Chapter 2 - Impairment of Assets Flashcards
What standard covers impairment of assets?
IAS 36
When does impairment usually arise?
When a substantial change has come about which adversely affects the way in which an asset is being used in a business
When does impairment occur?
When the carrying amount is greater than its recoverable amount
What 2 methods can make up recoverable amount?
- Value in use
- Fair value less costs of disposal
What 3 specific scenarios mean that the recoverable amount of an asset should be assessed for impairment annually?
- Intangible assets with indefinite lives
- Intangible asset that is not ready for use
- Goodwill recorded as a result of a business combination
What are examples of indicators impairment based on external sources?
- significant decline in asset’s market value
- significant change in technological, market, economic or legal environment
- increases in market interest rates
What are examples of indicators impairment based on internal sources?
- Obsolescence or physical damage to the asset
- Significant changes to how asset is used
- Performance of asset below that planned
What is the definition of recoverable amount in IAS 36?
Higher of:
Fair value less costs of disposal
OR
Value in use
What is FVLCD under IAS 36?
Fair value less costs of disposal.
Price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
What is value in use per IAS 36?
Future cash flows expected to be derived from an individual asset or a cash-generating unit.
Should be discounted back to present value to take account of the time value of money.
True or false:
When assessing impairment under IAS 36 and using the value in use method, future cash flows are discounted back to present value
True
What 2 steps are involved in measuring recoverable amount of an asset under IAS 36?
- Estimate future cash inflow / outflows, including disposal
- Discount back to present value.
How should a discount rate be determined when reviewing the recoverable amount of an asset under IAS 36?
Rate used should be the risk-free rate of interest, adjusted to reflect the risk associated with the particular asset and entity
True or false:
The recoverable amount should be determined on an individual asset basis as far as possible. If individual asset does not generate cash flows, then the assets are grouped together to form a “cash-generating unit”
True
Where the recoverable amount of an asset is less than the carrying amount, how should this be recorded under IAS 36?
An impairment loss should be recorded.
The impairment loss is recognised immediately in the profit & loss, unless the impairment is in relation to a previously revalued asset.
If an asset was previously revalued upwards and an impairment loss is about to be recorded, how should this be treated?
The impairment loss should first be applied against the revaluation surplus, any remaining is recognised in the P&L
True or false:
If the recoverable amount is more than the current carrying value, a negative impairment loss will be recorded.
False.
If the recoverable value is more than the carrying amount and a surplus would arise, no impairment entry needs to occur.
If goodwill is impaired, and is grouped with other assets in a cash-generating-unit (CGU), how is any impairment loss recorded?
First, impairment reduces the value of goodwill.
Second, if there is still an amount remaining to be impaired for the CGU, this is applied on a pro-rata basis across the other assets.
Can impairment on goodwill be reversed under IAS 36?
No.
Other than goodwill, can impairment losses be reversed for assets?
In certain circumstances, yes.
Reversal of impairment losses will be recognised in the profit or loss.
Any reversal of an impairment loss, other than goodwill, should only be recognised to the extent that it increases the carrying amount of the asset to its original pre-impaired value less subsequent depreciation.
True or false:
Under IAS 36, any reversal of an impairment loss, other than goodwill, can be recognised and increases the carrying amount of the asset to more than its original pre-impaired value less subsequent depreciation.
False.
Should only be recognised to the extent that it increases the carrying amount of the asset to its original pre-impaired value less subsequent depreciation.
What disclosures are required under IAS 36?
For each class of asset, the amount of any impairment losses recognised or reversed in the P&L, identifying the line item.
Any information for any impairment recognised or reversed in other comprehensive income.
If entity required to comply with IFRS 8 (Operating Segments), note the reportable segment to which recognition or reversal relates.
If any entity is using fair value less costs of disposal, or value-in-use, what further disclosures are needed?
- the period over which management has projected cash flows
- the growth rate used for cash flow projections
- the discount rates applied.
