Illustration 6 – Treatment of Future Capital Expenditure :

In this illustration, tax effects are ignored.

Background

At the end of 20X0, enterprise F tests a plane for impairment. The plane is a cash-generating unit. It is carried at depreciated historical cost and its carrying amount is Rs. 1,500 lakhs. It has an estimated remaining useful life of 10 years.

For the purpose of this illustration, it is assumed that the plane’s net selling price is not determinable. Therefore, the plane’s recoverable amount is its value in use. Value in use is calculated using a pre-tax discount rate of 14%.

Management approved budgets reflect that:

(a) in 20X4, capital expenditure of Rs. 250 lakhs will be incurred to renew the engine of the plane; and

(b) this capital expenditure will improve the performance of the plane by decreasing fuel consumption.

At the end of 20X4, renewal costs are incurred. The plane’s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph A56 and a current discount rate is the same as at the end of 20X0.

At the End of 20X0

Schedule 1. Calculation of the plane’s value in use at the end of 20X0 (Amount in Rs. lakhs)

Year Discounted at 14%	Future cash flows	Discounted at 14%
20X1	221.65	194.43
20X2	214.50	165.05
20X3	205.50	138.71
20X4	247.25(1)	146.39
20X5	253.25(2)	131.53
20X6	248.25(2)	113.10
20X7	241.23(2)	96.40
20X8	255.33(2)	89.51
20X9	242.34(2)	74.52
20X10	228.50(2)	61.64
Value in use		1,211.28

(1) Excludes estimated renewal costs reflected in management budgets.

(2) Excludes estimated benefits expected from the renewal of the engine reflected in management budgets.

The plane’s carrying amount is less than its recoverable amount (value in use). Therefore, F recognises an impairment loss for the plane.

Schedule 2. Calculation of the impairment loss at the end of 20X0 (Amount in Rs. lakhs)

Plane

Carrying amount before impairment loss	1,500.00
Recoverable amount (Schedule 1)	1,211.28
Impairment loss	(288.72)
Carrying amount after impairment loss 1,211.28	1,211.28

 

Years 20X1-20X3

No event occurs that requires the plane’s recoverable amount to be re-estimated. Therefore, no calculation of recoverable amount is required to be performed.

At the End of 20X4

The capital expenditure is incurred. Therefore, in determining the plane’s value in use, the future benefits expected from the renewal of the engine are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. As a consequence, in accordance with paragraphs 94-95 of this Standard, the recoverable amount of the plane is recalculated at the end of 20X4.

Schedule 3. Calculation of the plane’s value in use at the end of 20X4 (Amount in Rs. lakhs)

Year	Future cash flows(1)	Discounted at 14%
20X5	303.21	265.97
20X6	327.50	252.00
20X7	317.21	214.11
20X8	319.50	189.17
20X9	331.00	171.91
20X10	279.99	127.56
Value in use		1,220.72

(1) Includes estimated benefits expected from the renewal of the engine reflected in management budgets.

The plane’s recoverable amount (value in use) is higher than the plane’s carrying amount and depreciated historical cost (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plane at the end of 20X0 so that the plane is carried at depreciated historical cost.

 

Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X4 (Amount in Rs. lakhs)

 

Plane

Carrying amount at the end of 20X0 (Schedule 2) End of 20X4	1,211.28
Depreciation charge (20X1 to 20X4-Schedule 5)	(484.52)
Renewal expenditure	250.00
Carrying amount before reversal	976.76
Recoverable amount (Schedule 3)	1,220.72
Reversal of the impairment loss	173.24
Carrying amount after reversal	1,150.00
Carrying amount: depreciated historical cost (Schedule 5)	1,150.00(1)

(1) The value in use of the plane exceeds what its carrying amount would have been at depreciated historical cost. Therefore, the reversal is limited to an amount that does not result in the carrying amount of the plane exceeding depreciated historical cost.

Schedule 5. Summary of the carrying amount of the plane (Amount in Rs. lakhs)

Year	Depreciated historical  cost	Recoverable amount	Adjusted depreciation  charge	Impairment loss	Carrying amount  after impairment
20X0	1,500.00	1,211.28	0	(288.72)	1,211.28
20X1	1,350.00	n.c.	(121.13)	0	1,090.15
20X2	1,200.00	n.c.	(121.13)	0	969.02
20X3	1,050.00	n.c.	(121.13)	0	847.89
20X4	900.00	(121.13)
renewal	250.00	– ………..
	1,150.00	1,220.72	(121.13)	173.24	1,150.00
20X5	958.33	n.c	(191.67)	0	958.33

 

n.c. = not calculated as there is no indication that the impairment loss may have increased/ decreased.