Chapter 5: Asset Based Accounting Standards - Test 5: answer key

Question 1 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Sterling Garments Ltd. operates an integrated fabric-finishing plant at its Ahmedabad facility. The plant was acquired on 1 April 2023 and is used in the company's principal manufacturing operation. At 31 March 2027, its carrying amount, after charging depreciation, is ₹48 lakh. The technical team estimates that the plant has a remaining useful life of four years and a residual value of ₹2 lakh. During the year, a newly introduced finishing technology caused a significant decline in the market value of comparable equipment. A change in environmental regulations also requires additional treatment processes, adversely affecting the plant's operating economics. An engineering inspection identified corrosion in a major component. Internal reports further show that the plant's operating cash flows have been materially below the approved budget. The finance department has obtained an arm's-length offer of ₹43.50 lakh for the plant. Directly attributable disposal costs are estimated at ₹1.50 lakh. The plant's estimated future net cash flows from continuing use, before disposal, are: Year ending 31 March 2028: ₹14 lakh Year ending 31 March 2029: ₹13 lakh Year ending 31 March 2030: ₹12 lakh Year ending 31 March 2031: ₹11 lakh The estimated net disposal proceeds at the end of the fourth year are ₹2 lakh. A pre-tax discount rate of 10% is appropriate. The relevant discount factors are 0.9091, 0.8264, 0.7513 and 0.6830 for years one to four respectively. The finance manager proposes using the offer price as the recoverable amount without considering disposal costs or discounted cash flows. The auditor has requested an impairment assessment, including the effect on the plant's future depreciation, under AS 28.

Which statement correctly identifies the impairment indicators affecting Sterling Garments Ltd.'s finishing plant?

1. The market-value decline and regulatory change are external indicators; corrosion and weaker-than-budget performance are internal indicators. (correct answer)
2. The market-value decline and corrosion are external indicators; regulatory change and weaker performance are internal indicators.
3. The regulatory change and weaker performance are external indicators; market-value decline and corrosion are internal indicators.
4. Only the market-value decline and weaker-than-budget performance are indicators; corrosion and regulatory change are not relevant.

Answer: A — The market-value decline and regulatory change are external indicators; corrosion and weaker-than-budget performance are internal indicators.

Explanation. A significant decline in market value and an adverse regulatory change are external indicators under AS 28 para 8(a) and (b). Corrosion is evidence of physical damage, an internal indicator under para 8(e). Operating performance materially below expectations is also an internal indicator under para 8(g) and para 10. These indicators require the company to estimate recoverable amount. The classification depends on the source of the information, not merely on the fact that the asset's performance has deteriorated.

Where it goes wrong. Reversing the classification of external market or regulatory events and internal physical or operating evidence.

Authority. AS 28 paras 6-10; AS 28 para 8(a), 8(b), 8(e) and 8(g)

Question 2 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the value in use of the finishing plant at 31 March 2027, using the stated cash flows and discount factors?

1. ₹42.00 lakh
2. ₹41.37 lakh (correct answer)
3. ₹39.87 lakh
4. ₹45.22 lakh

Answer: B — ₹41.37 lakh

Explanation. Value in use is the present value of future cash flows from continuing use and ultimate disposal. The discounted amounts are ₹14 × 0.9091 = ₹12.7274 lakh; ₹13 × 0.8264 = ₹10.7432 lakh; ₹12 × 0.7513 = ₹9.0156 lakh; and ₹11 × 0.6830 = ₹7.5130 lakh. Add disposal proceeds of ₹2 × 0.6830 = ₹1.3660 lakh. Total value in use is ₹41.3652 lakh, approximately ₹41.37 lakh.

Where it goes wrong. Omitting the discounted disposal proceeds or adding undiscounted disposal proceeds to the present value of operating cash flows.

Authority. AS 28 paras 4.2 and 25; AS 28 paras 31 and 47

Question 3 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What impairment loss should Sterling Garments Ltd. recognise for the plant at 31 March 2027?

1. ₹8.00 lakh
2. ₹6.63 lakh
3. ₹6.00 lakh (correct answer)
4. ₹5.37 lakh

Answer: C — ₹6.00 lakh

Explanation. Net selling price is the offer of ₹43.50 lakh less disposal costs of ₹1.50 lakh, giving ₹42 lakh. Value in use is approximately ₹41.37 lakh. Recoverable amount is the higher figure, ₹42 lakh. The impairment loss is therefore carrying amount ₹48 lakh less recoverable amount ₹42 lakh = ₹6 lakh. Using the gross offer as net selling price would overstate recoverable amount, while selecting the lower value in use would contradict AS 28's higher-of test.

Where it goes wrong. Using gross sale consideration instead of net selling price, or selecting the lower of net selling price and value in use.

Authority. AS 28 paras 4.1, 4.3 and 4.5; AS 28 para 57

Question 4 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Assuming the impairment loss is recognised, what depreciation charge should be considered for the plant for 2027-28, based on its revised carrying amount, residual value and remaining useful life?

1. ₹12.00 lakh
2. ₹11.00 lakh
3. ₹10.50 lakh
4. ₹10.00 lakh (correct answer)

Answer: D — ₹10.00 lakh

Explanation. After impairment, the plant's revised carrying amount is ₹42 lakh. The residual value remains ₹2 lakh and the remaining useful life is four years. Future annual depreciation is therefore (₹42 lakh − ₹2 lakh) ÷ 4 = ₹10 lakh. AS 28 para 61 requires future depreciation to be adjusted so that the revised carrying amount, less residual value, is allocated systematically over the remaining useful life. Continuing the old depreciation charge would ignore the impairment adjustment.

Where it goes wrong. Continuing depreciation on the pre-impairment carrying amount instead of recalculating it after the write-down.

Authority. AS 28 paras 57 and 61

Question 5 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Meridian Electronics Ltd. operates an integrated manufacturing campus producing a specialised electronic component. The campus comprises two production machines and a registered manufacturing patent. Neither machine nor the patent generates cash inflows independently; they function together and the finished component is sold to several unrelated customers. The assets form the smallest identifiable group that generates largely independent external cash inflows. At 31 March 2027, the following carrying amounts are included in the campus balance sheet extract: Machine A: ₹120 lakh Machine B: ₹80 lakh Manufacturing patent: ₹40 lakh Goodwill allocated to the campus: ₹60 lakh Total carrying amount: ₹300 lakh Management estimates the value in use of the campus at ₹238 lakh. Its net selling price is ₹230 lakh. Goodwill has been allocated to the campus on a reasonable and consistent basis. The assets other than goodwill are to bear any residual impairment loss in proportion to their carrying amounts, subject to the restrictions in AS 28. Machine B has a separately determinable net selling price of ₹79.50 lakh. Its value in use cannot be determined independently and no evidence indicates that its value in use is higher than this net selling price. For Machine A and the patent, the relevant minimum carrying-amount floors under AS 28 are below the balances that would result from the proposed allocation. The company has no other recognised liability that needs to be included in the campus comparison. The finance director proposes allocating the entire impairment loss equally among all four balance sheet items. The audit committee requires the company to determine the campus impairment, apply the prescribed allocation sequence and respect the minimum carrying amount restriction for Machine B.

Which grouping should Meridian Electronics Ltd. use as the cash-generating unit for the impairment assessment described?

1. The integrated campus comprising both machines and the manufacturing patent. (correct answer)
2. Machine A and Machine B as two separate cash-generating units.
3. The manufacturing patent as one unit and the two machines as another unit.
4. The entire company, including unrelated manufacturing and trading operations.

Answer: A — The integrated campus comprising both machines and the manufacturing patent.

Explanation. A cash-generating unit is the smallest identifiable group of assets generating cash inflows from continuing use that are largely independent of those generated by other assets or groups. Neither the individual machines nor the patent independently generates cash inflows here; they function together to manufacture the component sold to external customers. Accordingly, the integrated campus is the appropriate unit. Selecting the whole company would aggregate unrelated activities beyond the lowest level of independent cash inflows.

Where it goes wrong. Treating each physical asset as a separate CGU despite the absence of largely independent cash inflows.

Authority. AS 28 para 4.10; AS 28 paras 64-67

Question 6 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the impairment loss for Meridian Electronics Ltd.'s Gamma-equivalent manufacturing campus at 31 March 2027?

1. ₹70 lakh
2. ₹62 lakh (correct answer)
3. ₹60 lakh
4. ₹52 lakh

Answer: B — ₹62 lakh

Explanation. The campus carrying amount is ₹120 + ₹80 + ₹40 + ₹60 = ₹300 lakh. Its recoverable amount is the higher of value in use ₹238 lakh and net selling price ₹230 lakh, namely ₹238 lakh. The impairment loss is ₹300 − ₹238 = ₹62 lakh. The figure is calculated for the CGU as a whole because the individual assets do not generate independent cash inflows. Allocating the impairment directly to individual assets before determining the CGU loss would reverse the required sequence.

Where it goes wrong. Comparing an individual asset's carrying amount with a CGU-wide recoverable amount or selecting the lower recoverable-amount measure.

Authority. AS 28 paras 4.1 and 72; AS 28 para 87

Question 7 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Before applying the individual-asset minimum carrying amount restriction, how should Meridian Electronics Ltd. allocate the ₹62 lakh impairment loss?

1. ₹15.50 lakh to each of the four balance sheet items.
2. ₹62 lakh to goodwill because it is allocated to the CGU.
3. ₹60 lakh to goodwill and ₹2 lakh to the other assets on a pro-rata basis. (correct answer)
4. ₹20.67 lakh to each of the three identifiable assets, with no reduction of goodwill.

Answer: C — ₹60 lakh to goodwill and ₹2 lakh to the other assets on a pro-rata basis.

Explanation. AS 28 para 87 requires the impairment loss of a CGU to be allocated first to goodwill. Goodwill of ₹60 lakh is therefore fully written down. The remaining impairment loss is ₹62 − ₹60 = ₹2 lakh, allocated to the other assets on a pro-rata basis according to their carrying amounts. Their aggregate carrying amount is ₹240 lakh. The restriction for Machine B may subsequently alter the initial pro-rata allocation, but it does not change the prescribed first allocation to goodwill.

Where it goes wrong. Allocating the CGU impairment equally or pro-rata across goodwill and other assets instead of reducing goodwill first.

Authority. AS 28 paras 78 and 87

Question 8 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

After applying the minimum carrying amount restriction for Machine B and reallocating the excess impairment to the other eligible assets, what impairment loss is finally allocated to Machine A?

1. ₹1.00 lakh
2. ₹0.50 lakh
3. ₹1.25 lakh
4. ₹1.125 lakh (correct answer)

Answer: D — ₹1.125 lakh

Explanation. After writing off goodwill, the ₹2 lakh residual loss is initially allocated in the ratio 120:80:40. Machine A's initial share is ₹1 lakh, Machine B's share ₹0.6667 lakh and the patent's share ₹0.3333 lakh. Machine B cannot be reduced below ₹79.50 lakh, so its loss is capped at ₹0.50 lakh. The excess ₹0.1667 lakh is reallocated between Machine A and the patent in their 120:40 ratio. Machine A receives an additional ₹0.125 lakh, making its final loss ₹1.125 lakh.

Where it goes wrong. Ignoring the asset-specific floor or failing to redistribute the impairment that cannot be allocated to Machine B.

Authority. AS 28 paras 87-88

Question 9 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Vardhan Chemicals Ltd. operates several manufacturing facilities and reviews impairment indicators at every reporting date. One item of process equipment, Asset R, was acquired on 1 April 2022 for ₹80 lakh. It has an estimated useful life of eight years, nil residual value and is depreciated on a straight-line basis. At 31 March 2026, after four years' depreciation, its carrying amount was ₹40 lakh. A material impairment indicator existed and its recoverable amount was estimated at ₹28 lakh. The company recognised an impairment loss of ₹12 lakh. The revised remaining useful life was four years. During 2026-27, depreciation was charged on the revised carrying amount and remaining useful life. At 31 March 2027, favourable changes in market conditions and operating performance resulted in an estimated recoverable amount of ₹34 lakh for Asset R. The company also tests its Gamma manufacturing cash-generating unit. At 31 March 2026, immediately before impairment, the unit comprised goodwill of ₹25 lakh, a machine with a carrying amount of ₹40 lakh and a patent with a carrying amount of ₹20 lakh. The unit's recoverable amount was ₹45 lakh. The impairment loss was allocated in accordance with AS 28. During 2026-27, depreciation reduced the machine and patent carrying amounts to ₹27 lakh and ₹13.50 lakh respectively. Had no impairment loss been recognised, their respective carrying amounts at 31 March 2027 would have been ₹36 lakh and ₹18 lakh. The Gamma unit's recoverable amount is now ₹56 lakh. The improvement reflects ordinary commercial demand and operating efficiencies, not a specific exceptional external event followed by a subsequent event reversing its effect. Management proposes reversing all previous impairment losses, including the amount charged to goodwill.

What is the maximum reversal of the impairment loss that Vardhan Chemicals Ltd. may recognise for Asset R at 31 March 2027?

1. ₹9.00 lakh (correct answer)
2. ₹13.00 lakh
3. ₹6.00 lakh
4. ₹12.00 lakh

Answer: A — ₹9.00 lakh

Explanation. After the impairment, Asset R's revised depreciation for 2026-27 is ₹28 lakh ÷ 4 years = ₹7 lakh, leaving a carrying amount of ₹21 lakh. Although recoverable amount is ₹34 lakh, the reversal cannot exceed the amount that would have been carried had no impairment occurred. Without impairment, five years' depreciation would have been ₹50 lakh, leaving ₹30 lakh. Permissible reversal is therefore ₹30 − ₹21 = ₹9 lakh, not the full difference to recoverable amount.

Where it goes wrong. Reversing an individual asset up to its recoverable amount without applying the ceiling based on the no-impairment carrying amount.

Authority. AS 28 paras 94 and 98; AS 28 para 101

Question 10 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the maximum aggregate reversal of the previous impairment loss that may be recognised for the Gamma cash-generating unit at 31 March 2027?

1. ₹15.50 lakh
2. ₹13.50 lakh (correct answer)
3. ₹10.00 lakh
4. ₹25.00 lakh

Answer: B — ₹13.50 lakh

Explanation. The current carrying amounts of the machine and patent are ₹27 lakh and ₹13.50 lakh. Their respective no-impairment carrying amounts are ₹36 lakh and ₹18 lakh, so the maximum permitted increases are ₹9 lakh and ₹4.50 lakh. Although the CGU recoverable amount exceeds its current carrying amount by ₹15.50 lakh, the aggregate reversal is capped at ₹13.50 lakh. Goodwill is not reversed because the stated recovery does not meet the exceptional-event condition in para 108.

Where it goes wrong. Treating the entire excess of CGU recoverable amount over carrying amount as a permissible reversal without applying asset-by-asset ceilings and the goodwill restriction.

Authority. AS 28 paras 98 and 106-107; AS 28 para 108

Question 11 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Which treatment is appropriate for the ₹25 lakh impairment loss previously allocated to goodwill in the Gamma cash-generating unit?

1. Reverse the loss in full because the CGU recoverable amount has increased.
2. Reverse the loss to the extent that goodwill's original carrying amount is restored.
3. Do not reverse the goodwill impairment because an ordinary improvement in forecasts is insufficient. (correct answer)
4. Reverse the loss after allocating the CGU reversal to the other assets.

Answer: C — Do not reverse the goodwill impairment because an ordinary improvement in forecasts is insufficient.

Explanation. AS 28 does not permit a goodwill impairment loss to be reversed merely because later estimates of cash flows, discount rates or recoverable amount improve. The narrow exception applies where the original loss resulted from a specific external event of an exceptional nature that is not expected to recur and subsequent external events reverse that event's effect. Ordinary improvement in commercial demand and operating efficiencies does not satisfy these conditions. The previous goodwill impairment therefore remains recognised.

Where it goes wrong. Assuming that the general CGU reversal procedure permits goodwill impairment to be reversed whenever recoverable amount increases.

Authority. AS 28 paras 108-110

Question 12 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

After recognising the maximum permitted reversal for Asset R, what annual depreciation charge should Vardhan Chemicals Ltd. consider for 2027-28?

1. ₹7.00 lakh
2. ₹8.00 lakh
3. ₹9.00 lakh
4. ₹10.00 lakh (correct answer)

Answer: D — ₹10.00 lakh

Explanation. The permitted reversal increases Asset R's carrying amount from ₹21 lakh to ₹30 lakh. At 31 March 2027, three years of its original eight-year useful life remain. With nil residual value, the revised annual depreciation is ₹30 lakh ÷ 3 = ₹10 lakh. AS 28 para 105 requires the post-reversal depreciation charge to allocate the revised carrying amount, less residual value, systematically over the remaining useful life. The recoverable amount of ₹34 lakh cannot be used as the revised carrying amount because of the reversal ceiling.

Where it goes wrong. Calculating future depreciation using recoverable amount rather than the carrying amount permitted after the reversal ceiling.

Authority. AS 28 paras 101 and 105

Question 13 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company identifies four developments relating to an item of plant: (i) its market value has fallen substantially more than normal wear would explain; (ii) market interest rates have increased, but the change is not expected to affect the discount rate for this asset; (iii) the plant has suffered physical damage; and (iv) internal reports show operating cash flows materially below budget. Which combination requires the company to estimate recoverable amount?

A company identifies four developments relating to an item of plant: (i) its market value has fallen substantially more than normal wear would explain; (ii) market interest rates have increased, but the change is not expected to affect the discount rate for this asset; (iii) the plant has suffered physical damage; and (iv) internal reports show operating cash flows materially below budget. Which combination requires the company to estimate recoverable amount?

1. Developments (i), (iii) and (iv) are indicators; development (ii) is not necessarily an indicator for this asset. (correct answer)
2. Developments (i) and (ii) are indicators; developments (iii) and (iv) are not external indicators.
3. Developments (ii), (iii) and (iv) are indicators; development (i) is normal market fluctuation.
4. All four developments automatically require a recoverable amount estimate, irrespective of materiality.

Answer: A — Developments (i), (iii) and (iv) are indicators; development (ii) is not necessarily an indicator for this asset.

Explanation. A significant market-value decline is an external indicator under para 8(a); physical damage and worse-than-budget operating performance are internal indicators under para 8(e), 8(g) and para 10. An increase in market rates is relevant under para 8(c) only where it is likely to affect the asset's discount rate and materially reduce recoverable amount. The facts expressly negate that link. The list of indicators is not exhaustive, but the company need not treat every rate increase as automatically material.

Where it goes wrong. Treating an increase in market interest rates as an automatic impairment indicator without assessing its effect on the asset's discount rate and recoverable amount.

Authority. AS 28 paras 6-12

Question 14 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A plant has estimated net cash inflows of ₹20 lakh, ₹25 lakh and ₹30 lakh at the end of the next three years. Net disposal proceeds at the end of year three are estimated at ₹4 lakh. Using pre-tax discount factors of 0.9091, 0.8264 and 0.7513 respectively, what is the plant's value in use?

A plant has estimated net cash inflows of ₹20 lakh, ₹25 lakh and ₹30 lakh at the end of the next three years. Net disposal proceeds at the end of year three are estimated at ₹4 lakh. Using pre-tax discount factors of 0.9091, 0.8264 and 0.7513 respectively, what is the plant's value in use?

1. ₹60.00 lakh
2. ₹64.39 lakh (correct answer)
3. ₹68.39 lakh
4. ₹61.39 lakh

Answer: B — ₹64.39 lakh

Explanation. Value in use includes discounted cash flows from continuing use and net disposal proceeds. The present values are ₹20 × 0.9091 = ₹18.182 lakh; ₹25 × 0.8264 = ₹20.660 lakh; ₹30 × 0.7513 = ₹22.539 lakh; and disposal proceeds ₹4 × 0.7513 = ₹3.0052 lakh. Total value in use is ₹64.3862 lakh, rounded to ₹64.39 lakh. The disposal proceeds must be discounted to the same date as the other cash flows.

Where it goes wrong. Discounting operating cash flows but adding the terminal disposal proceeds at their undiscounted amount.

Authority. AS 28 paras 4.2 and 25; AS 28 paras 31 and 47

Question 15 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A manufacturing company operates three stages of a production process. The machines at each stage cannot generate independent external cash inflows and their output is transferred internally to the next stage. The final output is sold to unrelated customers. Management monitors the process as one integrated operation. Which is the appropriate cash-generating unit?

A manufacturing company operates three stages of a production process. The machines at each stage cannot generate independent external cash inflows and their output is transferred internally to the next stage. The final output is sold to unrelated customers. Management monitors the process as one integrated operation. Which is the appropriate cash-generating unit?

1. Each machine is a separate unit because each performs a distinct production activity.
2. Only the final-stage machine is a unit because it completes the finished product.
3. The integrated three-stage production process is the smallest unit generating largely independent cash inflows. (correct answer)
4. The entire company is one unit because all production stages are under common management.

Answer: C — The integrated three-stage production process is the smallest unit generating largely independent cash inflows.

Explanation. The appropriate CGU is the smallest identifiable group generating cash inflows that are largely independent of other assets or groups. The individual machines only produce intermediate output transferred internally and do not generate independent cash inflows. The integrated three-stage process generates the external customer receipts and is monitored as one operation. The whole company would be too broad because unrelated assets and activities are not necessary to generate this process's cash inflows.

Where it goes wrong. Identifying a CGU based on physical production stages rather than the lowest level of largely independent cash inflows.

Authority. AS 28 para 4.10; AS 28 paras 64-67

Question 16 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A chemical intermediate produced by a company's processing unit is usually transferred to its downstream factory. However, an active external market exists for that intermediate, and the company could sell its entire output to unrelated buyers. How should the processing unit be treated when identifying cash-generating units?

A chemical intermediate produced by a company's processing unit is usually transferred to its downstream factory. However, an active external market exists for that intermediate, and the company could sell its entire output to unrelated buyers. How should the processing unit be treated when identifying cash-generating units?

1. Combine it with the downstream factory because all current output is internally transferred.
2. Combine it with the whole chemical division because internal transfers prevent independent cash inflows.
3. Treat it as a separate CGU only if the downstream factory is closed permanently.
4. Identify it as a separate CGU because its output could generate independent cash inflows through the active market. (correct answer)

Answer: D — Identify it as a separate CGU because its output could generate independent cash inflows through the active market.

Explanation. Where an active market exists for the output of an asset or group of assets, the unit is identified as a separate CGU even if some or all output is used internally. The ability to sell the intermediate output to external customers means that the processing unit can generate cash inflows largely independent of the downstream factory. Management should use the most reliable estimate of future market prices rather than relying uncritically on internal transfer prices.

Where it goes wrong. Combining a unit with downstream operations merely because its output is currently transferred internally despite the existence of an active external market.

Authority. AS 28 paras 68-70

Question 17 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. While estimating value in use, a company includes expected savings from a restructuring plan that has not yet been approved or committed, additional inflows from a future capacity-enhancement project, interest payments on borrowings and income tax payments. Which treatment is appropriate?

While estimating value in use, a company includes expected savings from a restructuring plan that has not yet been approved or committed, additional inflows from a future capacity-enhancement project, interest payments on borrowings and income tax payments. Which treatment is appropriate?

1. Exclude all these items from the cash flow estimates used to determine value in use. (correct answer)
2. Include restructuring savings and enhancement benefits but exclude interest and tax payments.
3. Include all items because they are part of the company's expected future cash flows.
4. Exclude restructuring savings only and include the remaining items in the estimates.

Answer: A — Exclude all these items from the cash flow estimates used to determine value in use.

Explanation. Value in use is based on the asset in its current condition. Cash flows from a future restructuring to which the enterprise is not yet committed and benefits from future capacity-enhancing expenditure are excluded. Financing cash flows and income tax receipts or payments are also excluded. The estimates must be consistent with a pre-tax discount rate and must avoid double counting. The proposed forecast improperly includes all four excluded categories.

Where it goes wrong. Including future restructuring or enhancement benefits and financing or tax cash flows in value in use.

Authority. AS 28 paras 35-37; AS 28 paras 42-43

Question 18 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company estimates value in use using cash flows that have already been adjusted for the specific volatility risk of the asset. The available market inputs include an 11% post-tax corporate discount rate, a 12.5% pre-tax rate reflecting the time value of money and relevant market risk, and a 15% pre-tax rate that adds a separate premium for the same volatility risk already reflected in cash flows. Which rate is most appropriate?

A company estimates value in use using cash flows that have already been adjusted for the specific volatility risk of the asset. The available market inputs include an 11% post-tax corporate discount rate, a 12.5% pre-tax rate reflecting the time value of money and relevant market risk, and a 15% pre-tax rate that adds a separate premium for the same volatility risk already reflected in cash flows. Which rate is most appropriate?

1. Use the 11% post-tax corporate discount rate without any adjustment.
2. Use the 12.5% pre-tax rate without adding the volatility risk a second time. (correct answer)
3. Use the 15% pre-tax rate because all asset risks must be added to the discount rate.
4. Use the 11% rate after deducting the asset's specific risk adjustment.

Answer: B — Use the 12.5% pre-tax rate without adding the volatility risk a second time.

Explanation. AS 28 requires a pre-tax discount rate reflecting current market assessments of the time value of money and asset-specific risks. It must not reflect risks for which cash flow estimates have already been adjusted, as this would double count the risk. The 12.5% rate is the appropriate pre-tax market rate in the facts given. The 11% post-tax rate is not suitable without adjustment, while the 15% rate duplicates the volatility premium.

Where it goes wrong. Using a post-tax discount rate or double counting asset-specific risk in both cash flows and the discount rate.

Authority. AS 28 paras 47 and 52-55

Question 19 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Management prepares cash flow forecasts for an asset covering eight years. The forecasts are based on approved budgets, but the company cannot demonstrate a reliable history of forecasting cash flows accurately beyond five years. What is the appropriate approach under AS 28?

Management prepares cash flow forecasts for an asset covering eight years. The forecasts are based on approved budgets, but the company cannot demonstrate a reliable history of forecasting cash flows accurately beyond five years. What is the appropriate approach under AS 28?

1. Use all eight years because the forecasts have received management approval.
2. Use three years only and assume nil cash flows thereafter.
3. Use a maximum five-year detailed forecast and extrapolate later cash flows using an appropriate steady or declining growth rate. (correct answer)
4. Use eight years but increase the growth rate to compensate for forecasting uncertainty.

Answer: C — Use a maximum five-year detailed forecast and extrapolate later cash flows using an appropriate steady or declining growth rate.

Explanation. Cash flow projections are normally based on the most recent approved budgets or forecasts for a maximum period of five years. A longer explicit period may be used only where management is confident in the forecasts and can demonstrate its ability, based on past experience, to forecast accurately over that longer period. Beyond the detailed forecast period, projections are extrapolated using a steady or declining growth rate unless an increase is justified. Management approval alone does not remove the reliability condition.

Where it goes wrong. Assuming that approved budgets automatically justify detailed cash flow projections beyond five years.

Authority. AS 28 paras 26-30

Question 20 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A machine has a carrying amount of ₹100 lakh. A binding arm's-length sale agreement provides for consideration of ₹104 lakh, and incremental disposal costs are ₹3 lakh. The machine has also experienced a possible impairment indicator. What is the appropriate treatment under AS 28?

A machine has a carrying amount of ₹100 lakh. A binding arm's-length sale agreement provides for consideration of ₹104 lakh, and incremental disposal costs are ₹3 lakh. The machine has also experienced a possible impairment indicator. What is the appropriate treatment under AS 28?

1. Recognise an impairment loss because the market has indicated a possible decline in value.
2. Calculate value in use and compare it with the gross sale consideration.
3. Recognise an impairment loss of ₹2 lakh based on disposal costs.
4. No impairment loss arises because net selling price exceeds carrying amount; value in use need not be estimated. (correct answer)

Answer: D — No impairment loss arises because net selling price exceeds carrying amount; value in use need not be estimated.

Explanation. Net selling price is the binding sale consideration of ₹104 lakh less disposal costs of ₹3 lakh, giving ₹101 lakh. Since net selling price exceeds the machine's carrying amount of ₹100 lakh, recoverable amount must also exceed carrying amount. AS 28 para 15 therefore makes it unnecessary to estimate value in use. The existence of an impairment indicator triggers assessment, but it does not by itself require a write-down where recoverable amount is sufficient.

Where it goes wrong. Recognising an impairment loss solely because an indicator exists without considering that one recoverable-amount measure already exceeds carrying amount.

Authority. AS 28 paras 15 and 20-23

Question 21 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A specialised machine has a carrying amount of ₹70 lakh and net selling price of ₹55 lakh. It does not generate cash inflows independently, and its individual value in use cannot be estimated. The machine belongs to a production-line CGU with a carrying amount of ₹220 lakh and recoverable amount of ₹240 lakh. What impairment treatment is appropriate for the machine?

A specialised machine has a carrying amount of ₹70 lakh and net selling price of ₹55 lakh. It does not generate cash inflows independently, and its individual value in use cannot be estimated. The machine belongs to a production-line CGU with a carrying amount of ₹220 lakh and recoverable amount of ₹240 lakh. What impairment treatment is appropriate for the machine?

1. No impairment loss is recognised for the machine because its CGU is not impaired. (correct answer)
2. Recognise an impairment loss of ₹15 lakh because net selling price is below carrying amount.
3. Write down the machine to ₹55 lakh and recognise the difference in profit or loss.
4. Allocate the CGU's excess recoverable amount to the machine as a reversal of impairment.

Answer: A — No impairment loss is recognised for the machine because its CGU is not impaired.

Explanation. The machine cannot be assessed independently because it does not generate largely independent cash inflows and its value in use cannot be estimated. Its recoverable amount must therefore be assessed through the production-line CGU. The CGU is not impaired because recoverable amount of ₹240 lakh exceeds its carrying amount of ₹220 lakh. Under para 91(b), no impairment loss is recognised for the individual machine even though its net selling price is below its carrying amount.

Where it goes wrong. Writing down an individual asset solely because its net selling price is below carrying amount when the related CGU is not impaired.

Authority. AS 28 paras 64-66; AS 28 paras 91(a) and 91(b)

Question 22 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A machine costing ₹100 lakh was acquired on 1 April 2022. It has a ten-year useful life and nil residual value and is depreciated on a straight-line basis. At 31 March 2026, after four years' depreciation, its carrying amount of ₹60 lakh was impaired to ₹40 lakh. For 2026-27, depreciation is charged over the revised remaining useful life of six years. At 31 March 2027, its recoverable amount is ₹58 lakh. What is the maximum impairment reversal permitted?

A machine costing ₹100 lakh was acquired on 1 April 2022. It has a ten-year useful life and nil residual value and is depreciated on a straight-line basis. At 31 March 2026, after four years' depreciation, its carrying amount of ₹60 lakh was impaired to ₹40 lakh. For 2026-27, depreciation is charged over the revised remaining useful life of six years. At 31 March 2027, its recoverable amount is ₹58 lakh. What is the maximum impairment reversal permitted?

1. ₹24.67 lakh
2. ₹16.67 lakh (correct answer)
3. ₹18.00 lakh
4. ₹20.00 lakh

Answer: B — ₹16.67 lakh

Explanation. After impairment, annual depreciation is ₹40 lakh ÷ 6 = ₹6.6667 lakh, leaving a 31 March 2027 carrying amount of approximately ₹33.3333 lakh. Without impairment, five years' depreciation would have been ₹50 lakh, leaving a carrying amount of ₹50 lakh. The recoverable amount of ₹58 lakh is higher, but the individual-asset reversal cannot exceed the no-impairment carrying amount. Maximum reversal is therefore ₹50 − ₹33.3333 = approximately ₹16.67 lakh.

Where it goes wrong. Reversing the asset to its recoverable amount without capping the increase at its hypothetical carrying amount after normal depreciation.

Authority. AS 28 paras 94 and 98; AS 28 para 101

Question 23 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. An asset was impaired in a previous year. At the current reporting date, its value in use has increased solely because the future cash inflows are closer in time and the present value has increased as a result of the passage of time. There has been no change in estimated cash flows, disposal proceeds or discount rates, and no increase in the asset's service potential. What is the correct treatment?

An asset was impaired in a previous year. At the current reporting date, its value in use has increased solely because the future cash inflows are closer in time and the present value has increased as a result of the passage of time. There has been no change in estimated cash flows, disposal proceeds or discount rates, and no increase in the asset's service potential. What is the correct treatment?

1. Reverse the impairment to the extent of the increase in value in use.
2. Reverse the impairment after deducting current-year depreciation.
3. Do not reverse the impairment merely because of the unwinding of the discount. (correct answer)
4. Recognise the increase directly in revaluation surplus.

Answer: C — Do not reverse the impairment merely because of the unwinding of the discount.

Explanation. A reversal reflects an increase in the estimated service potential of the asset resulting from a change in estimates, such as future cash flows, timing or discount rate. AS 28 para 100 specifically states that an increase in value in use arising merely because future cash inflows are closer does not represent an increase in service potential. Accordingly, the impairment loss is not reversed solely due to the unwinding of the discount.

Where it goes wrong. Treating the passage-of-time increase in the present value of future cash flows as evidence of a recoverable impairment reversal.

Authority. AS 28 paras 98-100

Question 24 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A cash-generating unit contains goodwill that was written down following a severe but ordinary decline in expected sales. In a subsequent year, management revises the sales forecasts upward and the discount rate falls, causing recoverable amount to exceed the unit's current carrying amount. No exceptional external event caused the original impairment. What is the appropriate treatment of the previous goodwill impairment?

A cash-generating unit contains goodwill that was written down following a severe but ordinary decline in expected sales. In a subsequent year, management revises the sales forecasts upward and the discount rate falls, causing recoverable amount to exceed the unit's current carrying amount. No exceptional external event caused the original impairment. What is the appropriate treatment of the previous goodwill impairment?

1. Reverse goodwill impairment in proportion to the increase in recoverable amount.
2. Reverse goodwill impairment after all other CGU assets have reached their original carrying amounts.
3. Reverse goodwill impairment to the extent that the revised cash flows relate to acquired operations.
4. Do not reverse the goodwill impairment because the exceptional external event conditions are not met. (correct answer)

Answer: D — Do not reverse the goodwill impairment because the exceptional external event conditions are not met.

Explanation. A goodwill impairment loss is not reversed merely because estimates of future cash flows improve or discount rates decrease. Reversal is permitted only in the exceptional situation where the original loss was caused by a specific external event of an exceptional nature that is not expected to recur and subsequent external events reverse that event's effect. The facts expressly state that the original impairment was not caused by such an event. Therefore, the goodwill impairment remains recognised.

Where it goes wrong. Applying the general reversal principle to goodwill without satisfying the specific exceptional external event requirements.

Authority. AS 28 paras 108-111

Question 25 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A cash-generating unit, containing no goodwill, has two assets: Asset P with a carrying amount of ₹80 lakh and Asset Q with a carrying amount of ₹40 lakh. The recoverable amount of the unit is ₹98 lakh. Asset P has a separately determinable net selling price of ₹78 lakh and no higher determinable value in use. Asset Q has no minimum carrying amount restriction other than zero. What are the final impairment losses allocated to Assets P and Q?

A cash-generating unit, containing no goodwill, has two assets: Asset P with a carrying amount of ₹80 lakh and Asset Q with a carrying amount of ₹40 lakh. The recoverable amount of the unit is ₹98 lakh. Asset P has a separately determinable net selling price of ₹78 lakh and no higher determinable value in use. Asset Q has no minimum carrying amount restriction other than zero. What are the final impairment losses allocated to Assets P and Q?

1. Asset P: ₹2 lakh; Asset Q: ₹20 lakh. (correct answer)
2. Asset P: ₹14.67 lakh; Asset Q: ₹7.33 lakh.
3. Asset P: ₹10 lakh; Asset Q: ₹12 lakh.
4. Asset P: ₹0 lakh; Asset Q: ₹22 lakh.

Answer: A — Asset P: ₹2 lakh; Asset Q: ₹20 lakh.

Explanation. The CGU impairment loss is ₹120 − ₹98 = ₹22 lakh. Initial pro-rata allocation based on carrying amounts of ₹80 lakh and ₹40 lakh would assign ₹14.6667 lakh to P and ₹7.3333 lakh to Q. However, P cannot be reduced below its net selling price of ₹78 lakh, so its impairment is capped at ₹2 lakh. The remaining ₹20 lakh is allocated to Q, leaving it at ₹20 lakh. The excess allocation that cannot be charged to P must be reallocated to the other eligible asset.

Where it goes wrong. Applying the initial pro-rata allocation without respecting an asset's minimum carrying amount floor and reallocating the excess impairment.

Authority. AS 28 paras 87-88