5 Impairment of Assets

Question 1

If the carrying amount of an asset exceeds he amoun 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

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

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