Determining Impairment Loss on Non-Current Asset of Dynamics Co. Ltd

BE130 (Current Issues In Financial Reporting)
Question 1
Dynamics Co. Ltd is a listed company that manufactures and distributes premium
security equipment. The company has acquired a non-current asset on 1 January 2016.
The company uses straight line method of depreciation and it is expected that the non-
current asset as acquired by the company has a useful life of five years. Straight line
method of depreciation charges depreciation at a fixed rate over the useful life of the
assets. The depreciation amount which is charged remains the same for each year.
Impairment refers to a loss in the value of assets when carrying amount exceeds the
recoverable amount of the asset. The assignment requires to determine either there is
any impairment loss on the asset.
$ 560k $ 890k $ 1,000k $ 1,100k
Bought Asset ($6 million, 5 years) Year End
Figure Showing Cash Flows
1 Jan 2016
31 Dec 2016
31 Dec 2017
31 Dec 2018
31 Dec 2019
31 Dec 2020

A. Carrying amount (CA) of non-current asset as at 31 December 2016
= Cost – Accumulated depreciation
= $6,000,000 - $1,200,000
= $4,800,000
The carrying amount of the asset is obtained by deducting the accumulated
depreciation charges which is $ 1,200,000 as per straight line method of depreciation
from total cost of the assets which is $ 6,000,000.
B. Establish the Recoverable Amount (RA)
Fair value less cost to sell (FVLCS) Value In Use (VIU)
(not given question)
PV of projected cash flows ($3,109,650)
C. As per the case study given in the question the company has earned positive
cash flows and with the use of cash flow given in the case study, Net Present Value
(NPV) and Impairment loss if any on the assets is to be calculated which is shown in the
table below:
Computation of Net Present Value
Particular
s
31st
December
2017
31st December
2018
31st
December
2019
31st December
2020 Total
$ $ $ $ $
Cash flows 560,000 890,000 1,000,000 1,100,000 3,550,000
Discountin
g Factors 0.952 0.907 0.864 0.823
Net
Present
Value 533,120 807230 864000 905300
(VIU)
3,109,650

Depreciation for the year ended 31 December 2016 = $6,000,000/5 years
= $1,200,000
As per the above table which shows the calculations the cash flow of the
company as predicted by the company is on an increasing trend. Cash flows shows the
cash inflow which is expected to be earned from the assets. The case study as given in
the question shows that the discounting rate as per the company is 5%. The Discounted
cash flow or the net present value is shown in the table above. The total of the
discounted cash inflows is shown at $ 3,109,650 which is also the recoverable amount
which can be expected out of the asset.
Carrying Amount > Recoverable Amount Impairment loss
CA ($4,800,000) > RA ($3,109,650) Impairment loss of ($1,690,350)
Dr Impairment Loss (expense) - P/L
Cr PPE (Balance sheet) - B/S
The impairment loss which arises on the asset as per the calculation in the
diagram given above shows a figure of $ 1,690,350. The impairment loss on the asset is
to be recorded as an expense in the statement of profit and loss account and also in the
balance sheet of the company. However as per the case of Dynamic Co ltd, the
impairment loss which is incurred by the company on its assets will be compensated by
the Government up to 20% of the amount of impairment loss. The amount which can be
received from the government is $338,070 which will lower the overall impairment loss
as suffered by the company.
The analysis of case study shows that there is an impairment loss on the asset as
the recoverable amount is less than the carrying amount of the asset. Moreover, the