Chapter 12, Problem 1JC

Judgment Case 1: Impairments of PPE under IFRS

Refer to the information in Surfing the Standards Case 1 later in the chapter to answer the following questions.

1. a. Prepare the calculation of the impairment loss.
2. b. What items included in the case itself involved issues of judgment? (Include only those that are ultimately relevant in determining the impairment loss.)
3. c. What judgments/decisions did you still need to make? Why did you make the particular decisions in your responses?

Surfing the Standards Case 1: Implements of PPE under IFRS

A&N, Inc. is a manufacturer and retailer of specialized office equipment. It currently operates in two countries, both of which follow IFRS for their financial reporting. For the sake of simplicity, assume that both countries have the same currency, the dollar During its annual impairment assessment of PPE, A&N determined that one of its factories presents with various impairment indicators. Facts related to this factory follow:

1. 1. The estimated future life of the factory is 20 to 25 years, and it has a current carrying value of $1,200,000.
2. 2. A&N has no sales agreement for the factory, nor does an active market exist. It did sell a similar factory several years ago in another country for $1,000,000. The costs to sell the factory were $67,000.
3. 3. A&N has a similar factory in the other country in which it currently operates. Due to differences in the market for their products in the two countries, the cash flow streams will not be similar.
4. 4. The table on the next page presents the projected cash inflows for the factory based on the most recent budgets approved by management.
5. 5. Although management can demonstrate that its short-term projects tend to be reasonably accurate, there is some uncertainty as to the projected cash flows. Management assesses that there is a range on either side of the projected cash inflows: The cash inflows could be as much as 10% lower than projected or 5% greater than projected. While the most likely amount is included m the following schedule presented, the probabilities associated with each amount are unknown.
6. 6. The table on the next page also presents the total projected cash outflows for overhead as well as specific projected outflows for maintenance of the factory. Generally, 25% of overhead is allocable to the use of the factory.
7. 7. The increase in projected cash inflows in Year 4 is related to a planned overhaul of the factory. The estimated cash outflow for the overhaul is $50,000 (which is included in the table’s Other