16-1 Three years ago, Ace Airlines (AA) was granted permission to schedule flights on the popular and profitable Newalta to Oldsford route, provided it also serviced Remoteville which is considerably further north than Oldsford. As a result, AA set up a facility in Oldsford and a small office and maintenance bay in Remoteville. Remoteville is sparsely populated and not accessible except by air. AA’s controller now wants to review the Remoteville assets for impairment due to the continuing losses on the Oldford-Remoteville route, but is not familiar with IAS 36.
Write a short memo to AA’s controller, identifying how he should proceed in determining whether the Remoteville assets are impaired.
16-2 Waix Ltd. (WL) is a manufacturer with a number of product lines, one of which is the production of parts for residential telephone sets. Recently there have been indications that the market for this product is likely to decline significantly, and WL is assessing various assets for impairment. The following assets are used specifically to manufacture these parts:
Tools and dies $ 10 $ 6
Specialized equipment 50 35
General equipment 30 18
The tools and dies and specialized equipment have no resale value other than for scrap, although the general equipment could be sold or used profitably in one of WL’s other product lines. WL plans on continuing production of these parts for two more years in order to fill its existing commitments. The present value of the net cash flows from the next two years’ production of these parts is $26 and the estimated net amount that could be recovered if these assets were sold today is $15.
16-3 Firstall Corp. (FC) acquired four divisions of a competitor eight years ago in a business combination transaction, paying $25 more than the fair value of the identifiable assets acquired. The goodwill was determined to be 100% attributable to the operations of the East Division and the South Division. Although these two divisions are cash-generating units in their own right, there was no basis on which to allocate the goodwill between them. FC has identified the combined divisions as one CGU for assessing goodwill impairment on an annual basis. At the end of the most recent year, the following information is available:
East Division $ 75
South Division 125
FC has determined that the estimated recoverable value of the two divisions together is $215.