NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (IFRS – 5)

OBJECTIVE
1. To specify the accounting for assets held for sale, and the presentation and
disclosure of discontinued operations. In particular, the IFRS requires that the
assets held for sale to be measured at lower of carrying value and fair value
less cost to sell and depreciation on such assets to cease; and
2. Assets held for sale to be presented separately in the statement of financial
position and the results of discontinued operations should be presented
separately in the statement of comprehensive income.
SCOPE
The classification and presentation requirements of this IFRS apply to all recognized
non-current assets and to all disposal groups of an entity.
The measurement provisions of this IFRS will not apply to the following assets: -
1. Deferred tax assets (IAS 12)
2. Assets arising from employee benefits (IAS 19)
3. Financial assets (IFRS-9/IAS 39)
4. Non-current assets that are accounted for in accordance with the fair value
model (IAS 40)
5. Non-current assets measured at fair value less estimate cost of sale (IAS 41);
and
6. Contractual right under the Insurance Contract (IFRS 4)
The classification, presentation and measurement requirements under this IFRS
applicable to non-current asset classified as held for distribution to owners in their
capacity as owners.
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUP) AS HELD FOR SALE
An entity will classify a non-current asset (or disposal group) as held for sale if its
carrying value will be recovered principally from the sale and not from the
continuing use. The pre-conditions necessary to classify held for sale are as under: -
(a) The assets must be available for sale in its present condition (subject to usual
or customary terms);
(b) The sale is highly probable i.e.;
– Management are committed to a plan to sell the asset
– There is an active programme to locate a buyer; and
– The asset is being actively marketed
(c) The sale should be expected to complete within one year unless
circumstances or events beyond the entity’s control may extend the period
to complete the sale;
(d) It is unlikely that the plan will be significantly changed or will be withdrawn;
(e) Sale transactions include exchange of non-current assets for other non-
current assets;
(f) Non-current assets acquired with the intention of resale should be classified as
held for sale only if to be disposed off in one year from the acquisition date;
and
(g) If any non-current asset meet the criteria of an asset held for sale after the
statement of financial position date but before the authorization for issuance
of financial statements, the entity shall only disclose (non-adjusting event)
NON-CURRENT ASSETS THAT ARE TO BE ABANDONED
An entity will not classify a non-current asset (disposal group) to be abandoned from
use as held for sale because its carrying amount will be recovered from use. Non-
current assets to be abandoned include non-current assets (disposal group) to be
used to end of their useful life or that are to be closed rather than sold (Exclude
temporary abandonment).
NON-CURRENT ASSET DISTRIBUTED TO OWNERS
A non-current asset (or disposal group) is classified as held for distribution to owners
when the entity is committed to distribute the asset (or disposal group) to the
owners. For this to be the case the assets must be available for immediate
distribution in their present condition and the distribution must be highly probable.
For the distribution to be highly probable, actions to complete the distribution must
have been initiated and should be expected to be completed within one year from
the date of classification. Actions required to complete the distribution should
indicate that it is unlikely that significant changes to the distribution will be made or
that the distribution will be withdrawn. The probability of shareholders’ approval (if
required in the jurisdiction) should be considered as part of the assessment of
whether the distribution is highly probable.
MEASUREMENT OF NON-CURRENT ASSETS (DISPOSAL GROUP) CLASSIFIED AS HELD FOR
SALE
The non-current assets held for sale should be stated at the lower of carrying value
or fair value less costs to sell.
An entity shall measure a non-current asset (or disposal group) classified as held for
distribution to owners at the lower of its carrying amount and fair value less costs to
distribute.
When the sale is expected to occur after one year the entity shall measure the costs
to sell at present value and any increase in present value of costs to sell shall be
charged to profit and loss account as financing cost.
Immediately before the initial classification of the asset or disposal group as held for
sale, the carrying amount will be determined according to other applicable IFRS.
On subsequent re-measurement of any asset or liability of a disposal group not
covered under this IFRS should continue to be measured other applicable IFRS.
RECOGNITION OF IMPAIRMENT LOSSES AND REVERSALS
The entity shall recognize the impairment loss for initial or subsequent write
down of asset (or disposal group) to fair value less costs to sell.
The entity will recognize gain of any increase in fair value up to the
cumulative impairment loss recognized under this IFRS or IAS –36
The impairment loss (subsequent gain) recognized for a disposal group shall
reduce (or increase) the carrying value in a group in the order of allocation
as per IAS –36
Any impairment loss not recognized up till the sale date will be recognized at
the time of de-recognition
Depreciation will cease from the date when the asset is recognized for sale
CHANGES TO PLAN OF SALE
If the entity changes its plan to sell the asset (disposal group), the asset shall cease
to be classified as held for sale and will be measured at the lower of: -
Its carrying value before the asset (disposal group) was classified as held for
sale adjusted against the depreciation, amortization or revaluation that
would have been recognized had the asset (disposal group) not classified as
held for sale, and
Its recoverable amount at the date of the subsequent decision not to sell
PRESENTATION AND DISCLOSURES
An entity shall present and disclose information that enables users of the financial
statements to evaluate the financial effects of discontinued operations and
disposals of non-current assets (or disposal groups).
Assets classified as held for sale must be presented separately on the face of the
statement of financial position under the heading of current assets.
DISCONTINUED OPERATIONS
A discontinuing operation is a component of an enterprise that either has been
disposed of or is classified as held for sale, and:
(a) Represents a separate major line of business or geographical area of
operations;
(b) Is part of a single coordinated plan to dispose of a separate major line of
business or geographical area of operations or
(c) Is a subsidiary acquired exclusively with a view to resale
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes from the rest of the
entity.
PRESENTATION IN THE STATEMENT OF COMPREHENSIVE INCOME
An entity shall disclose for the current period and prior period: -
(a) A single amount on the face of the statement of comprehensive incomes
comprising the following: -
The post tax profit or loss of discontinued operations and
The post tax gain or loss recognized on the measurement to the fair
value less costs to sell of the asset or disposal group constituting the
discontinuing operations
(b) An analysis of the single amount in a) into: -
The revenue, expenses and pre-tax profit or loss of discontinued
operations;
The related income tax expense as required by IAS –12
The gain or loss recognized on the measurement of fair value less costs
to sell or on the disposal of the assets or disposal group constituting
discontinued operations
The related tax expense as required by IAS –12
The analysis may be presented on the face of the statement of comprehensive
income or in the notes. The analysis is not required for newly acquired subsidiaries
held for sale.
PRESENTATION IN THE CASH FLOW STATEMENT
The net cash flows attributable to operating, investing and financing activities of the
discontinued operations. The analysis is not required for newly acquired subsidiaries.
PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION
1. An entity shall present either on the face or in the notes a non-current asset
classified as held for sale and the assets / liabilities of a disposal group
classified as held for sale separately from other assets/liabilities in the
statement of financial position.
2. Those assets and liabilities should not be offset against each other and
presented as a single amount.
3. An entity should also disclose any gain / loss related to assets/liabilities held for
sale which is recognized directly into equity.
4. The analysis is not required for newly acquired subsidiaries held for sale.
5. An entity shall not disclose/represent amount of assets held for sale in the
statement of financial position for prior periods to reflect classification in the
statement of financial position for the latest periods presented.
ADDITIONAL DISCLOSURES
An entity shall separately disclose the adjustments to amounts previously presented
discontinued operations in a prior period. The examples of adjustments are: -
 The resolution of uncertainties that arises from the terms of disposal
transaction (purchase price)
The resolution of uncertainties that arises from the and are directly related to
the operations of the component before its disposal (environmental and
product warranty obligations)
The settlement of employee benefit obligations provided that the settlement
is directly related to the disposal transaction.
If an entity ceases to classify a component of an entity as held for sale, the result of
operations of the component previously presented in discontinued operations shall
be reclassified and included in income from continuing operations for all the periods
presented. The amounts of prior periods shall be described as having been re-
presented.
An entity shall also disclose the following for assets held for sale/sold.
a) a description of the non-current assets
b) a description of the facts and circumstances of the sale, or leading to the
expected disposal, and the expected manner and time of that disposal
c) if applicable, the segment in which the non-current asset (or disposal group)
is presented in accordance with IFRS-8.

Illustrations of statement of comprehensive income presentation

KHAN LIMITED
20X6
Rs.
Continuing operations
Revenue X
Cost of sales (X)
____

Gross profit X
Distribution costs (X)
Administration expenses (X)
____

Profit from operations X

Finance costs (X)
____

Profit before tax X

Income tax expenses (X)
____

Profit for the period from continuing operations X

Discontinued operations
Profit for the period from discontinued operations* X
____

Total profit for the period X

____

Attributable to: -
Owners of the parent
Profit for the period from continuing operations x

Profit for the period from discontinued operations x

Profit for the period attributable to owners of the parent xx

Non-controlling interests
Profit for the period from continuing operations x

Profit for the period from discontinued operations x

 Profit for the period attributable to non-controlling interest xx

xxx

PRACTICE QUESTIONS
Q.1
The Board of Directors of Kids Limited decided to dispose off, one of their segment
“Boss”. On 10th May 2002, when the assets and liabilities of “Boss” were Rs. 5,250,000
and Rs. 750,000 respectively, the approval and announcement of disposal was
made. The net recoverable amount of the assets was determined as Rs. 4,250,000.

On March 31, 2003, when the carrying amount of net assets was Rs. 3,500,000 Kids
Limited signed a legally binding contract to sell “Boss”. The sale is expected to be
completed by July 31, 2003. The recoverable amount of the net assets as on March
31, 2003 was Rs. 3,000,000. The process requires incurrence of additional cost of Rs.
1,500,000 payable by July 31, 2003. The operations of “Boss” continued throughout
2002 – 2003.
Other data of Kids Limited includes:
2002 – 2003 2001 – 2002
Rs. Rs.
Revenue 7,000,000 7,000,000
Operating expenses 4,500,000 4,600,000
Interest expenses 1,250,000 750,000
Boss’s financial data included in the above was
2002 – 2003 2001 – 2002
Rs. Rs.
Revenue 2,000,000 2,500,000
Operating expenses 1,500,000 1,350,000
Interest expenses 250,000 250,000
The corporate tax rate is 35%.
Required:
The income statement for Kids Limited for the year ended June 30, 2003 and 2002, in
the light of IFRS 5 – Non-current asset held for sale and discontinued operation.
(08)
Q.2
Describe how users of financial statements benefit from information relating to
discontinued operations; and briefly explain the main disclosures in respect of
discontinued operations. (05)
Q.3
Being the financial consultant of Insha Chemicals Limited (ICL), a listed company,
you have been approached to advise on certain accounting issues.
Accordingly, you are required to explain how the following transactions should be
disclosed in ICL’s financial statements for the year ended June 30, 2009 in
accordance with International Financial Reporting Standards:
(a) In a board meeting held on January 1, 2009, the board of directors showed
concern over the poor results of one of the company’s cash generating unit,
Lahore Division (LD). It was principally decided in the meeting that this division
should be discontinued.
ICL’s CEO announced the closure of LD in a press conference held on
February 15, 2009. He also informed that negotiations to sell the entire division
are in progress and the sale is expected to be finalized within few months.
 On June 14, 2009, the CEO reported to the board of directors that
negotiations with Bashir Limited are proceeding well and the disposal of LD is
expected to materialize before July 31, 2009. However, it is estimated that the
assets would be sold at 95% of their fair value. (08)
Q-4
Global Air Limited (GAL) owns 100% equity in Moon (Private) Limited (MPL). On 1 July
2013, GAL decided to dispose of 90% equity in MPL. It is expected that the sale will
be finalised by 30 June 2014 at an estimated sale price of Rs. 140 million with an
estimated cost to sell of Rs. 3.5 million. Relevant information pertaining to MPL is as
under:
(i) Assets and liabilities as of 30 June 2013:
Rs. in million
Non-current assets 195.00
Current assets 50.00
Liabilities 90.00
(ii) It is estimated that MPL's trade debtors amounting to Rs. 6 million will not be
recovered; whereas provisions included in the liabilities amounting to Rs. 8
million are no more required.
(iii) MPL's net loss after tax for the nine months period ended 30 June 2013 was Rs.
30 million.
(iv) During the period 1 July 2013 to 30 September 2013, liabilities amounting to Rs.
26 million were paid and current assets of Rs. 18 million were recovered.
Goodwill of MPL as per the consolidated statement of financial position of GAL as at
30 September 2012 amounted to Rs. 15 million.
GAL had incurred expenses amounting to Rs. 1.5 million, for disposal of the equity up
to 30 September 2013.
Required:
Prepare relevant extracts from the consolidated statements of financial position and
comprehensive income of GAL for the year ended 30 September 2013, in
accordance with IFRS. (12)
ANSWERS
A-1
Kids Limited
Statement of comprehensive income
For the year ended June 30, 2003
2003 2002
Rs. Rs.
Revenue 5,000,000 4,500,000
Operating expenses (3,000,000) (3,250,000)
Operating profit 2,000,000 1,250,000
Interest expenses (1,000,000) (500,000)
Profit before tax 1,000,000 750,000
Tax expense (350,000) (262,500)
Profit after tax-continuing operations 650,000 487,500
Profit after tax-discontinuing operations (W-1) (1,137,500) 422,500
Loss / after tax (487,500) 910,000
W-1
Profit after tax from discontinuing operation
Revenue 2,000,000 2,500,000
Operating expenses (1,500,000) (1,350,000)
Operating profit 500,000 1,150,000
Interest expenses (250,000) (250,000)
Impairment loss on re-measurement (2,000,000) (250,000)
(Loss)/Profit before tax (1,750,000) 650,000
Tax saving/(expense) 612,500 (227,500)
Profit after tax-discontinuing operations (1,137,500) 422,500
W-2 Impairment loss
Carrying value of net assets (5,250,000-750,000) 3,500,000 4,500,000

Fair value less selling expenses 2003 (3,000,000-1,500,000) 1,500,000 4,250,000

Impairment loss 2,000,000 250,000

A-2
The separate presentation of discontinued operation in statement of comprehensive
income provides the information for consequential effect on earnings of the
company in future because of disposal of operation. This information also enhances
the user’s ability to forecast future cash flows and earnings of the company.
An entity shall disclose for the current period and prior period: -
(a) A single amount on the face of the statement of comprehensive incomes
comprising the following: -
The post tax profit or loss of discontinued operations and
The post tax gain or loss recognized on the measurement to the fair
value less costs to sell of the asset or disposal group constituting the
discontinuing operations
(b) An analysis of the single amount in a) into: -
The revenue, expenses and pre-tax profit or loss of discontinued
operations;
The related income tax expense as required by IAS –12
 The gain or loss recognized on the measurement of fair value less costs
to sell or on the disposal of the assets or disposal group constituting
discontinued operations
The related tax expense as required by IAS –12
The analysis may be presented on the face of the statement of comprehensive
income or in the notes. The analysis is not required for newly acquired subsidiaries
held for sale.
PRESENTATION IN THE CASH FLOW STATEMENT
The net cash flows attributable to operating, investing and financing activities of the
discontinued operations. The analysis is not required for newly acquired subsidiaries.
PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION
6. An entity shall present either on the face or in the notes a non-current asset
classified as held for sale and the assets / liabilities of a disposal group
classified as held for sale separately from other assets/liabilities in the
statement of financial position.
7. Those assets and liabilities should not be offset against each other and
presented as a single amount.
8. An entity should also disclose any gain / loss related to assets/liabilities held for
sale which is recognized directly into equity.
9. The analysis is not required for newly acquired subsidiaries held for sale.
10. An entity shall not disclose/represent amount of assets held for sale in the
statement of financial position for prior periods to reflect classification in the
statement of financial position for the latest periods presented.
ADDITIONAL DISCLOSURES
An entity shall separately disclose the adjustments to amounts previously presented
discontinued operations in a prior period. The examples of adjustments are: -
The resolution of uncertainties that arises from the terms of disposal
transaction (purchase price)
The resolution of uncertainties that arises from the and are directly related to
the operations of the component before its disposal (environmental and
product warranty obligations)
The settlement of employee benefit obligations provided that the settlement
is directly related to the disposal transaction.
If an entity ceases to classify a component of an entity as held for sale, the result of
operations of the component previously presented in discontinued operations shall
be reclassified and included in income from continuing operations for all the periods
presented. The amounts of prior periods shall be described as having been re-
presented.
An entity shall also disclose the following for assets held for sale/sold.
d) a description of the non-current assets
e) a description of the facts and circumstances of the sale, or leading to the
expected disposal, and the expected manner and time of that disposal
f) if applicable, the segment in which the non-current asset (or disposal group)
is presented in accordance with IFRS-8.
A-3
A 3 (a)
ICL should classify LD as a disposal group because LD's carrying amount is to be
recovered through a sale transaction rather than continuing use.
This is an adjusting event because the following conditions specified in the IFRS 5
have been met prior to year-end:
(i) The disposal group is available for sale in its present condition. (No
changes/alterations are intended to be made in the assets prior to the sale)
(ii) The sale is highly probable on account of management's intention,
negotiation, price is reasonable in relation to its fair value, sale is expected
within one year and no change in plan is expected.
Consequently, LD should be recorded as "held for sale" in ICL's financial statements
and the related disclosures should be as follows:
(i) A single amount in the Statement of Comprehensive Income comprising the
total of
• the post tax profit or loss of discontinued operation and
• the post tax gain or loss recognized on the measurement to fair value less
costs to sell.
(ii) An analysis of the single amount referred to in (i) above, into:
• The revenue, expenses and pre-tax profit or loss of discontinued
operations;
• The gain or loss recognized on the measurement to fair value less costs to
sell.
• The related income tax expense bifurcating the tax relating to:
o The profit or loss from ordinary activities of the discontinued
operation for the period, together with the corresponding amounts
for each prior period presented;
o Gain or loss on discontinuance;
(iii) Net cash flows attributable to the operating, investing and financing activities
of the discontinued operations.
Additional disclosure
ICL shall disclose the following information in the notes in the period in which the
disposal group has been classified as held for sale:
(a) description of the disposal group;
(b) description of the facts and circumstances leading to the expected disposal,
and the expected manner and timing of that disposal
A-4
(i)
Global Air Group Limited
Extract of consolidated
As at 30 September

2013
Rs. in millions
Current assets
Assets directly associated with the subsidiary 209.70
classified as held for sale (IFRS 5) W-1

Equity and liabilities

Retained earnings W-1 153.70

Current liabilities
Liabilities directly associated with the subsidiary 56.00
classified as held for sale (IFRS 5) W-1
(ii)
Global Air Group Limited
Extract of consolidated statement of comprehensive income
As at 30 September
Loss from operations of the subsidiary held for sale (30+18.3) 48.30

W-1 Equity balances and impairment

Description Balance Adjustments Adjusted Impairment Transactions Balance
as at as at 30-6- equity allocation Jul-Sep as at
30-6- 2013 as at 30- 2013 30-9-
2013 6-2013 2013
Goodwill 15.00 -- 15.00 (15.00) --
Non - current 195.00 195.00 (3.30) 191.70
assets
Current 50.00 (6.00) 44.00 (26.00) 18.00
assets
209.70
Liabilities (90.00) 8.00 (82.00) (26.00) (56.00)
Net equity 170.00 2.00 172.00 (18.30) -- 153.70
Net equity @90% (172x90%) 154.80
Sales price net of cost (140-3.50) 136.50
to sell
Impairment 18.30
IMPAIRMENT OF ASSETS (IAS 36)

OBJECTIVE
The objective of this IAS is to set rules to ensure that the assets of an enterprise are
carried at no more than their recoverable amount.
SCOPE
It applies to all assets except: -
a) Inventories (IAS-2)
b) Construction contracts (IAS-11)
c) Deferred tax assets (IAS-12)
d) Assets arising from employee benefits (IAS-19)
e) Financial assets (IAS-32&39)
f) Investment property measured at fair value (IAS-40)
g) Non-current assets classified as held for sale (IFRS-5)
h) Biological assets covered in the scope of (IAS-41)
DEFINITIONS
Recoverable amount is the higher of an asset’s net selling price and its value in use.
Value in use is the present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the end of its useful life.
Net selling price the amount obtainable from the sale of an asset in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal
Costs of disposal are incremental costs directly attributable to the disposal of an
asset, excluding finance costs and income tax expense.
An impairment loss is the amount by which the carrying amount of an asset exceeds
its recoverable amount
A cash-generating unit is the smallest identifiable group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows
from other assets or groups of assets.
Corporate assets are assets other than goodwill that contribute to the future cash
flows of both the cash-generating unit under review and other cash-generating
units.
IDENTIFY THAT AN ASSET IS IMPAIRED
An enterprise should assess at the end of each reporting period whether there is an
indication that an asset may be impaired. If such indication exists the entity should
estimate the recoverable amount. Irrespective of any indication of impairment, an
entity shall also: -
a) Test in case of intangible assets having indefinite life or under development.
The intangible asset under development or recognized during the year must
be tested annually before it becomes available for use.
b) Test goodwill acquired in business combination for impairment annually
In assessing whether there is impairment in the asset, the entity at minimum considers
the following indications.
External sources of information
a) Asset’s market value has declined significantly more than expected;
b) Significant changes with an adverse effect in the technological, market,
economic or legal environment in which the enterprise operates;
c) Market interest rates or other market rates of return on investments have
increased during the period, and those increases are likely to affect the
discount rate used in calculating an asset’s value in use and decrease the
asset’s recoverable amount materially; and
d) The carrying amount of the net assets of the entity is more than its market
value.
INTERNAL SOURCES OF INFORMATION
a) Obsolescence or physical damage
b) Significant changes with an adverse effect in the extent to which, or manner
in which, an asset is used or is expected to be used. These changes include
plans to discontinue or restructure the operation to which an asset belongs.
c) Economic performance of an asset is worse than expected.
Other evidence from internal reporting may be: -
1) Cash flows for acquiring and maintaining the asset are significantly
higher than the originally budgeted;
2) A significant decline in budgeted net cash flows or operating profit, or
a significant increase in budgeted loss, flowing from the asset;
3) Actual cash flows are worst that the budgeted; and
4) Operating losses or net cash outflows when current period amounts
are aggregated with the budgeted amounts for the future
MEASURING RECOVERABLE AMOUNT
a) It is not always necessary to determine both an asset’s net selling price and its
value in use. For example, if either of these amounts exceeds the asset’s
carrying amount, the asset is not impaired and it is not necessary to estimate
the other amount.
b) If it is not possible to determine selling price then value in use should be taken
as recoverable value.
c) If asset is held for disposal then present value of cash flow from the use of
asset until its disposal are likely to be negligible, in this case recoverable
amount shall be equal to the net selling price.
d) Recoverable amount is determined for an individual asset. If the asset does
not generate cash flows independent from other assets. This asset is clubbed
to cash generating unit and impairment loss is calculated of this cash-
generating unit.
MEASUREMENT OF NET SELLING PRICE
(a) Price in Binding Sale Agreement less Disposal Cost.
(b) Cost of disposal includes legal costs, stamp duty and similar transaction taxes,
costs of removing the asset, and direct incremental costs to bring an asset
into condition for its sale.
MEASUREMENT OF VALUE IN USE
Estimating the value in use of an asset involves the following steps:
a) Estimating the future cash inflows and outflows to be derived from continuing
use of the asset and from its ultimate disposal; and
b) Applying the appropriate discount rate to these future cash flows.
BASIS FOR THE ESTIMATES OF FUTURE CASH FLOWS
1) Estimates of future cash flows should include:
(a) Projections of cash inflows from the continuing use of the asset;
(b) Projections of cash outflows that are necessarily incurred to generate
the cash inflows from continuing use of the asset.
(c) Net cash flows, if any to be received (or paid) for the disposal of the
asset at the end of its useful life.
2) To avoid double counting. Estimates of future cash flows do not include:
(a) Financial assets such as receivables;
(b) Payables, pensions or provisions.
3) Estimates of future cash flows should not include:
 (a) Cash inflows or outflows from financing activities; or
(b) Income tax receipts or payments.
DISCOUNT RATE
1) The discount rate should be a pre-tax rate
2) The enterprise may take into account the following rates:
(a) The enterprise’s weighted average cost of the capital
(b) The enterprise’s incremental borrowing rate; and
(c) Other market borrowing rates.
RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS
a) If the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset should be reduced to its recoverable amount.
That reduction is an impairment loss.
b) An impairment loss should be recognized as an expense in the income
statement immediately if the asset is carried under cost model. If the asset is
carried at revalued amount under another International Accounting
Standard, any impairment loss of a revalued asset should be treated as a
revaluation decrease. An impairment loss on a revalued asset is
recognized directly against any revaluation surplus for the asset to the extent
that the impairment loss does not exceed the revaluation surplus for that
same asset.
c) After the recognition of an impairment loss, the depreciation (amortization)
charge for the asset should be adjusted in future periods to allocate the
asset’s revised carrying amount, less its residual value (if any), on a systematic
basis over its remaining useful life.
CASH GENERATING UNIT
IDENTIFICATION OF THE CASH-GENERATING UNIT TO WHICH AN ASSET BELONGS
1) If there is any indication that an asset may be impaired, recoverable amount
should be estimated for the individual asset. If it is not possible to estimate the
recoverable amount of the individual asset, an enterprise should determine
the recoverable amount of the cash-generating unit to which the asset
belongs.
2) The recoverable amount of an individual asset cannot be determined if:
(a) The asset’s value in use cannot be estimated to be close to its net
selling price (for example, when the future cash flows from continuing
use of the assets cannot be estimated to be negligible); and
(b) The asset does not generate cash inflows from use that are
independent of those from other asset. In such cases, value in use and,
therefore recoverable amount, can be determined only for the asset’s
cash-generating unit.
Example
A mining enterprise owns private railways to support its mining activities. The
private railways could be sold only for scrap value and the private railway does
not generate cash inflows from continuing use that are largely independent of
the cash inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railway
because the value in use of the private railways cannot be determined and it is
probably different from scrap value. Therefore, the enterprise estimates the
recoverable amount of the cash-generating unit to which the private railway
belongs, that is, the mine as a whole.
3) An asset’s cash generating unit is the smallest group of assets that includes
the asset and that generates cash inflows from continuing use that are largely
independent of the cash inflows from other assets or groups of assets.
Example
A bus company provides services under contract with a municipality that
requires minimum service on each of five separate routes. Assets devoted to
each route and the cash flows from each route can be identified separately.
One of the routes operates at a significant loss.
Because the enterprise does not have the option to curtain any one bus
route, the lowest level of identifiable cash from continuing use that are largely
independent of the cash inflows from other asset or groups of assets is the
cash inflows generated by the five routes together. The cash-generating unit
for each route is the bus company as a whole.
4) If an for an asset or group of assets there exists an active market then the
asset or group of assets should be identified as a cash generating unit even if
the out is consumed internally.
5) Cash generating unit should be identified consistently from period to period
for the same asset unless a change is justified.
RECOVERABLE AMOUNT AND CARRYING AMOUNT OF CASH GENERATING UNIT
The recoverable amount of a cash-generating unit is the higher of the cash-
generating unit’s net selling price and value in use.
Carrying value of cash generating unit
The carrying amount of a cash-generating unit includes the carrying amount of only
those assets that can be attributed directly, or allocated on a reasonable and
consistent basis, to the cash-generating unit and that will generate the future cash
inflows estimated in determining the cash-generating unit’s value in use.
ALLOCATION OF THE FOLLOWING TO CASH GENERATING UNITS
A GOODWILL
1. Goodwill does not generate cash flows independently from other
assets or groups of asset and, therefore, the recoverable amount of
goodwill as an individual asset cannot be determined. If there is an
indication that goodwill may be impaired, recoverable amount is
determined for the cash-generating unit to which goodwill belongs.
2. For the purpose of impairment testing, goodwill acquired in a business
combination shall, from the acquisition date, be allocated to each of
the acquirer’s cash-generating units that are expected to benefit the
combination. Each unit or group of units to which the goodwill is so
allocated shall:
(a) Represent the lowest level within the entity at which the
goodwill is monitored for internal management purposes; and
(b) Not be larger than an operating segment in accordance with
IFRS 8.
B CORPORATE ASSET
1) Corporate assets e.g. building of a headquarters or a division of the
enterprise, EDP equipment or a research center. Key characteristics of
corporate asset are that they do not generate cash inflows
independently from other assets or groups of assets their carrying
amount cannot be fully attributed to the cash-generating unit under
review.
2) In testing a cash-generating unit for impairment, an enterprise should
identify all the corporate assets that relate to the cash-generating unit
 under review. For each identified corporate asset, an enterprise should
apply following tests.
(a) If the carrying amount of the corporate asset can be allocated
on a reasonable and consistent basis to the cash-generating
unit under review and shall compare the carrying amount of the
unit including portion of corporate asset with its recoverable
amount
(b) If the carrying amount of the corporate asset cannot be
allocated on a reasonable and consistent basis an entity shall: -
Compare the carrying amount of the unit excluding
corporate assets with its recoverable amount and
recognize any impairment loss;
Identify the smallest group of cash generating units that
includes the cash generating unit under review and to
which a portion of the carrying amount of the corporate
asset can be allocated on a reasonable basis; and
Compare the carrying amount of that group of cash
generating units with the recoverable amount and
recognize any impairment loss.
RECOGNITION OF IMPAIRMENT LOSS OF CASH-GENERATING UNIT
1) An impairment loss should be recognized for a cash-generating unit if, and
only if, its recoverable amount is less than its carrying amount. The impairment
loss should be allocated to reduce the carrying amount of the assets of the
unit in the following order:
(a) First, to goodwill allocated to the cash-generating unit (if any); and
(b) Then, to the other assets of the unit on a pro-rata basis based on the
carrying amount of each asset in the unit.
These reductions in carrying amounts should be treated as impairment losses
on individual assets.
2) In allocating in impairment loss, the carrying amount of an asset should not be
reduced below the highest of:
(a) Its net selling price (if determinable);
(b) Its value in use (if determinable); and
(c) Zero
The amount of the impairment loss that would otherwise have been allocated to the
asset should be allocated to the other assets of the unit on a pro-rate basis.
Reversal of impairment loss
1) An enterprise should assess at each balance sheet date whether there is any
indication that an impairment loss recognized for an asset in prior years may
no longer exist or may have decreased. If any such indication exists, the
enterprise should estimate the recoverable amount of that asset.
REVERSAL OF AN IMPAIRMENT LOSS FOR AN INDIVIDUAL ASSET
1) The increased carrying amount of an asset due to a reversal on impairment
loss should not exceed the carrying amount that would have determined (net
of amortization or depreciation) had no impairment loss been recognized for
the asset in prior years.
2) A reversal of an impairment loss been recognized as income immediately in
the income statement, unless the asset is carried at revalued amount under
another International Accounting Standard. Any reversal of an impairment
loss on a revalued asset should be treated as a revaluation increase under
that other International Accounting Standard.
3) A reversal of an impairment loss on a revalued asset is credited directly to
equity under the heading revaluation surplus. However, to the extent that an
impairment loss on the same revalued asset was previously recognized as an
expense in the income statement, a reversal of that impairment loss is
recognized, as income in the income statement.
3) After a reversal of an impairment loss is recognized, the depreciation
(amortization) charge for the asset should be adjusted in future periods to
allocate the asset’s revised carrying amount, less its residual value (if any), on
a systematic basis over its remaining useful life.
REVERSAL OF AN IMPAIRMENT LOSS FOR A CASH-GENERATING UNIT
1) A reversal of an impairment loss for a cash-generating unit should be
allocated to increase the carrying amount of the asset of the unit in the
following order:
(a) First, asset other than goodwill on a pro-rata basis based on the
carrying amount of each asset in the unit; and
(b) Reversal of an Impairment Loss for Goodwill: An impairment loss
recognized for goodwill shall not be reversed in a subsequent period.
DISCLOSURE
1) For each class of assets, the financial statements should disclose:
(a) The amount of impairment losses recognized in the income statement
during the period and the line item(s) of the income statement in
which those impairment losses are included;
(b) The amount of reversals of impairment losses recognized in the income
statement during the period and the line item(s) the income statement
in which those impairment losses are reversed;
(c) The amount of the impairment losses recognized directly in equity
during the period; and
(d) The amount of reversals of impairment losses recognized directly in
equity during the period.
4) An enterprise that applies IAS 14, Segment Reporting, should disclose the
following for each reportable segment based on an enterprise’s primary
format (as defined in IAS 14):
(a) The amount of impairment losses recognized in the income statement and
directly in equity during the period; and
(b) The amount of reversal of impairment losses recognized in the income
statement and directly in equity during the period.
PAST PAPERS
Q.1
List down the conditions that the enterprise should consider in assessing that an
impairment loss previously recognized might no longer exist. (05)
Q.2
3S Service Limited has an asset that is being reviewed for possible impairment in
value. The cost of the asset is Rs. 26 million with a salvage value of Rs.2 million and a
remaining useful life of 4 years. The asset was being depreciated applying straight
line method and estimated useful life of 6 years. This asset is a cash generating asset
with the following expected cash flows:
Year Rs.
2005 – 06 6.0 million
2006 – 07 5.0 million
2007 – 08 4.0 million
2008 – 09 3.0 million
The company uses a discount rate of 10% and presently, the asset has a market
value of Rs.15 million. It is expected that the cost of disposal will be Rs.0.8 million.
Calculate impairment loss as at June 30, 2005 under each of the following
assumptions:
(a) The company will continue to use this asset in the future.
(b) The company intends to dispose of the asset in the coming year. (08)
Q.3
Ghalib Limited manufactures three products X, Y and Z. The management of the
company considers plants relating to each product as a separate Cash-Generating
Unit (CGU). The company has three Corporate Assets viz. a building, PABX system
and a computer network. On June 30, 2007, the assets were valued as under:

Carrying Recoverable
Amount* Amount*
Rupees Rupees
Cash-Generating Units excluding Corporate
Assets
Plant 1 – for Product X 2,500,000 1,200,000
Plant 2 – for Product Y 5,000,000 7,000,000
Plant 3 – for Product Z 10,000,000 6,400,000
17,500,000 14,600,000
Corporate Assets
Building 2,800,000
PABX system 1,400,000
Computer network 2,100,000
6,300,000
23,800,000
Before impairment
Based on a study carried out by the company which involved consideration of
various factors, the management was able to determine that the building and the
PABX system can be allocated to plant 1,2 and 3 in the ratio of 2 : 3 : 5. However, the
management was unable to determine a reasonable and consistent basis for
allocating the cost of computer network.
Required:
Calculate the carrying amount of each CGU and Corporate Asset for reporting on
the balance sheet as at June 30, 2007 in accordance with IAS-36 ‘Impairment of
Assets’. (18)
Q –4
Delta acquired Rolling Stock, a company that operates a railway along the coast of
Cornwall, which is a popular tourist area. The summarized balance sheet at fair
value of Rolling Stock Ltd on 1st April 2008, reflecting the terms of the acquisition was:
-
Rs.
000
Goodwill 200
Operating license 1,200
Property, train stations and land 300
Steam engines (2 engines) 1,000
Rail track and coaches 300
 3,000
On 31st May 2008 the boiler of one of the steam engine exploded and
completely destroyed the whole engine and was beyond repair. Due to its
uniqueness a replacement could not be obtained for the foreseeable future,
the value in use of the business as a result of this accident was assessed at Rs.
2 million due to its reduced passenger capacity and bad publicity.
Required: -
a) Calculate the carrying value of the assets of Rolling Stock at 31st May
2008 after recognizing the impairment loss. (10)
b) What is meant by impairment loss and when impairment tests to be
applied on assets? (5)
Q –5
M/S XYS has a plant used to produce goods major part of which is exported
to a neighboring country. Recently the tension starts developing on the
boarders with that country, which restricted the export to that country. This
fact forced the company to apply impairment test on the plant at December
31, 2008. The plant was purchased on July 01, 2006 for Rs. 100,000. The asset
had a useful life of 10 years with no residual value at the end of useful life. The
asset was being depreciated using straight line method. The impairment test
also forced the company to review the remaining useful life of the asset. A
professional valuer determined the remaining useful life of only three years
from the date of impairment test. The recoverable value is Rs. 30,000 at the
date of impairment test.

Required: - Provide extract of financial statements for the year ended June
30, 2009? (8)
Q –6
On 31 December 2008PESHAWAR Co purchased 90% shares of SIALKOT Co for Rs. 2.2
million. The net fair value of the identifiable assets, liabilities and contingent liabilities
of SIALKOT Co at that date was Rs. 1.85 million. MH Co made a loss in year ended 31
December 2009 and at 31 December 20009 the net assets of SIALKOT Co based on
fair values at December 31, 2008 were as follows:
Rs. (000)
Property, plant and equipment 1300
Capitalized development expenditure 1,200
Net current assets 250
1,750
An impairment review on 31 December 2009 indicated that the recoverable
amount of SIALKOT Co at that date was Rs. 1.55 million. The capitalized
development expenditure has no ascertainable external market value and the
current fair value less costs to sell of the property, plant and equipment is Rs. 1.122
million Value in use could not be determined separately for these two items.
Required
Calculate the impairment loss that would arise in the consolidated financial
statements of PESHAWAR Co as a result of the impairment review of SIALKOT Co at
31 December 2009 and show how the impairment loss would be allocated. (15)
Q –7
D Limited acquired 80% shares of C Limited on July 01, 2009. The cost of investment
paid was Rs. 270 million. The fair value of net assets at the date of acquisition of C
Limited was Rs. 300 million. The fair value of Non Controlling Interest (NCI) was Rs. 75
million at the date of acquisition. It is the group policy to value NCI at fair value at
the date of acquisition. One year later on June 30, 2010, the goodwill was tested for
impairment as per requirements of IAS 36.
The carrying value of net assets of C Limited based on fair value of net assets at the
date of acquisition was Rs. 420 million. However, the value in use of C Limited is Rs.
430 million and value in sale is not available. The C Limited is a cash generating unit
in its own and whole of the goodwill is attributable to C Limited.
Required: - Calculate goodwill and pass necessary double entry for impairment loss
to be recognized at the end of Year 2010? (10)
Q–8
XYZ Limited is a chain of super Stores. During the current year a severe fire broke out
in one of the entity’s store located in Lahore, which forced the entity to apply
impairment test under IAS 36. The each store in the chain is a cash generating units
in its own. The detail of carrying value of various assets on the date of impairment
test is as under: -
Rs. (000)
Land 25,500
Building 40,500
Air conditioning system 10,000
Furniture and fixtures 2,500
Computers 1,700
Inventory 100,300
Total carrying value 180,500
The fair market value of land at the date of impairment test is Rs. 30 million. The
inventory of the company can be divided into two categories, 70% good and 30%
damaged. The good inventory can be sold for cost plus 10% however, the
damaged inventory can fetch nothing. The 50% of the furniture got permanently
damaged and has no value at all. The value in use of the store has been calculated
by a specialist at Rs. 120.5 million.
Required: -
a) What is meant by impairment loss under IAS 36 (Impairment of assets)? (3)
b) Define Cash Generating unit (CGU) and identify the criteria for determining
CGU? (5)
c) Calculate impairment loss on the above CGU? (7)
Q–9
The company’s some of the products have been banned by European Union which
enforced it to apply impairment test on its business. The company has a whole is one
cash generating unit. The carrying value of its assets is as under: -

Name of asset Carrying value Comments

Rs. (millions)
Land 120 The revaluation surplus available is Rs. 12
million
Building 50 Carried under cost model but value in sale
is Rs. 35 million
Plant and machinery 35 Carried under cost model
Furniture and fixture 10 Carried under cost model
Inventory 25 Net realizable value is Rs. 22 million
Receivables 18 The provision for doubtful debts is Rs. 2
million.
 258
The value in use is taken at Rs. 210 million and value in sale is not available.
Required: - Allocate the impairment loss to different assets of the cash generating
unit? (12)
ANSWERS
A–1
In assessing whether there is any indication that an impairment loss recognized in
prior periods for an asset other than goodwill may no longer exist or may have
decreased, an entity shall consider, as a minimum, the following indications:
External sources of information
(a) there are observable indications that the asset’s value has increased
significantly during the period.
(b) significant changes with a favorable effect on the entity have taken place
during the period, or will take place in the near future, in the technological,
market, economic or legal environment in which the entity operates or in
the market to which the asset is dedicated.
(c) market interest rates or other market rates of return on investments have
decreased during the period, and those decreases are likely to affect the
discount rate used in calculating the asset’s value in use and increase the
asset’s recoverable amount materially.
Internal sources of information
a) significant changes with a favorable effect on the entity have taken place
during the period, or are expected to take place in the near future, in the
extent to which, or manner in which, the asset is used or is expected to be
used. These changes include costs incurred during the period to improve or
enhance the asset’s performance or restructure the operation to which the
asset belongs.
b) evidence is available from internal reporting that indicates that the
economic performance of the asset is, or will be, better than expected.

A – 2 Calculation of impairment loss

Carrying value Rs. (million) Rs. (million)
Cost 26.0
Accumulated depreciation
30-06-2004 (26-2)/6 4.0
30-06-2005 (26-2)/6 4.0
8.0
18.0
Value in sale
Fair value 15
Selling expense (0.8)
14.2
Value in use
Year Cash flow Disc. factor Present value
05-06 6.0 0.91 5.5
 06-07 5.0 0.83 4.2
07-08 4.0 0.75 3.0
08-09 3.0 0.68 2.1
Value in use 14.8
i) Recoverable value 14.8
ii) recoverable value 14.2
a) Impairment loss 18-14.8 3.2
b) Impairment loss 18-14.2 3.8
A–3
Impairment test Rs. Rs.
Product X
Plant 1 2,500,000
Share of building 2,800,000x2/10 560,000
Share of PABX 1,400,000x2/10 280,000
Carrying value 3,340,000
Recoverable value 1,200,000
Impairment loss 2,140,000
Allocated as follows: -
Plant (2,500,000x2,140,000)/3,340,000 1,601,800
Building (560,000x2,140,000)/3,340,000 358,800
PABX system (280,000x2,140,000)/3,340,000 179,400
2,140,000
Product Y
Plant 2 5,000,000
Share of building 2,800,000x3/10 840,000
Share of PABX 1,400,000x3/10 420,000
6,260,000
Recoverable value 7,000,000
No impairment loss --
Product Z
Plant 3 10,000,000
Share of building 2,800,000x5/10 1,400,000
Share of PABX 1,400,000x5/10 700,000
Carrying value 12,100,000
Recoverable value 6,400,000
Impairment loss 5,700,000
Allocated as follows: -
Plant (10,000,000x5,700,000)/12,100,000 4,710,744
 Building (1,400,000x5,700,000)/12,100,000 659,504
PABX system (700,000x5,700,000)/12,100,000 329,752
5,700,000
A–4
a)
Carrying Impairment Carrying
amount 1 loss 31 May amount 31st
st st

April 2008 2008 May 2008

Rs. (000) Rs. (000) Rs.(000)
Goodwill 200 (200) --
Operating license 1,200 (200) 1,000
Property 300 (50) 250
Steam engine 1,000 (500) 500
Rail track and coaches 300 (50) 250
3,000 (1,000) 2,000
b)
i) An impairment loss is the amount by which the carrying amount of an asset exceeds
its recoverable amount.
II) IDENTIFY THAT AN ASSET IS IMPAIRED
An enterprise should assess at each balance sheet date: -
a) Whether there is any indication that an asset may be impaired;
b) Irrespective of any indication of impairment, an entity shall also: -
Test in case of intangible assets both having definite life and indefinite
life; and
Test goodwill acquired in business combination for impairment
annually
External sources of information: In case of indication that an asset has impaired
Asset’s market value has declined significantly more than expected;
Significant changes with an adverse effect in the technological,
market, economic or legal environment in which the enterprise
operates;
Market interest rates or other market rates of return on investments
have increased during the period, and those increases are likely to
affect the discount rate used in calculating an asset’s value in use and
decrease the asset’s recoverable amount materially;
INTERNAL SOURCES OF INFORMATION: IN CASE OF INDICATION THAT
AN ASSET HAS IMPAIRED
Obsolescence or physical damage
Significant changes with an adverse effect in the extent to which, or
manner in which, an asset is used or is expected to be used. These
changes include plans to discontinue or restructure the operation to
which an asset belongs.
Economic performance of an asset is worse than expected.
Other evidence from internal reporting may be: -
 Cash flows for acquiring and maintaining the asset are significantly
higher than the originally budgeted;
Actual cash flows are worst that the budgeted; and
Operating losses or net cash outflows when current period amounts
are aggregated with the budgeted amounts for the future
A-5

Goodwill
Rs. (000) Rs. (000) Rs. (000)
Cost of investment 2,200
Share of net assets acquired (1,850 x0.90) (1,665)
Goodwill 535

Carrying Impairment New

value loss carrying
value
Rs. (000) Rs. (000) Rs. (000)
Property, plant and equipment 1,300 (173) 1,127
Development cost 200 (27) 173
Net current assets 250 -- 250
Goodwill (535x100/90) 595 (595)
2,345 795 1,550
Recoverable value 1,550
Impairment loss 795
The impairment loss of Rs. 535,000 will only be recognized but goodwill will be notionally
grossed up before applying impairment loss.
A–6

Rs. (m)
Cost of investment 270
Fair value of NCI 75
345
Fair value of net assets (300)
Goodwill 45
Carrying value of net assets 420
Goodwill 45
Total carrying value 465
Impairment loss (35)
Recoverable value 430

A-7
a)
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount
b)
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows from other assets or groups of
assets.
IDENTIFICATION OF THE CASH-GENERATING UNIT TO WHICH AN ASSET BELONGS
6) If there is any indication that an asset may be impaired, recoverable amount should be
estimated for the individual asset. If it is not possible to estimate the recoverable amount of
the individual asset, an enterprise should determine the recoverable amount of the cash-
generating unit to which the asset belongs.
7) The recoverable amount of an individual asset cannot be determined if:
(a) The asset’s value in use cannot be estimated to be close to its net selling price (for
example, when the future cash flows from continuing use of the assets cannot be
estimated to be negligible); and
(b) The asset does not generate cash inflows from use that are independent of those
from other asset. In such cases, value in use and, therefore recoverable amount, can
be determined only for the asset’s cash-generating unit.
Example
A mining enterprise owns private railways to support its mining activities. The private
railways could be sold only for scrap value and the private railway does not generate cash
inflows from continuing use that are largely independent of the cash inflows from the other
assets of the mine.
It is not possible to estimate the recoverable amount of the private railway because the
value in use of the private railways cannot be determined and it is probably different from
scrap value. Therefore, the enterprise estimates the recoverable amount of the cash-
generating unit to which the private railway belongs, that is, the mine as a whole.
8) An asset’s cash generating unit is the smallest group of assets that includes the asset and
that generates cash inflows from continuing use that are largely independent of the cash
inflows from other assets or groups of assets.
Example
A bus company provides services under contract with a municipality that requires minimum
service on each of five separate routes. Assets devoted to each route and the cash flows
from each route can be identified separately. One of the routes operates at a significant loss.
Because the enterprise does not have the option to curtain any one bus route, the lowest
level of identifiable cash from continuing use that are largely independent of the cash
inflows from other asset or groups of assets is the cash inflows generated by the five routes
together. The cash-generating unit for each route is the bus company as a whole.
c)
Assets Carrying Adjustments Adjusted Impairment Adjusted
value carrying Carrying
value Values

Land 25,500 25,500 -- 25,500

Building 40,500 40,500 21,716 18,784
Air conditioning 10,000 10,000 5,362 4,638
system
Furniture and 2,500 (1,250) 1,250 670 580
fixture
Computers 1,700 1,700 912 788
Inventory 100,300 (30,090) 70,210 -- 70,210
Total 180,500 31,340 149,160 28,660 120,500

Recoverable value 120,500

Impairment loss 28,660
A-8
Statement of comprehensive income
Rs.
Depreciation 10,000
Impairment loss 40,000
50,000
Statement of financial position
Assets
Cost 120,000
Accumulated depreciation (50,000)
Accumulated impairment loss (40,000)
30,000
W-1
Calculation of impairment loss
Rs.
Cost of asset 01-07-08 120,000
Accumulated depreciation 30-06-13 (50,000)
Carrying value at the date of impairment test 70,000
Recoverable value 30,000
Impairment loss 40,000

A-9
Assets Carrying Re- Revised Share of Revised
value measurement carrying impairment carrying
under other value loss value
IFRS
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Land 120 120 120/215x43=24 96
Building 50 50 50/215x43=10 40
Plant and 35 35 35/215x43=7 28
machinery
Furniture 10 10 10/215x43=2 8
and fixture
Inventory 25 (3) 22 -- 22
Receivables 18 (2) 16 -- 16
258 (5) 253 (43) 210
Recoverable 210
value
Impairment 43
loss

Note: the impairment loss on land up to revaluation surplus will be charged to

other comprehensive income and excess loss (exceeding 12) will be charged
to profit or loss account. The impairment loss on all other assets will be
charged to profit or loss account.
AGRICULTURE (IAS-41)
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment, financial
statement presentation, and disclosures related to agricultural activity.
SCOPE
This Standard shall be applied to account for the following when they relate to
agricultural activity:
(a) Biological assets except for bearer plants;
(b) Agricultural produce at the point of harvest; and
(c) Government grants related to biological assets but not bearer biological
assets.
This Standard does not apply to:
(a) Land related to agricultural activity (see IAS 16 Property, Plant and Equipment
and IAS 40 Investment Property);
(b) Bearer plants related to agricultural activity but agricultural produce is still of
such assets is still under IAS 41; and
(c) Intangible assets related to agricultural activity (see IAS 38 Intangible Assets).
This Standard is applied to agricultural produce, which is the harvested product of
the entity’s biological assets, only at the point of harvest. Thereafter, IAS 2 Inventories
or another applicable Standard is applied.
The table below provides examples of biological assets, agricultural produce, and
products that are the result of processing after harvest:
Biological assets Agricultural produce Products that are the result
of processing after harvest
Sheep Wool Yarn, carpet
Trees in a plantation forest Felled trees Logs, Lumber
Dairy cattle Milk Cheese
Bushes Leaf Tea, cured tobacco
Vines Grapes Wine
DEFINITIONS
Agricultural activity is the management by an entity of the biological
transformation of biological assets for sale, into agricultural produce, or into
additional biological assets.
A bearer plant is a living plant that:
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
The following are not bearer plants:
(a) plants cultivated to be harvested as agricultural produce (for example, trees
grown for use as lumber);
(b) plants cultivated to produce agricultural produce when there is more than a
remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales (for example, trees
that are cultivated both for their fruit and their lumber); and
(c) annual crops (for example, maize and wheat).

Agricultural produce is the harvested product of the entity’s biological assets. A

biological asset is a living animal or plant.
Biological transformation comprises the processes of growth, degeneration,
production, and procreation that cause qualitative or quantitative changes in a
biological asset.
A group of biological assets is an aggregation of similar living animals or plants.
Harvest is the detachment of produce from a biological asset or the cessation of a
biological asset’s life processes.
AGRICULTURAL ACTIVITY
Agricultural activity covers a diverse range of activities; for example, raising livestock,
forestry, annual or perennial cropping, cultivating orchards and plantations,
floriculture, and aquaculture (including fish farming). Certain common features exist
within this diversity:
(a) Capability to change. Living animals and plants are capable of biological
transformation;
(b) Management of change. Management facilitates biological transformation
by enhancing, or at least stabilizing, conditions necessary for the process to
take place (for example, nutrient levels, moisture, temperature, fertility, and
light). Such management distinguishes agricultural activity from other
activities. For example, harvesting from unmanaged sources (such as ocean
fishing and deforestation) is not agricultural activity; and
(c) Measurement of change. The change in quality (for example, genetic merit,
density, ripeness, fat cover, protein content, and fiber strength) or quantity
(for example, progeny, weight, cubic meters, fiber length or diameter, and
number of buds) brought about by biological transformation is measured and
monitored as a routine management function.
A bearer plant is a living plant that:
a) is used in the production or supply of agricultural produce;
b) is expected to bear produce for more than one period; and
c) has a remote likelihood of being sold as agricultural produce, except
for incidental scrape sales
The following are not bearer plants:
(a) plants cultivated to be harvested as agricultural produce (for example, trees
grown for use as lumber);
(b) plants cultivated to produce agricultural produce when there is more than a
remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales (for example, trees
that are cultivated both for their fruit and their lumber); and
(c) annual crops (for example, maize and wheat).
When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap, for example, for use as firewood. Such incidental scrap sales
would not prevent the plant from satisfying the definition of a bearer plant. Produce
growing on bearer plants is a biological asset.
BIOLOGICAL TRANSFORMATION
Biological transformation results in the following types of outcomes:
(a) Asset changes through (i) growth (an increase in quantity or improvement in
quality of an animal or plant), (ii) degeneration (a decrease in the quantity or
deterioration in quality of an animal or plant), or (iii) procreation (creation of
additional living animals or plants); or
(b) Production of agricultural produce such as latex, tealeaf, wool, and milk.
RECOGNITION AND MEASUREMENT
An entity shall recognize a biological asset or agricultural produce when and only
when:
(a) The entity controls the asset as a result of past events;
(b) It is probable that future economic benefits associated with the asset will flow
to the entity; and
(c) The fair value or cost of the asset can be measured reliably.
• In agricultural activity, control may be evidenced by, for example, legal
ownership of cattle and the branding or otherwise marking of the cattle on
acquisition, birth, or weaning. The future benefits are normally assessed by
measuring the significant physical attributes.
• A biological asset shall be measured on initial recognition and at each
statement of financial position date at its fair value less cost to sell, except
where the fair value cannot be measured reliably.
• Agricultural produce harvested from an entity’s biological assets shall be
measured at its fair value less estimated cost to sell at the point of harvest.
Such measurement is the cost at that date when applying IAS 2 Inventories or
another applicable Standard.
• The determination of fair value for a biological asset or agricultural produce
may be facilitated by grouping biological assets or agricultural produce
according to significant attributes; for example, by age or quality. An entity
selects the attributes corresponding to the attributes used in the market as a
basis for pricing.
• Entities often enter into contracts to sell their biological assets or agricultural
produce at a future date. Contract prices are not necessarily relevant in
determining fair value, because fair value reflects the current market in which
a willing buyer and seller would enter into a transaction. As a result, the fair
value of a biological asset or agricultural produce is not adjusted because of
the existence of a contract. In some cases, a contract for the sale of a
biological asset or agricultural produce may be an onerous contract, as
defined in IAS 37. IAS 37 applies to onerous contracts.
• An entity does not include any cash flows for financing the assets, taxation, or
re-establishing biological assets after harvest (for example, the cost of
replanting trees in a plantation forest after harvest).
• Cost may sometimes approximate fair value, particularly when:
(a) little biological transformation has taken place since initial cost
incurrence (for example, for fruit tree seedlings planted immediately
prior to a statement of financial position date); or
(b) the impact of the biological transformation on price is not expected
to be material (for example, for the initial growth in a 30-year pine
plantation production cycle).
• Biological assets are often physically attached to land (for example, trees in a
plantation forest). There may be no separate market for biological assets that
are attached to the land but an active market may exist for the combined
assets, that is, for the biological assets, raw land, and land improvements, as a
package. An entity may use information regarding the combined assets to
determine fair value for the biological assets. For example, the fair value of
raw land and land improvements may be deducted from the fair value of the
combined assets to arrive at the fair value of biological assets.
• Gains and Losses
1. A gain or loss arising on initial recognition of a biological asset at fair
value less cost to sell and from a change in fair value less cost to sell of
a biological asset shall be included in profit or loss for the period in
which it arises.
 2. A loss may arise on initial recognition of a biological asset, because
estimated cost to sell are deducted in determining fair value less
estimated cost to sell of a biological asset. A gain may arise on initial
recognition of a biological asset, such as when a calf is born.
3. A gain or loss arising on initial recognition of agricultural produce at fair
value less estimated cost to sell shall be included in profit or loss for the
period in which it arises.
4. A gain or loss may arise on initial recognition of agricultural produce as
a result of harvesting.
• Inability to Measure Fair Value Reliably
There is a presumption that fair value can be measured reliably for a
biological asset. However, that presumption can be rebutted only on initial
recognition for a biological asset for which market-determined prices or
values are not available and for which alternative estimates of fair value are
determined to be clearly unreliable.
In such a case, that biological asset shall be measured at its cost less any
accumulated depreciation and any accumulated impairment losses. Once
the fair value of such a biological asset becomes reliably measurable, an
entity shall measure it at its fair value less cost to sell.
Once a non-current biological asset meets the criteria to be classified as held
for sale (or is included in a disposal group that is classified as held for sale) in
accordance with IFRS 5, it is presumed that fair value can be measured
reliably.
In determining cost, accumulated depreciation and accumulated impairment
losses, an entity considers IAS 2 Inventories, IAS 16 Property, Plant and Equipment
and IAS 36 Impairment of Assets.
Government Grants
An unconditional government grant related to a biological asset measured at its fair
value less estimated cost to sell shall be recognized as income when, and only
when, the government grant becomes receivable.
If a government grant related to a biological asset measured at its fair value less
estimated cost to sell is conditional, including where a government grant requires an
entity not to engage in specified agricultural activity, an entity shall recognize the
government grant as income when, and only when, the conditions attaching to the
government grant are met.
This Standard requires a different treatment from IAS 20, if a government grant
relates to a biological asset measured at its fair value less estimated cost to sell or a
government grant requires an entity not to engage in specified agricultural activity.
IAS 20 is applied only to a government grant related to a biological asset measured
at its cost less any accumulated depreciation and any accumulated
impairment losses.
DISCLOSURE
General
An entity shall disclose the aggregate gain or loss arising during the current period
on initial recognition of biological assets and agricultural produce and from the
change in fair value less estimated cost to sell of biological assets.
Additional Disclosures for Biological Assets Where Fair Value Cannot Be Measured
Reliably
If an entity measures biological assets at their cost less any accumulated
depreciation and any accumulated impairment losses at the end of the period, the
entity shall disclose for such biological assets:
(a) a description of the biological assets;
(b) an explanation of why fair value cannot be measured reliably;
(c) if possible, the range of estimates within which fair value is highly likely to lie;
(d) the depreciation method used;
(e) the useful lives or the depreciation rates used; and
(f) the gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the
period.
Question No. 1
A herd of 10 animals 2 year old was held at 1 January 20X1. One animal aged 2.5
years was purchased on 1 July 20X1 for 108, and one animal was born on 1 July
20X1. No animals were sold or disposed of during the period. Per-unit fair values less
estimated cost to sell were as follows: -
Rs.
2 year old animal at 1 January 20X1 100
Newborn animal at 1 July 20X1 70
2.5 year old animal at 1 July 20X1 108
Newborn animal at 31 December 20X1 72
0.5 year old animal at 31 December 20X1 80
2 year old animal at 31 December 20X1 105
2.5 year old animal at 31 December 20X1 111
3 year old animal at 31 December 20X1 120
Required: -
Determine the change in fair value less point of sale expenses between the portion
to physical changes and the portion attributable to price changes between the two
dates mentioned above?
Question No. 2
As at December 31, 20X1, a plantation consists of 100 pine trees that were planted
10 years earlier. Pine take 30 years to mature and will ultimately be processed into
building material for houses or furniture. The enterprise’s weighted average cost of
capital is 6% p.a.
Only mature trees have established fair values by reference to quoted price in the
active market. The fair value (inclusive of current transport cost 100 logs to market)
for a mature tree of the same grade as in the plantation is: -
As at December 31, 20X1 Rs. 171
As at December 31, 20X2 Rs. 165
Required: -
Determine the change in fair value less point of sale expenses between the portion
to physical changes and the portion attributable to price changes between the two
dates mentioned above; and the value to be recognized in the balance sheet at
December 31, 20X1 and 20X2?
Question No. 3
The Lucky Dairy, a public limited company, produces milk for supply to various
customers. It is responsible for producing twenty five percent of the country’s milk
consumption. The company owns 150 farms and has a stock of 70,000 cows and
35,000 heifers which are being raised to produce milk in the future. The farms
produces 2.5 million kilograms of milk per annum and normally holds an inventory of
50,000 kilograms of milk.
The herds comprise at May 31, 2002
70,000 3 year old cows (purchased on or before June 01, 2001
25,000 Heifers (average age 1.5 years old-purchased on December 01,
 2001
10,000 Heifers (average age- 2 years-purchased 1 June 2001
There were no animals born or sold in the year. The per unit values less point of sale
costs were as follows: -
Rs.
2 year old animal at 1 January 2001 50
One year old animal at June 01, 2001 and December 01, 2001 40
3 year old animal at May 31, 2002 60
1.5 year old animal at May 31 2002 46
2 year old animal at May 31 2002 55
1 year old animal at May 31 2002 42
The company has had a difficult year in the financial and operating terms. The cows
had contracted a disease at the beginning of the financial year which had been
passed on in the food chain to a small number of consumers. The publicity
surrounding this event had caused a drop in the consumption of milk and as a result
the dairy was holding 500,000 kilograms of milk in storage.
The Government had stated on April 01, 2002, that it was prepared to compensate
farmers for the drop in the price and consumption of milk. An official letter was
received on June 06, 2002, stating that Rs. 1.5 million will be paid to Lucky on August
01, 2002. Additionally on May 01, 2002, Lucky had received a letter from its Lawyers
saying that legal proceedings had been initiated against the company by the
persons affected by the disease. The company lawyer has advised them that they
feel that it is probable that they will be found liable and that the costs involved may
reach Rs. 2 million. The lawyer however feels that the company may receive
additional compensation from a government fund if certain quality control
procedures had been carried out by the company. However, the lawyer will only
state that the compensation is possible.
The company’s activities are controlled in three geographical locations, Dale, Shire
and Ham. The only location affected by the disease was Dale and the government
has decided that it is to restrict milk of that region significantly. Lucky estimates that
the discounted future cash income from the present herds of cattle in the region
amount to Rs. 1.2 million, taking into account the government restriction order. Lucky
was not sure that the fair value of the cows in the region could be measured reliably
at the date of purchase because of the problem with the diseased cattle. The cows
in this region numbered 20,000 and the heifers numbered 10,000. All of the animals
were purchased on June 01, 2001. Lucky had an offer of Rs. 1 million for all in the
Dale region (net of point of sale expenses) and Rs. 2 million for the sale of the farms
in the region. However, there was a minority of directors who opposed the planned
sale and it was decided to defer the public announcement of sale pending the
outcome of the possible receipt of the government compensation. The Board had
decided that the potential sale plan was confidential but a national newspaper had
published an article stating that the sale may occur and that there would be many
people who would lose the employment. The Board approved the sale plan on May
31, 2002.
The directors of Lucky have approached you for professional advice on the above
matters.
Required: -
Advise the directors on how the biological assets and produce of Lucky should be
accounted for under IAS-41 and discussed the implications for the published
financial statements of the above events.
ANSWERS
A–1
Rs. Rs.
Fair value 01 January 20x1 (10x100) 1,000
Purchase 01 July 20x1 (1x108) 108
Increase in fair value less estimated cost to sell due to
price change
10x(105-100) 50
1x(111-108) 3
1x(72-70) 2 55
Increase in fair value less estimated point of sale costs
due to physical change
10x(120-105) 150
1x(120-111) 9
1x(80-72) 8
1x70 70 237
Fair value less estimated point of sale cost 31
December 20x1
11x120 1,320
1x80 80
1,400

A–2
Rs. Rs.
Fair value 31 December 20x1 (10x100) 5,332
100x171x(1.06)^-20
Increase in fair value less estimated cost to sell due to
price change
[100x165x(1.06)^-20] – [100x171x(1.06)^-20]
5,145 - 5,332 (187)

Increase in fair value less estimated point of sale costs

due to physical change
[100x165x(1.06)^-19] – [100x165x(1.06)^-20]
5,453 - 5,145 308

Fair value less estimated point of sale cost 31

December 20x2
100x165x(1.06)^-19 5,453

5,453

A–3
IAS 40 Agricultural Produce
IAS 41 ‘Agriculture’ prescribes the accounting treatment, financial statement
presentation and disclosures related to agricultural activity. A biological asset such
as dairy herd is measured at each reporting date at its fair value less estimated point
of sale costs except where fair value cannot be measured reliably. The fair value of
cattle is the price in the relevant market less the transport cost of getting the cattle
to market. Any gains or losses arising from a change in the fair value should be
included in the net profit or loss for the period in which it arises. The standard
encourages companies to separate the change in fair value less estimated point of
sale costs between that due to physical changes and the portion attributable to
price changes. Table 1 calculates these changes in fair value, excluding Dale
region, which are Rs. 300,000 due to price change and Rs. 350,000 due to physical
change. Again the company is encouraged by the standard to provide a
quantified description of each group of biological assets. Thus cows and the heifers
should be shown and quantified in the balance sheet.
Milk should be valued under IAS 41 at its fair value at the time of milking less
estimated point of sale costs. However, due to the bad publicity, the inventory of
milk has risen tenfold from 50,000 kilograms to 500,000 kilograms. There is a need to
ascertain whether this milk is fit for consumption and whether there will be a need to
dispose of some of the milk. The quantity of milk which will not be sold should be
determined and written off the value of the inventory. This amount should be shown
separately in the income statement under IAS 8.
IAS 40 Government Grant
Unconditional government grants should be recognized as income under IAS 41
when the grant becomes receivable. Although there had been a statement on 01
April 2002 that the grant/compensation was to be paid, it was only on 06 June 2002
that an official letter was received stating the amount to be paid to Luck and
therefore, the $ 1.5 million should be recognized as income in the 31 May 2003.
IAS 37
IAS 37 ‘provision, contingent liabilities and contingent assets’ indicates that where
there is a present obligation as a result of past obligating event which will probably
result in an outflow of resources, then a provision should be recognized for the best
estimate to settle the obligation. In this case the lawyer have indicated that it is
probable Lucky will become liable for the illness of consumers of the milk and
therefore, a provision for Rs. 2 million should be made.
IAS 37 is quite specific on expected reimbursement of costs. Such reimbursement
should only be recognized when it is virtually certain that will be received. In this
case, the reimbursement is only possible and therefore, an asset will not be
recognized for compensation which may be paid by the government. However, the
expected reimbursement will be disclosed in the financial statement, stating that
there has been no asset recognized for that expected compensation payment.
IAS 36
Given the various events that have affected the company during the period, it
would seem that consideration should be given to impairment of the herd’s value in
the Dale region as it is the only one affected by the disease. Dale can be identified
as a separate cash generating unit and where a biological asset’s fair value is not
reliable it should be valued at cost less any impairment losses. The impairment loss is
Rs. 1.2 million.
IFRS 5 and IAS 37
Noncurrent assets held for sale and discontinued operations, as the decision has not
been officially announced for discontinuation of the Dale operations, the provision
for constructive obligation does not exist on the reporting date. However, the
disclosures of IFRS 5 do apply to the Dale region.
Table 1
Based on cattle stock excluding Dale region Rs. (000) Rs. (000)
Fair value 01 June 2001 (50,000x50) 2,500
Purchase 01 December 2001 (25,000x40) 1,000
Increase in fair value less estimated point of sale costs
due to price change
50,000x(55-50) 250
25,000x(42-40) 100 300
Increase in fair value less estimated point of sale costs
due to physical change
50,000x(60-55) 250
25,000x(46-42) 100 350
Fair value less estimated point of sale cost 31 May
2002
50,000x60 3,000
25,000x46 1,150 4,150

Dale region
Impairment loss
Cost 01 June 2001
20,000x50 1,000
10,000x40 400
1,400
Value in sale 1,000
Value in use 1,200
Recoverable value (higher of value in use or value in 1,200
sale)
Impairment loss 200