unit because there is an active market for its products (see Example B - Plant for an Intermediate Step in a Production Process, Case 1). Although there is an active market for the products assembled by B and C, cash inflows for B and C depend on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C be determined individually. Therefore, it is likely that B and C together is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent. In determining the value in use of A and B plus C, M adjusts financial budgets/forecasts to reflect its best estimate of future market prices for A's products (see paragraph 71 of FRS 1362004).
Case 2 It is likely that the recoverable amount of each plant cannot be assessed independently because: there is no active market for A's products. Therefore, A's cash inflows depend on sales of the final product by B and C; and although there is an active market for the products assembled by B and C, cash inflows for B and C depend on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can be determined individually.
As a consequence, it is likely that A, B and C together (i.e., M as a whole) is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent.
D - Magazine Titles Background A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price paid for a purchased magazine title is recognised as an intangible asset. The costs of creating magazine titles and maintaining the existing titles are recognised as an expense when incurred. Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments. The level of advertising income for a magazine title depends on the range of titles in the customer segment to which the magazine title relates. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for the same customer segment. What is the cash-generating unit for an individual magazine title?
Analysis It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, although titles are managed by customer segments, decisions to abandon titles are made on an individual title basis. Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent from one another and that each magazine title is a separate cash-generating unit.
E-Building Half-Rented to Others and Half-Occupied for Own Use Background M is a manufacturing company. It owns a headquarter building that used to be fully occupied for internal use. After down-sizing, half of the building is now used internally and half rented to third parties. The lease agreement with the tenant is for five years. What is the cash-generating unit of the building?
Analysis The primary purpose of the building is to serve as a corporate asset, supporting M's manufacturing activities. Therefore, the building as a whole cannot be considered to generate cash inflows that are largely independent of the cash inflows from the enterprise as a whole. So, it is likely that the cash-generating unit for the building is M as a whole. The building is not held as an investment. Therefore, it would not be appropriate to determine the value in use of the building based on projections of future market related rents.
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