Chapter 4 - IAS 36 - Impairment of Assets Flashcards
Definition
- Carrying amount
The amount at which the asset is recognised after deducting any accumulated depreciation and accumulated impairment losses
Definition
- Value in Use
The present value of future cash flows expected to be derived from the asset
Definition
- Fair Value
The price that would be received to sell an asset or transfer a liability in an orderly transaction between two market participants at the measurement date
Recoverable Amount is the:
The higher of:
- Fair Value less disposal costs
- Value in use
Definition
- Impairment loss
The amount at which the carrying amount of an asset exceeds its recoverable amount
Impairment Indicators
EXTERNAL SOURCES
- Observable indications that the assets value has declined significantly
- Changes in technology, markets, economies & laws
- Increases in interest rates (reduces present value)
- Market value of company (negative NAV of assets)
Impairment Indicators
INTERNAL SOURCES
- Obsolesce or physical damage
- Adverse impact of major re-organisation in the company
- Worse than expected economic output
The three steps of an impairment review:
STEP 1 - The asset’s carrying amount is ascertained
STEP 2 - The asset’s recoverable amount is ascertained
STEP 3 - If the recoverable amount is greater than the carrying value, there is no impairment. If the carrying amount exceeds the recoverable amount, the asset is impaired and must be written down to the recoverable amount
How is the Loss on Impairment is treated in the Financial Statements:
- Recognised immediately as an expense on the SPL
- Debited to the Revaluation Surplus account within equity
- Revaluation Surplus cannot be distributed *
Why do we use the lower of carrying value and recoverable amount?
- The economic resource is dependent on the future economic benefits flowing to the business.
- Therefore an asset should not be valued at more than the value of the future benefits.
Therefore if the future benefit (i.e. the recoverable amount) is lower than the carrying value then the asset should be reduced in value down to the recoverable amount.
However if the recoverable amount is higher than the carrying amount we do not increase the value of the asset because those future benefits are not certain.
Why do we use the higher of the fair value less costs to sell and the value in use?
If an asset is impaired the business has the choice of either selling the asset or continuing to use it even though it is impaired.
If the business chooses to sell it then it will receive the fair value less costs to sell.
If the business chooses to continue using the asset then it will receive the value in use, that is the present value of the future cash flows from the asset.
