|
Example 6 - Treatment of
Future Capital Expenditure
In this example, tax effects are
ignored.
Background
-
At the end of 20X0, enterprise F
tests a plane for impairment. The plane is a cash-generating unit.
It is carried at depreciated historical cost and its carrying amount
is RMI50,000.It has an estimated remaining useful life of 10 years.
-
For the purpose of this example,
it is assumed that the plane's net selling price is not
determinable. Therefore, the plane's recoverable amount is its value
in use. Value in use is calculated using a pre-tax discount rate of
14%.
-
Management approved budgets
reflect that:
-
in 20X4, capital expenditure of
RM25,000 will be incurred to renew the engine of the plane; and
-
this capital expenditure will
improve the performance of the plane by decreasing fuel
consumption.
-
At the end of 20X4, renewal costs
are incurred. The plane's estimated future cash flows reflected in
the most recent management approved budgets and a current discount
rate are the same as those estimated at the end of 20X0.
At the End of 20X0
Schedule 1 Calculation of the plane's value
in use at the end of 20X0
-
|
Year
|
Future cash flows(1)
|
Discounted at 14%
|
|
RM
|
RM
|
|
20X1
|
22,165
|
19,443
|
|
20X2
|
21,450
|
16,505
|
|
20X3
|
20,550
|
13,871
|
|
20X4
|
24,725(1)
|
14,639
|
|
20X5
|
25,325(2)
|
13,153
|
|
20X6
|
24,825 (2)
|
11,310
|
|
20X7
|
24,123 (2)
|
9,640
|
|
20X8
|
25,533 (2)
|
8,951
|
|
20X9
|
24,234 (2)
|
7,452
|
|
20X10
|
22,850 (2)
|
6,164
|
|
Value in use
|
|
121,128
|
(1) Excludes
estimated renewal costs reflected in management budgets.
(2) Excludes
estimated benefits expected from the renewal of the engine reflected
in management budgets.
-
The plane's carrying amount is
higher than its recoverable amount (value in use). Therefore, F
recognises an impairment loss for the plane.
Schedule 2. Calculation of the
impairment loss at the end of 20X0
|
Plane
RM
|
|
Carrying amount before impairment loss
|
150,000
|
|
Recoverable amount (Schedule 1)
|
121,128
|
|
Impairment loss
|
(28,872)
|
|
Carrying amount after impairment loss
|
121,128
|
Years 20X1-20X3
-
No event occurs that requires the
plane's recoverable amount to be re-estimated. Therefore, no
calculation of recoverable amount is required to be performed.
At the End of 20X4
-
The capital expenditure is
incurred. Therefore, in determining the plane's value in use, the
future benefits expected from the renewal of the engine are
considered in forecasting cash flows. This results in an increase in
the estimated future cash flows used to determine value in use at
the end of 20X0. As a consequence, in accordance with paragraphs
97-98 of FRS 1362004, the recoverable amount of the plane
is recalculated at the end of 20X4.
Schedule 3. Calculation of the plane's value in use at
the end of 20X4
-
|
Year
|
Future cash flows(1)
|
Discounted at 14%
|
|
RM
|
RM
|
|
20X5
|
30,321
|
26,597
|
|
20X6
|
32,750
|
25,200
|
|
20X7
|
31,721
|
21,411
|
|
20X8
|
31,950
|
18,917
|
|
20X9
|
33,100
|
17,191
|
|
20X10
|
27,999
|
12,756
|
|
Value in use
|
|
122,072
|
(1) Includes estimated benefits
expected from the renewal of the engine reflected in management
budgets.
-
The plane's recoverable amount
(value in use) is higher than the plane's carrying amount and
depreciated historical cost (see Schedule 4). Therefore, K reverses
the impairment loss recognised for the plane at the end of 20X0 so
that the plane is carried at depreciated historical cost.
Schedule 4. Calculation of the reversal of the
impairment loss at the end of 20X4
-
|
Plane
RM
|
|
Carrying amount at the end of 20X0
(Schedule 2)
|
121,128
|
|
End of 20X4
|
|
|
Depreciation charge (20X1 to
20X4-Schedule 5)
|
(48,452)
|
|
Renewal expenditure
|
25,000
|
|
Carrying amount before reversal
|
97,676
|
|
Recoverable amount (Schedule 3)
|
122,072
|
|
Reversal of impairment loss
|
17,324
|
|
Carrrying amount after reversal
|
115,000
|
|
Carrying amount: depreciated
historical cost (Schedule 5)
|
115,000(1)
|
(1) The value in use of the plane
exceeds what its carrying amount would have been at depreciated
historical cost. Therefore, the reversal is limited to an amount that
does not result in the carrying amount of the plane exceeding
depreciated historical cost.
Schedule
5. Summary of the carrying amount of the plane
-
|
Year
|
Depreciated historical cost
|
Recoverable amount
|
Adjusted depreciation charge
|
Impairment loss
|
Carrying amount after impairment
|
|
RM
|
RM
|
RM
|
RM
|
RM
|
|
20X0
|
150,000
|
121,128
|
0
|
(28,872)
|
121,128
|
|
20X1
|
135,000
|
n.c.
|
(12,113)
|
0
|
109,015
|
|
20X2
|
120,000
|
n.c.
|
(12,113)
|
0
|
96,902
|
|
20X3
|
105,000
|
n.c.
|
(12,113)
|
|
84,789
|
|
20X4
|
90,000
|
|
(12,113)
|
|
|
|
Renewal
|
25,000
|
|
-
|
|
|
|
115,000
|
122,072
|
(12,113)
|
17,324
|
115,000
|
|
20X5
|
95,833
|
n.c.
|
(19,167)
|
0
|
95,833
|
n.c. = not calculated as there is no indication that
the impairment loss may have increased/ decreased.
|
Our Standards 
