Question

Homes Stylist Ltd (HSL) runs 4 stores (namely: Alpha, Beta, Ceta and Delta) selling antique furniture and home accessories in various cities in Europe. Each store makes all its retail purchases through HSL's purchasing centre and all stores are managed in the same way. Marketing, advertising and human resources functions are conducted and centralised in HSL's headquarters. Each store has its own customer base and generates daily sales information and monthly statements of profit or loss for management to make decisions about continuing to operate individual stores. At its recent management meeting, the Sales Director has expressed his concern about the decrease in sales performance of stores in some cities due to keen competition in that region and a change in the desire of customers for stylish modern furniture. The Sales Director is considering to re-allocate resources to enhance the profitability of the company and has doubt on whether impairment assessment should be performed at entity level for HSL as a whole or at store level at 31 October 2018. According to management's decision, the carrying amount of the headquarters' building can be allocated to the cash generating units under review. The allocation basis of the headquarters' building is based on the carrying amount of the stores. As at 31 October 2018, the following financial data was obtained: Store Carrying amount of relevant assets $'o00 Recoverable amount $'o00 Alpha Beta Ceta Delta Total 4,300 5,400 6,000 3.800 3,100 6,200 7,000 3.500 19,800 19.500 Recoverable amount of HSL as a whole: Carrying amount of headquarters' building: 21,000 1,800 Required: (a) Based on the background information, advise the Sales Director at what level should HSL conduct its impairment assessment for the year ended 31 October 2018 in accordance with HKAS 36 'Impairment of Assets'. (7 marks) (b) Determine the impairment of assets, with detailed calculation, if any, to be recognised by HSL at 31 October 2018 and prepare journal entries to record the impairment loss. (13 marks)

Answer 1

Answer-a:

Based on the background information, impairment assessment is to be done at store level i.e. CGU level

In testing a cash-generating unit for impairment, an entity shall identify all the corporate assets that relate to the cash-generating unit under review.

If a portion of the carrying amount of a corporate asset can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the carrying amount of the unit, including the portion of the carrying amount of the corporate asset allocated to the unit, with its recoverable amount.

Answer-b:

The first step is to calculate the impairment losses for each of the CGUs. To do this, the carrying amount
of the headquarters building is allocated in proportion to their carrying amount. Impairment losses are then as follows.

$'000 Allocated HQ Total Relevant assets Recoverable Impairment building carrying carrying Store amount Carrying amount loss amount amount 4,300 $ 3,100 $ 397 $ Alpha 4,697 $ 1,597 Beta 5400 498 5898 6200 6000 Ceta 554 6554 7000 3500 $ Delta 351 3800 4151 651 19,500 $ 1,800

The above impairment loss is then allocated across all non‐excluded assets in that CGU.

$'000 Alpha Adjusted carrying Proportion Carrying amount Loss of loss amount $ 1,462 $ 4,300 4300/4697 Relevant assets 2,838 397 397/4697 HQ Building 135 262 1,597 $ 4,697 3,100 $'000 Delta Adjusted carrying Proportion Carrying amount Loss of loss amount 3,800 3800/4151 596 $ Relevant assets 3,204 HQ Building 351 351/4151 296 55 651 $ 4,151 3,500

Debit Credit Account Impairment loss 1,597 Accumulated impairment loss-Relevant asset 1,462 Accumulated impairment loss-HQ Building |(to record impairment loss of Alpha store) 135 Impairment loss 651 Accumulated impairment loss-Relevant asset 596 Accumulated impairment loss-HQ Building 55 (to record impairment loss of Delta store)