Ind AS on Tangible Assets and Impairment — Practice

Question 1

A company's inventory item has a purchase cost of ₹400 per unit, incurs ₹30 per unit of directly attributable conversion cost, and ₹20 per unit of abnormal wastage cost during production. The item is expected to sell for ₹480 per unit, with estimated selling costs of ₹25 per unit and no further costs to complete. Compute the cost per unit eligible for inventory recognition, the NRV per unit, and the amount at which the inventory should be measured.

Accepted Answer

Cost eligible for inventory recognition = Purchase cost ₹400 + directly attributable conversion cost ₹30 = ₹430 per unit; the ₹20 per unit of abnormal wastage is excluded from cost and expensed as incurred, since Ind AS 2 explicitly excludes abnormal amounts of wasted material and production costs from inventory cost. NRV = Estimated selling price ₹480 − estimated costs to sell ₹25 (no further completion cost) = ₹455 per unit. Since cost (₹430) is lower than NRV (₹455), the inventory is measured at cost, ₹430 per unit, and no write-down is required.

Question 2

In the prior year, a company wrote down inventory from its cost of ₹500 per unit to an NRV of ₹420 per unit due to a temporary market downturn. This year, market prices have recovered, and the same inventory's NRV is now estimated at ₹530 per unit, with the inventory still unsold and still carried at ₹420 per unit. Explain how this should be treated, and the maximum amount to which the inventory can be written back up.

Accepted Answer

Since the circumstances that caused the original write-down, the temporary market downturn, no longer exist and there is clear evidence of a genuine increase in NRV, Ind AS 2 requires the previous write-down to be reversed, recognised as a reduction in the cost of inventories expensed in the period the reversal occurs. However, the reversal is capped: the inventory can be written back up only to the lower of its current NRV and its original cost, never above original cost, because Ind AS 2's measurement rule remains lower of cost and NRV even during a reversal. Since original cost was ₹500 and current NRV is ₹530, the inventory is written back up to ₹500 per unit, the original cost, not to ₹530, since writing it up beyond original cost would effectively recognise an unrealised gain above cost, which the standard does not permit.

Question 3

An asset was revalued upward by ₹8 lakh in Year 1, recognised in OCI as revaluation surplus. In Year 2, the same asset is revalued downward by ₹12 lakh. In Year 3, the same asset is revalued upward again by ₹6 lakh. Explain how each year's revaluation movement should be recognised, applying the same-asset-history offset rule.

Accepted Answer

Year 1: the ₹8 lakh increase is recognised in OCI and accumulated in equity as revaluation surplus, since there is no prior revaluation decrease on this asset recognised in profit or loss to reverse. Year 2: the ₹12 lakh decrease is first offset against the existing revaluation surplus of ₹8 lakh for this same asset, reducing that surplus to zero and recognising ₹8 lakh of the decrease in OCI; the remaining ₹4 lakh of the decrease (₹12 lakh − ₹8 lakh), for which no surplus remains to absorb it, is recognised in profit or loss. Year 3: the ₹6 lakh increase must first reverse the amount previously recognised in profit or loss for this same asset, which was ₹4 lakh in Year 2, so ₹4 lakh of the Year 3 increase is recognised in profit or loss (reversing the earlier profit-or-loss decrease), and the remaining ₹2 lakh (₹6 lakh − ₹4 lakh) is recognised in OCI as a new revaluation surplus, since it exceeds the amount needed to reverse the prior profit-or-loss decrease. This year-by-year, asset-specific tracking of both the OCI surplus balance and any profit-or-loss decrease previously recognised is exactly what the same-asset-history offset rule requires.

Question 4

A company borrows ₹100 lakh specifically to construct a qualifying asset, at an interest rate of 9% per annum. Of this amount, ₹30 lakh remains temporarily unutilised for four months and is invested in a short-term deposit earning 6% per annum during that period. Compute the borrowing cost eligible for capitalisation for the year, assuming the full ₹100 lakh was borrowed at the start of the year and construction continued throughout.

Accepted Answer

Total borrowing cost incurred on the specific borrowing for the year = 9% × ₹100 lakh = ₹9 lakh. Investment income earned on the temporarily unutilised ₹30 lakh, invested for 4 months (4/12 of a year) at 6% per annum = 6% × ₹30 lakh × 4/12 = ₹0.60 lakh. Borrowing cost eligible for capitalisation = Total borrowing cost incurred − investment income on temporary investment of unused specific borrowing funds = ₹9 lakh − ₹0.60 lakh = ₹8.40 lakh. This deduction of investment income from the specific borrowing's cost reflects that the company did not actually incur a net cost of ₹9 lakh to fund the asset during the period the funds sat temporarily idle, since part of that cost was offset by income earned on the unused portion.

Question 5

A company has general borrowings outstanding during the year: Loan A of ₹200 lakh at 8% and Loan B of ₹100 lakh at 11%, with no specific borrowing for the qualifying asset. Average expenditure on the qualifying asset during the year is ₹150 lakh. Compute the capitalisation rate, the borrowing cost eligible for capitalisation, and state the rule that caps this amount.

Accepted Answer

Weighted average capitalisation rate = Total borrowing cost on general borrowings ÷ Total general borrowings outstanding = [(8% × 200) + (11% × 100)] ÷ (200 + 100) = (16 + 11) ÷ 300 = 27 ÷ 300 = 9% per annum. Borrowing cost eligible for capitalisation = Capitalisation rate × average expenditure on the qualifying asset = 9% × ₹150 lakh = ₹13.50 lakh. Ind AS 23 caps the amount capitalised in any period at the total borrowing costs actually incurred on general borrowings during that period, which here is ₹16 lakh + ₹11 lakh = ₹27 lakh; since the computed capitalisable amount of ₹13.50 lakh is comfortably below this ₹27 lakh ceiling, the full ₹13.50 lakh is capitalised, but had average expenditure on the asset been high enough to produce a computed figure exceeding ₹27 lakh, capitalisation would have been restricted to the ₹27 lakh actually incurred.

Question 6

A cash-generating unit has a carrying amount of ₹90 lakh, comprising goodwill of ₹15 lakh, a specialised machine of ₹40 lakh, and other assets of ₹35 lakh. The unit's recoverable amount is determined to be ₹60 lakh. The specialised machine has a separately determinable fair value less costs of disposal of ₹32 lakh. Allocate the impairment loss across the unit's assets.

Accepted Answer

Total impairment loss = Carrying amount ₹90 lakh − Recoverable amount ₹60 lakh = ₹30 lakh. Step 1: allocate first to goodwill, which absorbs ₹15 lakh in full, reducing goodwill to zero. Remaining impairment loss to allocate to the other assets = ₹30 lakh − ₹15 lakh = ₹15 lakh. Step 2: allocate the remaining ₹15 lakh pro rata based on carrying amounts of the machine (₹40 lakh) and other assets (₹35 lakh), total ₹75 lakh: machine's pro rata share = (40/75) × 15 = ₹8 lakh, reducing it to ₹32 lakh; other assets' pro rata share = (35/75) × 15 = ₹7 lakh, reducing them to ₹28 lakh. Step 3: check the floor — no asset can be reduced below the highest of its own fair value less costs of disposal, value in use (if determinable), or zero; the machine's fair value less costs of disposal is ₹32 lakh, and its pro rata allocation reduces it to exactly ₹32 lakh, which is at, not below, this floor, so no further reallocation is needed. Final allocation: goodwill ₹0 (impaired by ₹15 lakh), machine ₹32 lakh (impaired by ₹8 lakh), other assets ₹28 lakh (impaired by ₹7 lakh).

Question 7

A CGU's goodwill was impaired by ₹10 lakh two years ago. This year, the CGU's recoverable amount has increased substantially due to improved market conditions, suggesting the earlier impairment would no longer be justified if reassessed today. Explain whether this ₹10 lakh goodwill impairment can be reversed, and the reasoning behind the rule.

Accepted Answer

No — Ind AS 36 explicitly prohibits the reversal of an impairment loss recognised for goodwill in any subsequent period, regardless of how favourably the CGU's recoverable amount has since moved. The reasoning is that an apparent increase in goodwill's recoverable amount in a later period is far more likely to reflect internally generated goodwill that has built up within the business since the impairment, through ongoing operations, customer relationships, and reputation, rather than a genuine recovery of the value of the specific, originally acquired goodwill that was impaired; since Ind AS 38 explicitly prohibits recognising internally generated goodwill as an asset at all, permitting a reversal of a prior goodwill impairment would effectively allow this prohibited internally generated goodwill to be recognised indirectly through the impairment-reversal mechanism, which is precisely the loophole the non-reversal rule is designed to close.

Question 8

An aircraft is purchased for ₹50 crore, and its engines, which require replacement every 8 years while the airframe has a useful life of 25 years, cost ₹12 crore of that total. Explain how Ind AS 16 requires this asset to be depreciated, and why component accounting matters here.

Accepted Answer

Ind AS 16 requires each significant part of an item of PPE with a cost that is significant in relation to the total cost of the item to be depreciated separately, over its own useful life, rather than depreciating the entire asset as a single unit over one useful life. Here, the engines, at ₹12 crore of the ₹50 crore total, are clearly a significant part of the aircraft's cost, and have a materially different useful life, 8 years, from the remaining airframe and other components, which have a 25-year useful life; component accounting requires the ₹12 crore engine cost to be depreciated separately over 8 years, and the remaining ₹38 crore over 25 years. This matters because depreciating the entire ₹50 crore as a single unit over 25 years would understate the annual depreciation charge relative to the engines' genuinely shorter consumption pattern, and would also create a mismatch when the engines are eventually replaced, since a single-unit depreciation approach provides no mechanism for derecognising the original engine cost and its accumulated depreciation separately from the rest of the asset at the point of replacement.

Question 9

A company installs an offshore oil rig and is legally required to dismantle and remove it at the end of its 20-year useful life. The present value of the estimated dismantling cost is ₹8 crore. Explain how this amount should be treated at initial recognition of the rig under Ind AS 16.

Accepted Answer

Ind AS 16 requires the initial estimate of the costs of dismantling, removing and restoring the site on which an asset is located to be included in the cost of the asset at initial recognition, where the entity has incurred the obligation either when the asset is acquired or as a consequence of using it for purposes other than to produce inventories. Here, since the company has a present legal obligation to dismantle and remove the rig, the present value of this estimated cost, ₹8 crore, is added to the cost of the rig at initial recognition, with a corresponding provision recognised as a liability under Ind AS 37; the ₹8 crore is not expensed immediately, but is instead capitalised as part of the rig's cost and depreciated over the rig's 20-year useful life, alongside the unwinding of the discount on the provision being recognised as a finance cost over that same period, reflecting that the decommissioning obligation, though settled only at the end of the asset's life, is a genuine cost of installing and operating the rig from the very outset.

Question 10

A company is constructing a qualifying asset, but construction is halted for four months due to an unresolved dispute with a contractor, with no active development work occurring during that period. Explain how borrowing cost capitalisation should be treated during this four-month period.

Accepted Answer

Ind AS 23 requires capitalisation of borrowing costs to be suspended during extended periods in which active development of the qualifying asset is interrupted, and a four-month halt due to an unresolved contractor dispute, during which no active development work is occurring, qualifies as such an extended interruption; borrowing costs incurred during this four-month period should therefore be expensed as incurred rather than capitalised into the asset's cost, since the asset is not actually being brought closer to its intended use or sale during this period, and capitalisation is meant to reflect only borrowing costs genuinely attributable to bringing the asset to readiness. Capitalisation would resume once active development activities recommence, provided expenditure and borrowing costs are again being incurred at that point, and it is not necessary to restart the qualifying-asset assessment from scratch — only the capitalisation is suspended and later resumed, not the underlying qualification of the asset itself.

Question 11

In estimating value in use for an asset with an expected remaining useful life of 15 years, an entity's management wants to use detailed cash flow projections it has prepared for all 15 years, based on aggressive internal growth targets rather than externally supportable assumptions. Explain the concerns Ind AS 36 would raise with this approach.

Accepted Answer

Ind AS 36 requires cash flow projections used in estimating value in use to be based on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that will exist over the asset's remaining useful life, giving greater weight to external evidence over purely internal targets, and generally requires detailed, explicit forecasts to cover a maximum of five years unless a longer period can be justified, with cash flows beyond that explicit forecast period estimated by extrapolating the projections using a steady or declining growth rate, not by continuing detailed internal projections indefinitely. Using detailed cash flow projections for the full 15-year remaining useful life, based on aggressive internal growth targets not supported by external evidence, would raise two distinct concerns: first, using genuinely internal, unsupportable assumptions rather than externally corroborated evidence risks overstating recoverable amount and understating or entirely avoiding an impairment loss that should genuinely be recognised; second, extending detailed forecasts to 15 years without specific justification exceeds the standard's default five-year limit on explicit projections, which exists precisely because forecasting genuine cash flows in specific detail becomes progressively less reliable the further into the future the projection extends.

Question 12

A retail chain operates several stores, each in a different city, each generating its own cash inflows from sales largely independent of the other stores, though all stores share a centralised warehouse and head office function. Explain how the CGU for impairment testing purposes should be identified in this scenario.

Accepted Answer

Since each individual store generates cash inflows from sales largely independent of the other stores, each store, on its own, is likely to represent a separate cash-generating unit for impairment testing purposes, being the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. The centralised warehouse and head office, by contrast, do not themselves generate independent cash inflows — they support all the stores collectively — and are treated as corporate assets under Ind AS 36, which cannot be tested for impairment on a standalone basis and must instead be allocated on a reasonable and consistent basis across the CGUs (the individual stores) they support, or, if such allocation cannot be made reasonably and consistently, tested by comparing the carrying amount of the smallest group of CGUs to which a reasonable allocation can be made, including the corporate asset, against its recoverable amount, rather than attempting to test the warehouse or head office as if it were its own independent CGU.

Question 13

A company holds work-in-progress inventory that cost ₹300 per unit so far, and requires a further ₹90 per unit to complete. The finished product is expected to sell for ₹420 per unit, with selling costs of ₹15 per unit. Determine whether a write-down is required and, if so, its amount.

Accepted Answer

NRV = Estimated selling price ₹420 − estimated costs of completion ₹90 − estimated costs to sell ₹15 = ₹315 per unit. Comparing this to the cost incurred so far of ₹300 per unit, cost (₹300) is lower than NRV (₹315), so no write-down is required and the work-in-progress inventory is measured at its cost of ₹300 per unit. This illustrates that NRV must be computed net of all remaining costs to get the item to a saleable condition and actually sell it, not merely as selling price less selling costs, since a partially completed item still requires further completion expenditure before the estimated selling price can actually be realised.

Question 14

An asset with a carrying amount of ₹40 lakh (cost ₹60 lakh, accumulated depreciation ₹20 lakh) is revalued to a fair value of ₹52 lakh. Explain the two acceptable methods Ind AS 16 permits for restating the accumulated depreciation at the date of revaluation, and their effect on the asset's presentation.

Accepted Answer

Ind AS 16 permits two methods for treating accumulated depreciation when an asset is revalued. The first method restates the accumulated depreciation proportionately with the change in the gross carrying amount of the asset, so that the carrying amount after revaluation equals the revalued amount; here, the gross carrying amount and accumulated depreciation would each be scaled up proportionately (gross carrying amount and accumulated depreciation both increased in the same ratio that brings net carrying amount from ₹40 lakh to ₹52 lakh, a ratio of 1.3), preserving the same proportion of accumulated depreciation to gross cost as existed before revaluation, and continuing to show both a gross cost and accumulated depreciation figure, just both scaled up. The second method eliminates the accumulated depreciation against the gross carrying amount of the asset, restating the net amount to the revalued amount, so the asset is presented at a gross carrying amount of ₹52 lakh with accumulated depreciation reset to zero, as though the asset were newly acquired at its revalued amount at that date. Both methods produce the same net carrying amount of ₹52 lakh, but they differ in how the gross cost and accumulated depreciation are subsequently presented and how future depreciation is computed from that point, and the method used is a choice the entity must apply consistently for the class of assets concerned.

Question 15

Name three external and two internal indicators of impairment that Ind AS 36 requires an entity to consider when assessing, at each reporting date, whether an asset may be impaired.

Accepted Answer

External indicators include a significant decline in an asset's market value beyond what would be expected from the passage of time or normal use; significant adverse changes in the technological, market, economic or legal environment in which the entity operates or in the market to which the asset is dedicated; and an increase in market interest rates or other market rates of return likely to materially affect the discount rate used in calculating an asset's value in use, thereby decreasing its recoverable amount. Internal indicators include evidence of obsolescence or physical damage to an asset; and significant changes with an adverse effect on the entity, such as the asset becoming idle, plans to discontinue or restructure the operation to which the asset belongs, or evidence from internal reporting indicating that the asset's economic performance is, or will be, worse than expected. The presence of any such indicator triggers a full recoverable amount estimation, whereas in the absence of any indicator, other than for goodwill and indefinite-life intangible assets which require an annual test regardless, no formal recoverable amount calculation is required.

Practice — Ind AS on Tangible Assets and Impairment

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