If the revalued asset had a previous revaluation increase of 20 giving rise to

If the revalued asset had a previous revaluation

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If the revalued asset had a previous revaluation increase of $20, giving rise to a revaluation surplus of $14 and a deferred tax liability (using a tax rate of 30%) of $6, then the entry to write the asset down to a recoverable amount of $90 requires an adjustment directly against the revaluation surplus: Dr. Accumulated depreciation 20 Dr. Asset revaluation surplus 7 Dr. Deferred tax liability 3 Cr. Asset 30 (Write-down of asset to recoverable amount) 15.4 Cash-generating units – excluding goodwill. Value in use requires determining the expected cash flows to be received from an asset. Some assets do not individually generate cash flows because the cash flows generated are the result of a combination of several assets. For example, a machine in a factory works in conjunction with the rest of the assets in the factory to produce sellable goods. For such assets, if the carrying amount exceeds the fair value less costs of disposal, some other measure relating to value in use must be used. IAS 36 requires that, where there is any indication an asset may be impaired, if possible the recoverable amount should be estimated for the individual asset. However, if this is not possible, the entity should ‘determine the recoverable amount of the cash-generating unit to which the asset belongs’. In other words, the impairment test is applied to a cash-generating unit rather than to an individual asset. Cash-generating unit = the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. 15.4.1 Identifying cash-generating units . As is stated in the definition, the key is to determine the ‘smallest identifiable group of assets’, and this group must create ‘independent’ cash flows from continuing use. Guidelines: - Consider how management monitors the entity's operations, such as by product lines, businesses, individual locations, districts or regional areas; - Consider how management makes decisions about continuing or disposing of the entity's assets and operations; - If an active market exists for the output of a group of assets, this group constitutes a cash- generating unit; - Even if some of the output of a group is used internally, if the output could be sold externally, then these prices can be used to measure the value in use of the group of assets;
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- Cash-generating units should be identified consistently from period to period for the same group of assets. For example, an entity owns eight shops, spread across the same city. Head office sets selling prices and designs shop layout. All inventory is purchased centrally. Factors that would indicate that each store is a cash generating unit include the following: Does management monitor the profitability of each store separately? Does the location of the store suggest that each will have its own unique customer base?
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