5 Impairment of Assets

Question 1

If the carrying amount of an asset exceeds he amount gained from using the asset or from selling it, then…

Answer 1

… it is NOT prudent (ratsam) to continue to carry it at the net book value

Question 2

What does IAS 36 require?

Answer 2

IAS 36 requires companies to test all non-current assets for impairment, if there is some indication that the asset might be impaired.

Question 3

What are External and Internal indicators for impairment?

External
1.
2.
3.

Internal
1.
2.
3.
4.

Answer 3

External
- decline in market value of assets
- adverse changes in business environment
- rising interest rates

DAR

Internal
- evidence of asset obsolescene or damage
- plans to discontinue the operation in which the asset is used
- business reorganisation, loss of key staff
- loss making unit

DDR

Question 4

Impairment occurs if….

Answer 4

… the carrying amount of the asset is HIGHER than the recoverable amount.

Carrying amount: depreciated value, ie cost or revaluation less accumulated depreciation
Recoverable amount: the HIGHER or two values: net selling price and value in use

Question 5

What is the Value in Use (VIU)?

Answer 5

Present value of expected future cash flows from the asset’s use in the business and its ultimate disposal

-> CFs taken from formally approved budgets
-> growth rates over long term should not exceed average growth rate of economy
-> present value calculation requires a discount rate - market rate for equally risky investments

Question 6

Whats a CGU?
What are two dangers arising with these?

Answer 6

cash generating unit = smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or group of assets

Danger:
 disguise poorly performing units and hence
 these are supposed to be as small as possible

Question 7

What is…

1. The carrying amount?
2. the recoverable amount?

Answer 7

1. the depreciated value, i.e. cost or revaluation less accumulated depreciation
2. the HIGHER or two value: A. the net selling price and B. the value in use

Question 8

How often should non current assets that can be sold (!) be tested for impairment?

Answer 8

• reviewed for impairment only if the expected net selling price > carrying amount of asset

Question 9

What can you say to Cash Generating Units (CGUs)? And whats a danger that comes with it?

1.
2.
3.

Answer 9

• if its impractible to assess the recoverable amount of individual assets, they may be grouped into Cash Generating Units (CGUs) to assist with the value in use calculations
• CGU = smallest identifiable group of assets that generates cahs inflows that are largely independent of the cash inflows from other assets or group of assets
• Danger: company may be inclined to diguise poorly performing units and hence these are supposed to be as small as possible

Question 10

CGUs - How do we have to write of the impariment? And in which order?

1.
2.
3.
4.
5.

Answer 10

• musst be written off as an expense to income and allocated to the net assets in the following order:
• goodwill
• intangible asset having no active market
• assets whose selling price is lower than carrying value
• other assets pro rata

Question 11

When impairment occurs…

1. … a revised carrying amount of these assets is shown on…
2. … an impairment loss is generally recorded as… in…

BUT, if the asset is carried at a revalued amount…
3.

Answer 11

1. on the SoFP
2. an expense in the SoCI in the year in which the impairment arises

DR impairment loss (expense) in SoCI
CR asset value in SoFP

3. the impairment loss is accounted for in the same way as a revaluation decrease (see Chapter 4), and subsequent depreciation or amortisation charges would be charged on the assets revised carrying amount

Question 12

If carrying amount of an asset is HIGHER than what you can recover, then….

Answer 12

it must be impaired