Illustration 5 – Treatment of a Future Restructuring

Illustration 5 – Treatment of a Future Restructuring :

In this illustration, tax effects are ignored.

Background

At the end of 20X0, enterprise K tests a plant for impairment. The plant is a cash-generating unit. The plant’s assets are carried at depreciated historical cost. The plant has a carrying amount of Rs. 3,000 lakhs and a remaining useful life of 10 years.

The plant is so specialised that it is not possible to determine its net selling price. Therefore, the plant’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) at the end of 20X3, the plant will be restructured at an estimated cost of Rs. 100 lakhs. Since K is not yet committed to the restructuring, a provision has not been recognised for the future restructuring costs; and

(b) there will be future benefits from this restructuring in the form of reduced future cash outflows.

At the end of 20X2, K becomes committed to the restructuring. The costs are still estimated to be Rs. 100 lakhs and a provision is recognised accordingly. The plant’s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph A47 and a current discount rate is the same as at the end of 20X0.

At the end of 20X3, restructuring costs of Rs. 100 lakhs are paid. Again, the plant’s estimated future cash flows reflected in the most recent management approved budgets and a current discount rate are the same as those estimated at the end of 20X2

At the End of 20X0

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

594 AS 28 (issued 2002) At the End of 20X0

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

Year	Future cash flows	Discounted at 14%
20X1	300	263
20X2	280	215
20X3	420⁽¹⁾	283
20X4	520⁽²⁾	308
20X5	350⁽²⁾	182
20X6	420⁽²⁾	191
20X7	480⁽²⁾	192
20X8	480⁽²⁾	168
20X9	460⁽²⁾	141
20X10	400⁽²⁾	108
Value in use		2,051

Excludes estimated restructuring costs reflected in management budgets.
Excludes estimated benefits expected from the restructuring reflected in management

A45. The plant’s recoverable amount (value in use) is less than its carrying amount. Therefore, K recognises an impairment loss for the plant.

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

Year	Future cash flows	Discounted at 14%
20X1	300	263
20X2	280	215
20X3	420⁽¹⁾	283
20X4	520⁽²⁾	308
20X5	350⁽²⁾	182
20X6	420⁽²⁾	191
20X7	480⁽²⁾	192
20X8	480⁽²⁾	168
20X9	460⁽²⁾	141
20X10	400⁽²⁾	108

Value in use

2,051

Excludes estimated restructuring costs reflected in management budgets.
Excludes estimated benefits expected from the restructuring reflected in management

A45. The plant’s recoverable amount (value in use) is less than its carrying amount. Therefore, K recognises an impairment loss for the plant.

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

	Plant
Carrying amount before impairment loss	3,000
Recoverable amount (Schedule 1)	2,051
Impairment loss	(949)
Carrying amount after impairment loss	2,051

At the End of 20X1

No event occurs that requires the plant’s recoverable amount to be reestimated. Therefore, no calculation of the recoverable amount is required to be performed.

At the End of 20X2

The enterprise is now committed to the restructuring. Therefore, in determining the plant’s value in use, the benefits expected from the restructuring 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. In accordance with paragraphs 94-95 of this Standard, the recoverable amount of the plant is re-determined at the end of 20X2.

Schedule 3. Calculation of the plant’s value in use at the end of 20X2 (Amount in Rs. lakhs)

20X3	420(1)	368
20X4	570(2)	439
20X5	380(2)	256
20X6	450(2)	266
20X7	510(2)	265
20X8	510(2)	232
20X9	480(2)	192
20X10	410(2)	144
Value in use		2,162

(1) Excludes estimated restructuring costs because a liability has already been recognised.

(2) Includes estimated benefits expected from the restructuring reflected in management budgets.

The plant’s recoverable amount (value in use) is higher than its carrying amount (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plant at the end of 20X0.

Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X2 (Amount in Rs. lakhs)

Carrying amount at the end of 20X0 (Schedule 2)	2,051
End of 20X2 Depreciation charge (for 20X1 and 20X2 Schedule 5)	(410)
Carrying amount before reversal	1,641
Recoverable amount (Schedule 3)	2,162
Reversal of the impairment loss	521
Carrying amount after reversal	2,162
Carrying amount: depreciated historical cost (Schedule 5)	2,400(1)

(1) The reversal does not result in the carrying amount of the plant exceeding what its carrying amount would have been at depreciated historical cost. Therefore, the full reversal of the impairment loss is recognised.

At the End of 20X3

There is a cash outflow of Rs. 100 lakhs when the restructuring costs are paid. Even though a cash outflow has taken place, there is no change in the estimated future cash flows used to determine value in use at the end of 20X2. Therefore, the plant’s recoverable amount is not calculated at the end of 20X3.

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

End of year	Depreciated historical cost	Recoverable amount	Adjusted depreciation charge	Impairment loss	Carrying amount after impairment
20X0	3,000	2,051	0	(949	2,051
20X1	2,700	n.c.	(205)	0	1,846
20X2	2,400	2,162	(205)	521	2,162
20X3	2,100	n.c.	(270)	0	1,892

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

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