Question 3

Part a

GHI Ltd has a technological asset, AXS which it uses to manufacture computer processing unit (CPU). The carrying amount of AXS after four years usage is $5 million (cost $9 million, accumulated depreciation of $4 million on a straight line basis). There is no expected scrap value. Due to a breakthrough in technology in the manufacture of CPU, GHI Ltd now expects the machine to produce 40% less in revenue terms than expected over the rest of its estimated useful life of 6 years. Net future cash flows for the next six years, based on managements best estimate after taking the 40% reduce into account, are as follows. (all in $000)

Year ended

Future

cash flow

Expected

growth rate

1

660

-

2

700

-

3

730

-

4

750

-

5

-

+4%

6

-

-5%

(Hint: use future cash flow of year 4 and expected growth rate of year 5, to calculate the future cash flow of year 5)

If the technological asset was disposed now, it would realize $3.2 million at net realizable value. The discount rate to be applied to the future cash flows is 8%

Required

Calculate any impairment loss and state the new carrying amount of the AXS.

(Detailed calculation steps should be shown, for present value factor, please adopt after 4 decimal places)

Part b

A division of GHI Ltd has the following non-current assets, which are stated at their carrying amount at 31 March 2023.

$million

$million

Intangible assets: goodwill

140

Tangible assets

Land and Building

640

Plant and machinery

220

860

1,000

Because these assets are used to produce a specific product, it is possible to identify the cash flows from their use. The management of GHI Ltd believes that the value of these assets may have become impaired, because a major competitor has developed a superior version of the same product. As a result, sales are expected to fall.

The following additional information is relevant:

The land and buildings are carried at valuation. $120 million of revaluation surplus exists as at 31 March 2023. All other non-current assets are carried at historical cost.

The goodwill does not have a market value. It is estimated that the land and buildings could be sold for $540 million and plant and machinery could be sold for $100 million, net of direct selling costs.

The value in use of the assets has been calculated at $770 million.

Required

Calculate the impairment losses that will be recognized in accounts of GHI Ltd.

Explain how this loss will be treated in financial statements for the year ended 31 March 2023.