Illustration 2 – Calculation of Value in Use and Recognition of an Impairment Loss :
In this illustration, tax effects are ignored.
Background and Calculation of Value in Use
A23. At the end of 20X0, enterprise T acquires enterprise M for Rs. 10,000 lakhs. M has manufacturing plants in 3 countries. The anticipated useful life of the resulting merged activities is 15 years.
Schedule 1. Data at the end of 20X0 (Amount in Rs. lakhs)
End of 20X0 |
Allocation of purchase price |
Fair value of identifiable assets |
Goodwill(1) |
Activities in Country A |
3,000 |
2,000 |
1,000 |
Activities in Country B |
2,000 |
1,500 |
500 |
Activities in Country C |
5,000 |
3,500 |
1,500 |
Total |
10,000 |
7,000 |
3,000 |
A24. T uses straight-line depreciation over a 15-year life for the Country A assets and no residual value is anticipated. In respect of goodwill, T uses straight-line amortisation over a 5 year life.
A25. In 20X4, a new government is elected in Country A. It passes legislation significantly restricting exports of T’s main product. As a result, and for the foreseeable future, T’s production will be cut by 40%.
A26. The significant export restriction and the resulting production decrease require T to estimate the recoverable amount of the goodwill and net assets of the Country A operations. The cash-generating unit for the goodwill and the identifiable assets of the Country A operations is the Country A operations, since no independent cash inflows can be identified for individual assets.
A27. The net selling price of the Country A cash-generating unit is not determinable, as it is unlikely that a ready buyer exists for all the assets of that unit.
A28. To determine the value in use for the Country A cash-generating unit (see Schedule 2), T:
(a) prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (years 20X5- 20X9) approved by management;
(b) estimates subsequent cash flows (years 20X10-20X15) based on declining growth rates. The growth rate for 20X10 is estimated to be 3%. This rate is lower than the average longterm growth rate for the market in Country A; and
(c) selects a 15% discount rate, which represents a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash-generating unit.