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Example 2 - Calculation of Value in Use and Recognition of an Impairment Lossf In this example, tax effects are ignored. Background and Calculation of Value in Use At the end of 20X0, enterprise T acquires enterprise M for RM 10,000. M has manufacturing plants in 3 countries. The anticipated useful life of the resulting merged activities is 15 years. Schedule 1. Data at the end of 20X0
End of 20X0 | Allocation of purchase price | Fair value of identifiable assets | Goodwill(1) |
| RM | RM | RM | Activities in Country A | 3,000 | 2,000 | 1,000 | Activities in Country B | 2,000 | 1,500 | 500 | Activities in Country C | 5,000
____ | 3,500
____ | 1,500
____ | Total | 10,000 | 7,000 | 3,000 |
(1) Activities in each country are the smallest cash-generating units to which goodwill can be allocated on a reasonable and consistent basis (allocation based on the purchase price of the activities in each country, as specified in the purchase agreement).
T uses straight-line depreciation and amortisation over a 15-year life for the Country A assets and no residual value is anticipated. In 20X4, a new government is elected in Country A. It passes legislation significantly restricting exports of T's main product. As a result, and for the foreseeable future, T's production will be cut by 40%. The significant export restriction and the resulting production decrease requires T to estimate the recoverable amount of the goodwill and net assets of the Country A operations. The cash-generating unit for the goodwill and the identifiable assets of the Country A operations is the Country A operations, since no independent cash inflows can be identified for individual assets. The net selling price of the Country A cash-generating unit is not determinable, as it is unlikely that a ready buyer exists for all the assets of that unit. To determine the value in use for the Country A cash-generating unit (see Schedule 2), T; prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (years 20X5-20X9) approved by management; estimates subsequent cash flows (years 20X10-20X15) based on declining growth rates. The growth rate for 20X10 is estimated to be 3%. This rate is lower than the average long term growth rate for the market in Country A; and selects a 15% discount rate, which represents a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash-generating unit.
Recognition and Measurement of Impairment Loss The recoverable amount of the Country A cash-generating unit is RM1,360; the higher of the net selling price of the Country A cash-generating unit (not determinable) and its value in use (RM1,360). T compares the recoverable amount of the Country A cash-generating unit to its carrying amount (see Schedule 3). T recognises an impairment loss of RM840 immediately in the income statement. The carrying amount of the goodwill that relates to the Country A operations is eliminated before reducing the carrying amount of other identifiable assets within the Country A cash-generating unit (see paragraph 90 of FRS 1362004). Tax effects are acccounted for separately in acccordance with FRS 1122004, Income Taxes (see Example 3A).
Schedule 2. Calculation of the value in use of the Country A cash-generating unit at the end of 20X4 Year | Long-term growth rates | Future cash flows | Present value factor at 15% discount rate(3) | Discounted
future cash flows |
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| RM |
| RM | 20X5(n=1) |
| 230(1) | 0.86957 | 200 | 20X6 |
| 253(1) | 0.75614 | 191 | 20X7 |
| 273(1) | 0.65752 | 180 | 20X8 |
| 290(1) | 0.57175 | 166 | 20X9 |
| 304(1) | 0.49718 | 151 | 20X10 | 3% | 313(2) | 0.43233 | 135 | 20X11 | -2% | 307(1) | 0.37594 | 115 | 20X12 | -6% | 289(2) | 0.32690 | 94 | 20X13 | -15% | 245(2) | 0.28426 | 70 | 20X14 | -25% | 184(2) | 0.24719 | 45 | 20X15 | -67% | 61(2) | 0.21494 | 13
____ | Value in use |
|
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| 1,360 |
(1) Based on management's best estimate of net cash flow projections (after the 40% cut).
(2) Based on an extrapolation from preceding year cash flow using declining growth rates.
(3) The present value factor is calculated as k = 1/(1+a)n, where a = discount rate and n = period of discount
Schedule 3. Calculation and allocation of the impairment loss for the Country A cash-generating unit at the end of 20X4
End of 20X4 | Goodwill | Identifiable assets | Total |
| RM | RM | RM | Historical cost | 1,000 | 2,000 | 3,000 | Accumulated depreciation/ amortisation (20X1-20X4) | (267) | (533) | (800) | Carrying amount | 733 | 1,467 | 2,200 | Impairment Loss | (733)
____ | (107)
_____ | (840)
_____ | Carrying amount after impairment loss | 0 | 1,360 | 1,360 |
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