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Wiley IFRS: Practical Implem entation Guide and Workbook
November 30, 20X5, was deemed to be $6 million, and its fair value less costs to sell was thought to be
$50,000 (the scrap value).
Required
What is the recoverable amount of the plant and equipment at November 30, 20X5?
Solution
The recoverable amount is the higher of the assets' fair value less costs to sell and its value-in-use. In
this case, even though the assets were scrapped on January I, 20X6, the value-in-use at November 30,
20X5, was $6 million, which was higher than the fair value less costs to sell and their carrying value.
Therefore, the assets are not impaired. The scrapping of the assets may be disclosed as a nonadjusting
post-balance sheet event if material.
5, FAIR VALUE LESS COSTS TO SELL
lAS 36 sets out how an entity should determine the fair value less costs to sell. The Standard sets
out these exampl es:
• Where there is a buying and selling agreement, the price in that agreement less the costs to
sell can be used.
• Th e price in an active market less the cost of disposal can be used.
• The fair value less costs to sell can be based on the best information avai lable which reflects
the proceeds that could be obtained from the disposal of the asset in an arm's-length transac–
tion .
• The Standard says that the best evidence is the price in a binding sale agreement in an arm' s–
length transaction adj usted for the cos ts of disposal.
6. VALUE-IN-USE
6,1 These elements should be used when calc ulating the value- in-use:
• Estimates of the future cash flows that the entity expects to get from the asset
• Any possible varia tions that may occur in the amount or timing of the futur e cas h flows
• The time value of money represented by the current market risk-free rate of interest
• The uncert ainty inherent in the asset
• Any other factors that should be borne in mind when determining the futur e cash flows from
the asse t
6.2 Typically an entity should estimate the future cash inflows and outflows from the asset and
from its eventu al sale, and then discount the future cas h flows acco rdingly.
Practical Insight
Interroll Holding AG, a Swiss entity, discloses in its 2003 acco unts that it had revised the cal–
culation of value-in-use as a result of a more realistic estimate of future cas h flows. As a
result, goodwi ll was impaired. Thu s it can be seen that the estimates of futur e cas h flows are
critical to the impairment review.
7. FUTURE CASH FLOWS
7.1 It is important that any cash flow projections are based on reasonabl e and supportable as–
sumptions. They should be based on the most recent financial budgets and forecasts. The cash
flows should not include any cash flows that may arise from future restru cturing or from improvi ng
or enhancing the asset' s performance.
7,2 The Standard also says that any predictions incorporated into budgets and forecasts shall
cover only a five-y ear period at maximum. Extrapolation should be used for periods beyond the
five-year period. However, if management is confident that any projections beyond the five-year
period are reliable , and management can demonstrate that , based on past experience, the cash flows
that will be generated beyond this five-year period are likely to be accurate, then it is possible to
use these forecasts.