On
1
January
2
0
2
1
,
Reignith acquired a distribution licence in terms of the Service Level Agreement
(
SLA
)
,
at a cost of R
1
0
0
0
0
0
0
,
granting the company the sole right to market and distribute Radine Iced Coffee in South Africa. The cost of the licence is being amortised over a period of
1
0
years. On
3
0
April
2
0
2
4
,
Reignith was informed that the main ingredient used in the production of the iced coffee is under investigation by the Food and Beverage Regulatory Authority of South Africa. The Authority released a statement in July
2
0
2
4
indicating that the aforementioned ingredient would officially be declared a banned substance in South Africa from
1
August
2
0
2
7
.
As a result, Reignith will be unable to distribute the product beyond this date, impacting its SLA for the licence. Due to the announcement by the Authority, demand for the iced tea has begun tomdecline, and expected net cash inflows were revised accordingly. The value in use of the licence agreement using the pre
-
tax discount rate of
1
4
%
was correctly calculated to be R
3
9
8
8
5
4
.
4
An investigation has indicated that Reignith would be able to sell the remaining term of the licence to an interested buyer on
1
August
2
0
2
4
,
in a country with less stringent quality controls, for an amount of R
3
5
0
0
0
0
.
Costs of disposal should amount to
7
%
in this case. There were no previous impairment losses relating to the distribution licence. As of
3
1
July
2
0
2
4
,
the useful life of the distribution licence remains unchanged. REQUIRED: Discuss whether Reignith Limited should recognise an impairment loss, in accordance with IAS
3
6
Impairment of Assets, in respect of the distribution licence associated with the Radine Iced Coffee Service Level Agreement for the year ended
3
1
July
2
0
2
4
.
•
Where necessary, provide calculations to support your answer.
•
Ignore any effects of taxation
give full answer with step by step answer and give final summary
Question:
On
1
January
2
0
2
1
,
Reignith acquired a distribution licence in terms of the Service Level Agreement
(
SLA
)
,
at a cost of R
1
0
0
0
0
0
0
,
granting the company the sole right to market and distribute Radine Iced Coffee in South Africa. The cost of the licence is being amortised over a period of
1
0
years. On
3
0
April
2
0
2
4
,
Reignith was informed that the main ingredient used in the production of the iced coffee is under investigation by the Food and Beverage Regulatory Authority of South Africa. The Authority released a statement in July
2
0
2
4
indicating that the aforementioned ingredient would officially be declared a banned substance in South Africa from
1
August
2
0
2
7
.
As a result, Reignith will be unable to distribute the product beyond this date, impacting its SLA for the licence. Due to the announcement by the Authority, demand for the iced tea has begun tomdecline, and expected net cash inflows were revised accordingly. The value in use of the licence agreement using the pre
-
tax discount rate of
1
4
%
was correctly calculated to be R
3
9
8
8
5
4
.
4
An investigation has indicated that Reignith would be able to sell the remaining term of the licence to an interested buyer on
1
August
2
0
2
4
,
in a country with less stringent quality controls, for an amount of R
3
5
0
0
0
0
.
Costs of disposal should amount to
7
%
in this case. There were no previous impairment losses relating to the distribution licence. As of
3
1
July
2
0
2
4
,
the useful life of the distribution licence remains unchanged. REQUIRED: Discuss whether Reignith Limited should recognise an impairment loss, in accordance with IAS
3
6
Impairment of Assets, in respect of the distribution licence associated with the Radine Iced Coffee Service Level Agreement for the year ended
3
1
July
2
0
2
4
.
•
Where necessary, provide calculations to support your answer.
•
Ignore any effects of taxation
give full answer with step by step answer and give final summary
This is AI generated Response.
Asked by: sreegeeth
Created at: 2025-11-05 19:02:19
Final Answer:
RenderedRaw Text
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# IAS 36 Impairment Assessment: Reignith Distribution Licence (Year Ended 31 July 2024)
## 1. **Background and Key Facts**
- **Asset:** Distribution licence for Radine Iced Coffee (South Africa)
- **Acquisition Cost:** R1,,000
**Acquisition:** 1 2021- **Useful:** 10 yearsamortised this period)
**Impairment Trigger:** Ingredient to be banned from 1 August 2027; licence will be unusable after this date
- **Value in Use (VIU):** R398,854 (as calculated)
- **Fair Value Less Costs of Disposal (FVLCD):**
- Fair value: R350,000 (expected sale price as at 1 August 2024)
- Costs to sell: 7% of R350,000 = R24,500
- FVLCD = R350,000 - R24,500 = **R325,500**
- **Previous Impairments:** None
## 2. **IAS 36 Process Steps**
### Step 1: **Identify Indication of Impairment**
- The future economic benefits from the licence will cease earlier than originally expected (product cannot be distributed beyond 1 August 2027).
- Demand and expected net cash inflows have declined.
- **Conclusion:** There is clear indication of impairment.
### Step 2: **Determine Carrying Amount at 31 July 2024**
- **Amortisation:**
- Useful life: 10 years
- Annual amortisation = R1,000,000 / 10 = R100,000 per year
- Time elapsed: 1 January 2021 to 31 July 2024 = 3 years, 7 months
- 1 Jan 2021 – 31 Dec 2021: 1 year
- 1 Jan 2022 – 31 Dec 2022: 1 year
- 1 Jan 2023 – 31 Dec 2023: 1 year
- 1 Jan 2024 – 31 July 2024: 7 months (7/12 of R100,000 = R58,333)
- **Total amortisation to date:** R100,000 × 3 + R58,333 = R358,333
- **Carrying amount as at 31 July 2024:**
R1,000,000 − R358,333 = **R641,667**
### Step 3: **Calculate Recoverable Amount**
- **Recoverable amount** is the higher of:
- Value in use (VIU): **R398,854**
- Fair value less costs of disposal (FVLCD): **R325,500**
- **Recoverable amount = R398,854**
### Step 4: **Compare Carrying Amount and Recoverable Amount**
- Carrying amount: **R641,667**
- Recoverable amount: **R398,854**
- **Impairment loss required:** R641,667 − R398,854 = **R242,813**
## 3. **Conclusion & Summary**
### **Should Reignith Limited Recognise an Impairment Loss?**
**Yes.**
In accordance with IAS 36, Reignith must recognise an impairment loss for the distribution licence for the year ended 31 July 2024, as the carrying amount of the licence exceeds its recoverable amount.
### **Summary Table**
| Item | Amount (R) |
|-----------------------|------------------|
| Carrying Amount | 641,667 |
| Value in Use (VIU) | 398,854 |
| FVLCD | 325,500 |
| Recoverable Amount | 398,854 |
| **Impairment Loss** | **242,813** |
**Journal Entry:**
```
Dr Impairment Loss (P&L) 242,813
Cr Accumulated Impairment Loss 242,813
```
---
## **Key Points**
- The licence’s carrying amount exceeds its recoverable amount.
- The recoverable amount is based on the higher of value in use and fair value less costs to sell.
- An impairment loss of **R242,813** must be recognised in the 2024 financial statements.
Question:
give 2 sentence summary in each steps
This is AI generated Response.
Asked by: sreegeeth
Created at: 2025-11-05 19:05:19
Final Answer:
RenderedRaw Text
Did you like this answer?
# IAS 36 Impairment Assessment Summary: Reignith Distribution Licence
## 1. Background and Key Facts
Reignith acquired a distribution licence for Radine Iced Coffee at a cost of R1,000,000, amortised over 10 years. The licence will become unusable after 1 August 2027 due to a ban on a key ingredient, prompting a review for impairment.
## 2. IAS 36 Process Steps
### Step 1: Identify Indication of Impairment
There is clear evidence of impairment due to the impending ban on a primary ingredient, leading to a decline in expected cash inflows. This indicates that the future economic benefits of the licence will be compromised.
### Step 2: Determine Carrying Amount at 31 July 2024
The carrying amount is calculated by deducting accumulated amortisation from the acquisition cost. As of 31 July 2024, the carrying amount is R641,667 after accounting for R358,333 in amortisation.
### Step 3: Calculate Recoverable Amount
The recoverable amount is determined as the higher of value in use (R398,854) and fair value less costs of disposal (R325,500). The recoverable amount is R398,854, indicating the asset's future potential.
### Step 4: Compare Carrying Amount and Recoverable Amount
A comparison reveals that the carrying amount (R641,667) exceeds the recoverable amount (R398,854). This results in an impairment loss of R242,813, which Reignith is required to recognise.
## 3. Conclusion & Summary
Reignith must recognise an impairment loss for the distribution licence, as its carrying amount exceeds the recoverable amount. An impairment loss of R242,813 will be reflected in the financial statements for the year ended 31 July 2024.
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