Home › CA Final › financialreporting › Ind AS 36 — Impairment of Revalued Assets, CGU Edge Cases, Disclosures, Post-Impairment Depreciation › Plant X sells intermediate product to Plant Y at…
Plant X sells intermediate product to Plant Y at TRANSFER PRICE that passes all margins to X; 60% of X's output goes to Y, 40% to external customers; 80% of Y's output to external customers. Under Ind AS 36, when determining VIU of Plant X (as a CGU), management should use:
AManagement's best estimate of future ARM'S-LENGTH prices for X's output (because internal transfer pricing distorts CGU-level cash flows)
BThe market price of Y's final products
CZero, because X's revenue from Y is intercompany
DThe internal transfer price as agreed between X and Y
Answer & Solution
Correct answer: A. Management's best estimate of future ARM'S-LENGTH prices for X's output (because internal transfer pricing distorts CGU-level cash flows)
Ind AS 36 paragraph 70: when cash inflows are affected by internal transfer pricing, both X's VIU calculation AND any other CGU's VIU calculation must use management's best estimate of arm's-length prices. Internal transfer pricing isn't arm's length.
Related questions
Identify the statement about CGU disclosure under Ind AS 36 that is INCORRECT.When an impairment loss recognised in a prior period for a CGU is REVERSED:When an impairment loss is allocated within a CGU, the order of allocation under Ind AS 36Multiple CGUs share the SAME key assumption (e.g. growth in a common end market) and the AAn entity's CGU recoverable amount is based on VIU. The discount rate disclosure required An entity uses a SENSITIVITY disclosure when a reasonably possible change in a key assumptWhen projecting cash flows beyond the period covered by management's most recent budgets/fWhen an entity discloses a CGU to which significant goodwill is allocated and recoverable