IAS 36 Impairments 6 / 16

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Question 3b

(b) At 30 November 20X6, the directors of Fill estimate that a piece of mining equipment needs to be reconditioned every two years. They estimate that these costs will amount to $2 million for parts and $1 million for the labour cost of their own employees. The directors are proposing to create a provision for the next reconditioning which is due in two years’ time in 20X8, along with essential maintenance costs. There is no legal obligation to maintain the mining equipment.

As explained above, it is expected that there will be future reductions in the selling prices of coal which will affect the forward contracts being signed over the next two years by Fill.

The directors of Fill require advice on how to treat the reconditioning costs and whether the decline in the price of coal is an impairment indicator. (8 marks)

Required:
Advise the directors of Fill on how the above transactions should be dealt with in its financial statements with reference to relevant IFRS Standards and the Conceptual Framework and its proposed revision where indicated.

Note: The split of the mark allocation is shown against each of the three issues above.

Question 2a i

Background
Farham manufactures white goods such as washing machines, tumble dryers and dishwashers. The industry is highly competitive with a large number of products on the market. Brand loyalty is consequently an important feature in the industry. Farham operates a profit related bonus scheme for its managers based upon the consolidated financial statements but recent results have been poor and bonus targets have rarely been achieved. As a consequence, the company is looking to restructure and sell its 80% owned subsidiary Newall which has been making substantial losses. The current year end is 30 June 20X8.

Factory subsidence
Farham has a production facility which started to show signs of subsidence since January 20X8. It is probable that Farham will have to undertake a major repair sometime during 20X9 to correct the problem. Farham does have an insurance policy but it is unlikely to cover subsidence. The chief operating officer (COO) refuses to disclose the issue at 30 June 20X8 since no repair costs have yet been undertaken although she is aware that this is contrary to international accounting standards. The COO does not think that the subsidence is an indicator of impairment. She argues that no provision for the repair to the factory should be made because there is no legal or constructive obligation to repair the factory.

Farham has a revaluation policy for property, plant and equipment and there is a balance on the revaluation surplus of $10 million in the financial statements for the year ended 30 June 20X8. None of this balance relates to the production facility but the COO is of the opinion that this surplus can be used for any future loss arising from the subsidence of the production facility. (5 marks)

Required:
(a) Discuss the accounting treatment which Farham should adopt to address each of the issues above for the consolidated financial statements.

Note: The mark allocation is shown against each of the two issues above.

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