Impairment of a Thermal Power CGU: Recoverable Amount, Allocation and a Post-Year-End Offer
Deccan Power Ltd operates a 300 MW thermal plant that is a single cash-generating unit. At 31 March 20X5 the unit comprises plant ₹780 crore, a right-of-use land asset ₹40 crore, and goodwill of ₹20 crore allocated to it on the 20X2 acquisition of the plant. Head office assets and the ERP system of ₹60 crore support the plant and two other units; ₹30 crore has been allocated to this unit in proportion to carrying amounts. Deccan carries a decommissioning provision of ₹90 crore, and its value-in-use model includes the decommissioning cash outflows; the model gives ₹720 crore. On 15 May 20X5 Deccan received a binding offer from a strategic buyer to buy the plant for ₹700 crore; disposal costs are ₹30 crore, and the buyer has asked Deccan to pay ₹5 crore of its financing fees. The financial statements were approved on 10 June 20X5.
1. Determine the recoverable amount of the unit. How are the ₹30 crore disposal costs, the ₹5 crore financing fees and the ₹90 crore decommissioning provision treated?
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Fair value less costs of disposal (FVLCD)
- Binding offer: ₹700 crore
- Less incremental costs directly attributable to disposal: ₹30 crore
- FVLCD = ₹670 crore
The ₹5 crore of the buyer's financing fees is excluded. Costs of disposal are incremental costs directly attributable to the disposal, excluding finance costs and income tax; a buyer's funding cost is not a cost Deccan incurs to dispose of the asset, nor is it a cost avoided by choosing not to sell.
Value in use (VIU) The model gives ₹720 crore. The decommissioning outflows are included, which is the right treatment because the ₹90 crore provision is a liability and is not deducted from the unit's carrying amount. The consistency rule in Ind AS 36 must be applied: either the provision is deducted from the carrying amount and the restoration outflows are excluded from VIU, or the provision is left as a liability and the outflows are included. Deccan has done the latter, so there is no double counting. If the provision had been netted against the plant, VIU would have to be recomputed excluding the outflows - otherwise the loss would be overstated twice.
Recoverable amount = higher of the two = ₹720 crore. The VIU exceeds FVLCD, so no sale is assumed in the impairment test even though a buyer exists.
2. Compute the impairment loss and allocate it. What limits apply?
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Carrying amount of the unit
| Asset | ₹ crore |
|---|---|
| Plant | 780.00 |
| Right-of-use land asset | 40.00 |
| Goodwill | 20.00 |
| Corporate assets allocated | 30.00 |
| Total | 870.00 |
Impairment loss = 870 − 720 = ₹150 crore
Allocation
- Reduce goodwill first: ₹20 crore fully written off.
- Allocate the remaining ₹130 crore pro rata to the other assets of the unit: plant 780, ROU 40, corporate allocation 30 (total 850).
| Asset | Share | Impairment (₹ crore) | Revised carrying amount |
|---|---|---|---|
| Plant | 780/850 | 119.29 | 660.71 |
| ROU land | 40/850 | 6.12 | 33.88 |
| Corporate assets | 30/850 | 4.59 | 25.41 |
| Goodwill | - | 20.00 | - |
Limits and judgements
- No individual asset may be written down below the higher of its FVLCD (if determinable), its VIU (if determinable) and zero. Here the plant's own FVLCD of ₹670 crore is above its revised carrying amount of ₹660.71 crore, so the pro-rata allocation stands.
- Corporate assets are included only if they can be allocated on a reasonable and consistent basis. If they cannot, the unit is tested without them first, and then the smallest group of units to which they can be allocated is tested.
- The impairment is recognised in profit or loss; the ROU asset is impaired, not remeasured, and the depreciation of the ROU and the plant continues on the revised carrying amounts over the remaining useful lives.
- Goodwill impairment is not reversed in later periods.
3. What is the effect of the 15 May 20X5 binding offer on the 31 March 20X5 financial statements?
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Adjusting or non-adjusting? The offer was received after the reporting date and does not, by itself, provide evidence of a condition existing at 31 March 20X5 - it evidences a decision taken by a third party in the following period. On that analysis it is a non-adjusting event under Ind AS 10, and no adjustment is made to the ₹150 crore impairment.
But the conclusion is the same either way. Even if the offer were treated as the best evidence of fair value at the measurement date, FVLCD would be ₹700 − ₹30 = ₹670 crore, which is below VIU of ₹720 crore. Recoverable amount would still be ₹720 crore and the impairment would still be ₹150 crore. This is why the valuation work and the event-date analysis must be done separately - the impairment outcome is insulated from the event.
Disclosure (Ind AS 10 and Ind AS 36)
- The nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made.
- The recoverable amount of the unit (₹720 crore), whether it is FVLCD or VIU, the discount rate used, the period of cash flow projections and the key assumptions.
- The impairment recognised and the amount allocated to each class of asset.
- In 20X5-26, the offer at ₹670 crore net becomes an impairment indicator for the next reporting date and must be tested against the then VIU; the buyer's request that Deccan fund ₹5 crore of financing is a commercial term of the deal, not a cost of disposal, and would be accounted for as part of the transaction if the sale proceeds.