CGU impairment and reversal with goodwill and asset floors under IAS 36
At 31 December 20X4, Sora Chemicals' specialty chemicals plant is a single cash-generating unit. Its carrying amount is ₩5,600 million, comprising property, plant and equipment ₩3,800 million, a patent ₩800 million with eight years remaining, and goodwill ₩1,000 million allocated from a 20X2 acquisition. A government ban on one product line, announced in November 20X4, will reduce sales by 30% from 20X5. Management's five-year cash flow forecast is ₩350 million, ₩400 million, ₩450 million, ₩480 million and ₩500 million. After 20X9, cash flows are expected to grow at 1% annually. The pre-tax discount rate is 12%. The plant could be sold for ₩3,200 million, with selling costs of ₩150 million. The patent is not a separate CGU and its value in use cannot be determined separately. At 31 December 20X5, conditions improve; the CGU's recoverable amount is ₩4,500 million, its carrying amount before any reversal is ₩3,900 million, and the carrying amount that would have existed without the 20X4 impairment is ₩4,200 million.
1. Calculate the recoverable amount and impairment loss at 31 December 20X4, and allocate the loss.
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FVLCD = ₩3,200m − ₩150m = ₩3,050m. For value in use, the terminal value at end 20X9 = ₩500m × 1.01/(0.12 − 0.01) = ₩4,590.9m. Discounting at 12%:
- PV of forecast cash flows = ₩1,540.4m.
- PV of terminal value = ₩4,590.9m × 0.56743 = ₩2,605.1m.
- VIU = ₩4,145.5m.
Recoverable amount is the higher of VIU and FVLCD = ₩4,145.5m. Carrying amount is ₩5,600m, so impairment = ₩1,454.5m. Allocate first to goodwill: ₩1,000m, leaving ₩454.5m. Allocate the remainder pro rata to PPE and patent: PPE 3,800/4,600 × 454.5 = ₩375.4m; patent 800/4,600 × 454.5 = ₩79.0m. After impairment: PPE ₩3,424.6m; patent ₩721.0m; goodwill ₩0.
2. Determine the reversal at 31 December 20X5 and explain the ceiling.
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At 31 December 20X5, recoverable amount is ₩4,500m and carrying amount before reversal is ₩3,900m, so the potential reversal is ₩600m. However, IAS 36 limits the reversal to the carrying amount that would have existed had no impairment been recognized, which is ₩4,200m. The ceiling therefore allows only ₩4,200m − ₩3,900m = ₩300m. Recognize ₩300m in profit or loss and allocate it pro rata to the impaired non-current assets other than goodwill, based on their carrying amounts at the reversal date. Goodwill is never reversed. After the reversal, the CGU carrying amount is ₩4,200m, not ₩4,500m.
3. If the patent had a measurable fair value less costs of disposal of ₩600 million, would the impairment allocation change?
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IAS 36 limits the reduction of an individual asset within a CGU so that it is not reduced below the highest of its fair value less costs of disposal (if measurable), its value in use (if determinable), and zero. The patent's FVLCD of ₩600m is below its allocated carrying amount of ₩721.0m, so the floor is not breached and the allocation does not change. If the FVLCD were, say, ₩750m, the patent could be reduced only to ₩750m, and the excess impairment would be reallocated to the other assets pro rata. Because the patent's value in use is not separately determinable, it provides no additional floor.