IFRS 5 & IAS 36 Flashcards
General principles
IFRS 5 and IAS 36
- RA(FV) > CA impairment loss = 0
- When calculating CA, if you didn’t account for impairment for the asset use the assets CA, rest of assets, use FV
- Asset that is aboned should not be classified as HFS
IAS 36:
- Exclude any additional sales from enhancements to the formula.
- Exclude any formula enhancement costs and additional production and sales costs directly related to additional
sales. - Exclude promotional product support campaign.
- Included insurance costs as these are committed costs
- Only if the RA of an asset is less than CA the CA of the asset should be written down to RA
- Market capitalization < NAV = Impairment
- In RA include working capital
- Include terminal value
Criticize Value in use IAS 36
-Reasonableness of assumptions used in the value in use calculation
- It is on pre tax do not deduct tax from FCF
•IAS 36.34 requires that management must assess the reasonableness of the assumptions used on which cash flow projections are based.
•The cash flow projections for 2022, 2023 and 2024 are based on an anticipated growth of 5% p.a however management expect that at most sales can only be expected to increase by 4% p.a. Therefore, anticipated revenues should be calculated to increase by 4% per annum.
•The value in use calculation includes expected cash flows for 2025 and 2026 even though the sale of plant is expected to take place at the end of 2024.
•The cash flows for 2025 and 2026 should be excluded from the calculation.
•In addition the cash flows for 2025 and 2026 appear to include the expected cash flows using increased cash flows related to the new plant. This is incorrect because the value in use calculation must only include the existing plant in its current condition IAS 36.44.
•The 2025 and 2026 cash flows must be reversed.
•The value in use calculation must be based on expected cash flows
•The cost of sales and expense figures include depreciation which is a non cash item.
•Therefore, depreciation must be excluded for the projected cash outflows.
Finance costs
- Cash outflows can not include financing activities IAS 36.50
- Therefore, finance costs must be excluded from projected cash outlaws
- Anticipated cost of patent renewal, replacing property, plant and equipment and new product development.
- Future cash flows must be estimated for an asset in its current condition IAS 36.44
- and may not include expenditure relating to future replacement of property, plant and equipment, the renewal of the patent and new product development to which an entity is not yet committed IAS 36.44(a)
- The value in use calculation includes the cost of replacing property, plant and equipment, renewing the patent and product development
- But at 31 July 2021 management was not committed to a plan to replace the assets nor the replacement of the property, plant and equipment
- Therefore, the cost of replacing property, plant and equipment, renewing the patent and product development must be excluded from the value in use calculation.
Composition of future cash flows
- IAS 36.39 (c) requires that any cash flows that may be received on the disposal of the asset must be included in estimated cash inflows
- The value in use calculation does not include the cash inflows that are anticipated at the end of the projection period which is 3 years as discussed above
- Therefore, the fair value less costs to sell the Cool Innovations property, plant and equipment at 31 July 2024 amounting to R 9.5 million must be included in anticipated cash inflows.
Discount rate
- The discount rate that must be used to calculate the present value of the net cash inflows and outflows must be a pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the assets IAS 36.55
- The discount rate used is incorrect because an after tax rate has been used.
- And it is the prime lending rate which does not include risks specific to the asset.
- This rate does not include risks specific to the asset, which are not available. However, EOH’s lending rate is considerable higher that prime, therefore the discount rate used should be significantly higher than the prime rate.
- The value in use calculations must be discounted to their present value at 31 July 2021.
Date inconsistency
•The dates are not all the same in the table - Jan only
