In accordance with IAS 36: Impairment of Assets, explain which of the following would require an impairment test to be performed during the year ended 31 December 2019 on assets or cash-generating units or at group level in respect of Timtim Ltd (Timtim):
i) A fall in the benchmark interest rate used by the lender to calculate interest due on Timtim’s loans payable, its main form of finance.
ii) Acquisition by Timtim of 100% of another entity in 2018 at a price substantially above the fair value of the entity’s net assets. The entity acquired was not sold in 2019.
iii) Sanctions put in place restricting exports by Timtim to a major client.
iv) Increase in the tax rate applied to Timtim.
(Note: You should consider each event independently). (4 marks)
View Solution
i) Fall in benchmark interest:
No impairment test is required. However a rise in interest rates would trigger an impairment test.
ii) Acquisition of entity last year:
Yes, impairment test is necessary because the acquisition would result in goodwill and must be tested annually for impairment.
iii) Sanctions restricting exports:
Yes, this impairment indicator alters cash flow of the unit.
iv) Increase in tax rate:
No, impairment losses are calculated on a pre-tax basis.
(4 points for 4 marks)