Company XYZ extracts oil and accordingly owns a drilling platform in the Arabian Gulf. By the end of the platform’s useful life, the firm is required to remove and dismantle it. Thus, the firm accounts for the removal and dismantling costs, which are depreciated over the platform’s useful life. Using the information below, you are asked to investigate whether there has been an impairment of the platform: The carrying amount of the platform in the statement of financial position is £5m. The company received an offer of £4.8m for the platform from a neighbouring competitor. This potential bidder would take the responsibility of dismantling and removing the platform (including the costs) at the end of the asset’s life. The present value of the estimated cash flows from the platform’s continued use is £5.4m, excluding any dismantling costs. The carrying value in XYZ’s balance sheet for the provision for dismantling and extraction is £0.8m. Describe in detail what is meant by the impairment of assets. How is it calculated? Include a critical examination of the reasons why it might arise. Using the appropriate IFRS standard and the above details, calculate what the platform’s value should be in XYZ’s balance sheet. What is the amount (if any) of impairment loss? Discuss the impairment review process and examine its advantages and current criticisms of its practical implementation.
Company XYZ extracts oil and accordingly owns a drilling platform in the
Arabian Gulf. By the end of the platform’s useful life, the firm is required to
remove and dismantle it. Thus, the firm accounts for the removal and
dismantling costs, which are depreciated over the platform’s useful life.
Using the information below, you are asked to investigate whether there
has been an impairment of the platform:
The carrying amount of the platform in the
position
The company received an offer of £4.8m for the platform from a
neighbouring competitor. This potential bidder would take the
responsibility of dismantling and removing the platform
(including the costs) at the end of the asset’s life.
The present value of the estimated
platform’s continued use is £5.4m, excluding any dismantling
costs.
The carrying value in XYZ’s balance sheet for the provision for
dismantling and extraction is £0.8m.
Describe in detail what is meant by the impairment of assets. How is it
calculated? Include a critical examination of the reasons why it might
arise.
Using the appropriate IFRS standard and the above details, calculate
what the platform’s value should be in XYZ’s balance sheet. What is the
amount (if any) of impairment loss?
Discuss the impairment review process and examine its advantages and
current criticisms of its practical implementation.
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