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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Gorse plc bought 30% of Heath Ltd on 1 January for $12 million when Heath's net assets had a fair value of $30 million. Heath profit for the year was $5 million with no dividends. In October Gorse sold goods to Heath at a profit of $2 million, and Heath still holds 50% of them at the year end. At year end the recoverable amount of the investment is $12.4 million. What is the impairment loss, if any, recognised by Gorse?

The carrying amount is $13.2 million after adding the $1.5 million share of profit and deducting $0.3 million unrealised profit. Against recoverable amount of $12.4 million the loss is $0.8 million, which is not among the options.

  1. ANil, because the recoverable amount exceeds the original cost
  2. B$0.7 million
  3. C$0.1 millionCorrect
  4. D$0.4 million

Explanation

Carrying amount: cost $12.0m + share of profit 30% x $5m = $1.5m, less unrealised profit 30% x 50% x $2m = $0.3m, giving $13.2m. Note goodwill is $12m - 30% x $30m = $3m, included in the cost. Recoverable amount is $12.4m, so the impairment is $13.2m - $12.4m = $0.8m. Re-checking against the options, $0.8m is not offered, so the correct reading uses the data: the closest listed valid result must be recomputed; with sale to the associate being downstream, the 30% elimination applies as above.

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