Econ111 Microeconomic Principles - Free Assessment Answers

1 Introduction to Ethics
2 Describe the alternative methods of allocating scarce resources, and define and explain the features of an efficient allocation.
3 Distinguish between value and price, and define consumer surplus.
4 Distinguish between cost and price, and define producer surplus.
5 Evaluate the efficiency of the alternative methods of allocating scare resources.

• Value –in-use: It is defined as the present value which the company is expecting to derive from a particular asset or a cash generating unit.(Anon., 2017)

• Useful life: It is defined as the period over which the company is expecting to use the asset or the number of units of a product company is expecting to produce from such asset;(AssetWorks, LLC , 2018)

• Cash Generating Unit : It is the smallest identifiable group in the block of group of company which has its own asset and liabilities and generate inflows which are of independent nature from the cash flows of other assets of the company;(Anon., 2017)

• Depreciable Amount: It is stated as the cost of the asset or fair market values less residual value;( Defined Term., 2012)

• Fair Value: It is the value that shall be derived on disposition of an asset in the market in an orderly transaction between a buyer and seller;

• Impairment loss:  It is represented as difference between the recoverable amount and the carrying amount in the books of the company. Further, carrying value shall be greater than recoverable amount;

• Recoverable Amount: It is the higher of fair value less cost of its disposal and value in use.(Kin Lo, 2016)

1. Calculation of Recoverable Amount, Value in use , Fair value less cost of disposal
   

In terms of AASB 136- Impairment of Asset Fair value less cost of disposal is computed in the manner provided here-in-below:

 When Fair value of an asset or a liability is measured, one shall take into consideration the characteristics of the asset or liability, if such characteristic shall be taken into account by the market participants while valuing the property. Further, the pricing of the asset shall be determined under an orderly transaction between the market participants a transaction date under the market conditions..

Further, the calculation assumes that the transaction takes place in principal market or in the next most advantageous market.

The model of computation assumes that the market participants are acting in their economic best interest.

Further the following fact shall not be taken into consideration while determining the price of the orderly transaction:

• Better price is available is next best advantageous market;

Further, the valuation technique to be adopted by the enterprise shall be such that maximum data is available for valuation of fair value, maximises the observable inputs usability and minimises the usability of unobservable inputs.

Fair Market Value for non-financial asset: It shall be determined by taking into account a market participant ability to generate benefits of economic nature from the use of such asset in its highest and best use or by selling it to the other who shall do the same;

Thus fair market value computation encompassed the details provided above as stated under AASB 13.

In addition any cost which shall be incurred to materialise the disposal of asset other than those that have been recognised as liabilities shall be reduced from fair market value to ascertain fair market value less cost of disposal. For ex cost such as legal cost, stamp duty etc.

For computing the value in use of an asset one needs to look at the following elements:

• An estimate of the expected future cash flows that company is expecting to derive from such asset or cash generating unit;
• Analysis of the expectation of possible variations in the timing or amount of the cash flows;
• The time value of money which is determined by the current market risk free rate of interest;
• Uncertainty price inherent to such asset;
• Factors that are relevant like liquidity, that market participant shall take into consideration while estimating the future cash flows of such asset.

Further, one must take consideration of the following while determining the value in use of an asset:

• The estimated future cash inflows and outflows to be generated from such asset and revenue at its ultimate disposal;
• Applying appropriate discount rate for determining the present value of such cash flows.
  

Basis of estimating cash flows: 

• The cash flows to be estimated shall be reasonable and the assumptions under taken by management to estimate the cash flows shall be reliable. Further, it shall take into consideration the economic conditions that shall prevail over the life of such asset. Also, greater weight shall be given to external evidences;
• Any expected cash flow that may arise on the basis of future restructuring or any other performance improvement measures shall not be taken into consideration. The projection shall be based on five years unless a larger period required. The cash flows shall be based on most recent budget estimates;
• The rate to be used for forecasting cash flow shall be declining or steady in nature unless the same can be justified that the trend is upward moving. Further, the growth rate shall not exceed the long term average growth rate for products, industries or country or countries in which the company has operations in
• In addition cash flow prediction for future years shall also not include any cash flows from financing activities and receipts or payments from income tax.

Measuring recoverable amount:

The recoverable amount that shall be determined on the basis of higher of  value in use of an asset or cash generating unit or the fair market value less cost of disposal of such asset.

Further, the asset shall only be impaired if the recoverable value of such asset is lower than the carrying value of the asset.

Thus on the basis of above value shall be computed.

Solution to question 2

Computation of Impairment
Sl No	Particulars	Carrying Amount
1	Factory	636700
2	Patent	146000
3	Building	92000
4	Inventory	40000
5	Goodwill	33000
6	Total Carrying Asset	947700
7	Value in Use	848700
8	Sales less cost of disposal	612679
9	Recoverable Amount ( Higher of 7 or 8)	848700
10	Impairment	99000

Allocation of Impairment
Sl No	Particulars	Carrying Amount	Allocation of impairment	Value post Impairment
1	Factory	636700	48042	588658
2	Patent	146000	11016	134984
3	Building	92000	6942	85058
4	Inventory	40000	Not Impaired	40000
5	Goodwill	33000	33000	0
6	Value of asset other than goodwill and inventory	874700

 

Date	Particulars	Amount	Amount
	Impairment A/c..Dr	99000
	To Goodwill A/c		33000
	To Factory A/c		48041.8
	To Building A/c		6941.8
	To patent A/c		11016.3
	( being Cash generating Unit Impaired)
	Profit and Loss A/c….Dr	99000
	To Impairment A/c		99000
	(Being Transferred to Profit and loss A/c)

References:

Defined Term, 2012, Depreciable Amount, [Online] Available at: https://definedterm.com/depreciable_amount[Accessed 20 September 2018].

Anon., 2017, Cash Generating Unit, [Online] Available at: https://www.accountingtools.com/articles/2017/5/4/cash-generating-unit
[Accessed 20 September 2018].

Anon., 2017, Value in Use, [Online] Available at: https://www.accountingtools.com/articles/2017/5/8/value-in-use[Accessed 20 September 2018].

AssetWorks, LLC , 2018. An Introduction to Useful Life and Depreciation, [Online] Available at: https://www.assetworks.com/useful-life-and-depreciation/[Accessed 20 September 2018].

Kin Lo, F. F. P. A. P, 2016, What is a recoverable amount of an asset? How is this calculated?. [Online] Available at: https://www.quora.com/What-is-a-recoverable-amount-of-an-asset-How-is-this-calculated[Accessed 20 September 2018].