Ch. 10 - Impairment of Assets

Question 1

Technical competencies: Evaluate treatment for non-routine transactions

Answer 1

Technical competencies: Evaluate treatment for non-routine transactions

Question 2

When is an asset considered impaired?

Answer 2

When an entity in unable to recover the carrying amount of the asset. Impairment is covered in IAS 36

Question 3

Can you explain Step 2: When to test for impairment?

Answer 3

Under IFRS, there are two incidents that lead to the requirement to test for impairment:

• indicators of impairment
• annual tests for select assets

Question 4

What are internal indicators of impairment?

Answer 4

Evidence of obsolescence or physical damage, significant changes in the use of asset/CGU, such as discontinuance, disposal or restructuring, declining asset/ CGU performance

Question 5

What are some external indicators of impairment?

Answer 5

Significant decline in market value, significant change in the technological market or legal environment in which the entity operates, increase in market interest rates, decreasing the asset/CGU amount.

Question 6

What are some types of assets that require to be tested for impairment annually?

Answer 6

• intangible assets with indefinite useful life
• intangible assets not yet available for use
• CGUs to which goodwill has been allocated

Question 7

Explain Step 3: Measure the recoverable amount

Answer 7

The recoverable amount is recorded as the higher of:

(a) the fv less cost of disposal
(b) Value in use:
- Estimate future cash flows from:
- continuing use
- ultimate disposal
- apply an appropriate discount rate

Question 8

Step 4: How do you test for impairment if any?

Answer 8

Compare its carrying amount with its recoverable amount. If the recoverable amount is less than the carrying value, the asset/cgu is impaired.

An impairment loss is recorded to net income, and the asset is credited.

The depreciation charge of the asset/CGU is adjusted for future periods.

If it is applied to a CGU (not an asset) then the credit is as follows:

• Goodwill (if there is any in the CGU) is written to 0
• Remaining balance of the loss is applied to the remaining assets in the CGU on a pro-rata basis.

Question 9

How do you reverse impairment?

Answer 9

Impairment on asset other than goodwill can be reversed if there are indicators. Asset is written up to the lesser of:

• its recoverable amount
• carrying value that would have existed (net of depreciation) had the asset never been written down.

Question 10

What are the differences between ASPE 3603 Impairment of Long-lived Assets and IFRS 36?

Answer 10

1. Level of asset grouping - assets shall be grouped with other assets and liabilities to form an asset group at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
2. Testing for impairment - Test for recoverability when events or changes in circumstances indicate that the carrying amount may not be recoverable.
3. Recoverable amount and impairment test - Uses a two-step approach
4. Reversal of impairment - not allowed

Question 11

Explain ASPE’s two-step approach

Answer 11

1. Compare the carrying amount to undiscounted cash flows - if the carrying amount exceeds recoverable, then move to step 2.
2. Determine the FV and compare it to the carrying amount: Loss = FV - Carrying amount

Question 12

Step 1: Level of asset grouping - how do you pair assets?

Answer 12

If a recoverable amount cannot be determined for independent assets, impairment can be based on cash-generating units - it is the smallest group of assets (multiple) that generate cash flows from other groups.

Question 13

What are the four steps in IFRS impairment testing?

Answer 13

Step 1: Level of asset grouping
Step 2: Testing for impairment (when) - Note: goodwill and intangible assets are tested annually. All others are tested when indicated
Step 3: Measuring the recoverable amount
Step 4: Testing for impairment, if any