Sporty World (Pty) Ltd is a sporting equipment manufacturing and distribution company with a 31 December 2023 financial year-end.

Sporty World (Pty) Ltd, has noted at the end of the current financial year that their tennis racket division, which manufactures traditional tennis rackets, is not performing that well compared to previous years due to the latest rise in popularity of Padel tennis. Padel tennis rackets have a solid impact surface that is filled with holes to allow an easy swing in the air.

The accountant, Miss Daisy, is in quite a panic because she will need to perform an impairment test of the tennis racket division for the annual financial statements to comply with the International Financial Reporting Standards (IFRS).

You are an IFRS specialist at a medium-sized auditing firm, and Miss Daisy has reached out to you to assist with the determination of the recoverable amount of the tennis racket division.

The fair market value was readily determinable as there is an active market for tennis rackets. The fair value less costs of disposal was determined to amount to R15 450 000.

The value in use, however, seems to be more difficult to estimate. The following information is available, and Miss Daisy is unsure what items to include in the value in use computation:

REQUIRED:
1) Briefly outline what cash flows should be included in the value in use calculation.
2) Calculate the value in use of the tennis racket division at the financial year ended 31 December 2023, briefly explaining why each of the above mentioned line items will be included or excluded from the calculation.
3) Calculate the recoverable amount of the tennis racket division for the year ended 31 December 2023.

Transcribed Image Text:

Cash inflows directly attributable to the tennis racket division Maintenance expenses to operate the tennis racket division Depreciation Salaries of administration staff Sale of the tennis racket division in 2027 Costs incurred in 2024 to upgrade ma- chinery to include the production of Padel tennis rackets Additional inflows to upgrade the ma- chinery 2024 Rand (3 500 000) (2 000 000) (3 000 000) 2025 Rand 13 000 000 13 000 000 13 000 000 (7 000 000) (3 500 000) (2 000 000) (3 000 000) 2026 Rand 2 500 000 (3 500 000) (2 000 000) (3 000 000) 25 000 000 2 500 000 Miss Daisy has correctly determined that a pre-tax discount rate of 12% is appropriate. Cash inflows directly attributable to the tennis racket division Maintenance expenses to operate the tennis racket division Depreciation Salaries of administration staff Sale of the tennis racket division in 2027 Costs incurred in 2024 to upgrade ma- chinery to include the production of Padel tennis rackets Additional inflows to upgrade the ma- chinery 2024 Rand (3 500 000) (2 000 000) (3 000 000) 2025 Rand 13 000 000 13 000 000 13 000 000 (7 000 000) (3 500 000) (2 000 000) (3 000 000) 2026 Rand 2 500 000 (3 500 000) (2 000 000) (3 000 000) 25 000 000 2 500 000 Miss Daisy has correctly determined that a pre-tax discount rate of 12% is appropriate.

Answer rating: 100% (QA)

SOLUTION Cash flows to be included in the value in use calculation typically consist of cash inflows and outflows directly attributable to the tennis ... View the full answer