Reference no: EM132459428

On 2 Jan 2005, E2E Corporation Ltd., a technology hardware company, capitalized $40 million of development expenditures as an asset on its balance sheet. All of these expenditures relate to the development of a prototype technological product and qualify for capitalization as an intangible asset under IAS 38 (Intangible Assets) as they are expected to generate future economic benefits to the company approximately equally each year over the next 8 years with zero salvage value.

The company adopts cost model to account for intangible asset and the policy of amortizing the costs of intangible assets on a straight-line basis over the asset's useful life.

Since the completion of the development project, however, the outlook for demand of the product had deteriorated substantially. E2E estimated that the value-in-use, calculated on the basis of the present value of future operating cash flow, of the intangible asset would be $21 million on 31 Dec 2005. A study by an international technology-research consultant commissioned by E2E had reported a potential fair market value of the intangible to be $20 million on the same date.

Required:

Problem (a) Determine:

1. the amount (if any) of impairment loss on the intangible asset that E2E would have to recognize in its income statement for the year ended 31 Dec 2005,

2. the carrying amount of the intangible asset on the balance sheet as at 31 Dec 2005,

3. in accordance with IAS 36 (Impairment of Assets). Show all relevant workings.

Problem (b) In 2006, the demand outlook for the product began to improve. As a result, by 31 Dec 2006, E2E estimated that the value-in-use, calculated on the basis of the present value of future operating cash flow, of the intangible asset would be $26 million. A second study by an international technology-research consultant commissioned by E2E reported a potential fair market value of the intangible asset to be $28 million on the same date.

Determine:

1. the amount (if any) of impairment loss, or reversal of impairment loss, on the intangible asset that E2E would have to recognize in its income statement for the year ended 31 Dec 2006,

2. the carrying amount of the intangible asset on the balance sheet as at 31 Dec 2006,

3. in accordance with IAS 36 (Impairment of Assets). Show all relevant workings.