ACCY231 WK8 L16 Impairment of Assets

Question 1

What accounting standard covers impairment of assets?

Answer 1

NZ IAS 36 Impairment of Assets

Question 2

What is an impairment loss?

Answer 2

An impairment loss is the amount by which the carrying amount of an asset or cash-generating unit (CGU) exeeds its recoverable amount.

Question 3

What is the purpose of the impairment test?

Answer 3

To ensure that assets are not carried at amounts that exceed their recoverable amounts or more simply to ensure that assets are not overstated.

Question 4

When should an impairment test undertaken?

Answer 4

At the end of wach reporting period, an entity should assess whether there are indications that an asset may be impaired. If any such indication exists, the entity should estimate the recoverable amount of the asset.

Question 5

What are two sources of information for indications of impairment?

Answer 5

1. External sources of information
2. Internal sources of information

Question 6

What are four example of external sources of information for indications of impairment?

Answer 6

1. Decline in market value of the asset
2. Adverse changes in an entity’s external environment including economic, legal, or technological environments

Question 7

What are four examples of external sources of information for indications of impairment?

Answer 7

1. Decline in market value of the asset
2. Adverse changes in an entity’s external environment including economic, legal, or technological environments and relavant markets.
3. Increase in interest rates affecting the discount rates that are used to calculate the value of an asset
4. Carrying amount of net assets exceeds market capitalisation

Question 8

What are three examples of internal sources of information for indications of impairment?

Answer 8

1. Obsolescence or physical damage
2. Adverse changes in the entity expected to affect the use of the asset, such as plans to discontinue or restructure the operation to which the asset belongs and the asset becomes idle
3. Economic performance of the asset is worse than estimated; actual cash flows for maintenance may be higher than expected, or actual cash inflows may be lower than expected

Question 9

What three types of assets must be tested annualy for impairment regardless of whether there are any indications of impairment?

Answer 9

1. Intangible assets with idenfinate useful lives
2. Intangible assets not yet available for use
3. Goodwill aquired in a business combination

Question 10

What are the two steps of the impairment test?

Answer 10

1. Determine the recoverable amount
2. Compare the recoverable amount to the carrying amount. If the recoverable amount is greater than the carrying amount, no further action is required. If the recoverable amount is less than the carrying amount, there has been an impairment loss

Question 11

What is the recoverable amount?

Answer 11

The recoverable amount is the higher of the fair value of the asset less costs of disposal and the value in use.

Question 12

What is fair value and costs of disposal of an asset?

Answer 12

Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
Costs of disposal are the incremental costs directly attributable to the disposal of an asset or CGU, excluding finance costs and income tax expense.

Question 13

What is the value in use of an asset?

Answer 13

The present value of the future cash flows expected to flow from the asset or CGU.

Question 14

How is an impairment loss treated for an individual asset under the cost model?

Answer 14

The impairment loss is recognised in the profit or loss statement by debiting the expense account impairment loss on the asset. The contra-asset accumulated depreciation and impairment losses of the asset is then credited.

Question 15

Illustrative Example 1: Impairment Loss on an Individual Asset under Cost Model

Answer 15

a

Question 16

How is an impairment loss treated for an individual asset under the revaluation model?

Answer 16

The impairment loss is treated as a downward revaluation and any existing revaluation surplus is reduced.
The asset is credited and the loss is recognised on the income statement by debiting the account loss on revaluation of the asset.

Question 17

Illustrative Example 2: Impairment Loss on an Individual Asset under Revaluation Model

Question 18

What is a cash-generating unit (CGU)?

Answer 18

A cash generating unit is the smallest identifiable group of assets that generate cash flows that are largely independent from the cash inflows from other assets or groups of assets.

Question 19

How is an impairment loss treated for a CGU?

Answer 19

1. The carrying amount of any goodwill allocated to the CGU is reuduced by the impairment loss
2. If an impairment loss still remains, allocate the remaining balance of the impairment loss to the other assets proportionately according to the proportion of the total carrying amount of all the assets of the CGU each individual asset of the CGU contributes. The decrease in the carrying amount is treated the same way as an individual asset.

Question 20

What is the rule for reducing the carrying amount of assets?

Answer 20

An entity should not reduce the carrying amount of an asset below the highest of its fair value less costs of disposal (if measureable), value in use (if determinable), and zero.

Question 21

Illustrative Example 3: Impairment loss of a CGU

Question 22

How are reversals of impairment losses generally treated?

Answer 22

A reversal of an impairment loss would allow the entity to write up the asset and recognise the increase in value as income.
In assessing whether there is any indication opf an impairment reversal, an entity should consider external and internal sources of information. The sources of information are the same but the indications are positive instead of negative.
The procedure for determining a reversal of an impairment loss is the same as the one for determining an impairment loss. If the recoverable amount is greater than the carrying amount, a reversal of an impairment loss may be in order.

Question 23

How are reversals of impairment losses treated for single assets under the cost model?

Answer 23

The increase in carrying amount should not exceed the cost of the asset.
The increase in carrying amount should be recognised in the income statement as

Question 24

Illustrative Example 4: Reversal of Impairment Loss for a Single Asset under the Cost Model

Question 25

How are reversals of impairment losses treated for single assets under the revaluation method?

Answer 25

Treated as a revaluation increase.

Question 26

Illustrative Example 4: Reversal of Impairment Loss for a Single Asset under the Revaluation Model

Question 27

Ill