Reference no: EM132579293

Sun Ltd has a product line producing plastic packaging materials for fresh foods sold in supermarkets. The carrying amount of the net assets employed on the line as at 31st December 2019 (based on historical cost) was HK$1,500,000. The scrap value of the net assets at 31st December 2022 is estimated to be HK$800,000.

There is an indication that the market for plastic products will be adversely affected in 2022 when the government introduces legislation restricting its use on environmental grounds This means that the net assets employed to produce this product might have been impaired.

It is estimated that the net realisable value of the net assets at 31 December 2019 is HK$1,200,000.

The following estimated data is available:

                                                  2019              2020             2021              2022

Sales

(boxes containing 1,000 units each)    9,000          10,000           11,000       3,000

Income stream per box                      HK$60          HK$65           HK$70        HK$40

Company's expected cost of capital       8%             8%                8%           8%

Discount rates applicable:

Periods        8%

1                  0.926

2                  0.857

3                  0.794

4                  0.735

Required:

Question a) Your Financial Controller has asked you to calculate whether the carrying amount of the net assets at 31 December 2019 needs to be revised, and state the amount of any impairment adjustment required to comply with IAS 36 Impairment of Assets.

Question b) Your Financial Controller has also asked you to describe, in the context of IAS 36, the external and internal indicators that impairment of non-current assets or goodwill may have occurred.

Question c) Your Financial Controller has also asked you to critically examine the argument that the use of fair values in financial statements provides more useful information than historical cost accounting.