Chapter 4 - Impairment of assets

Question 1

Impairment

Answer 1

An asset is impaired if it’s recoverable amount is below the value currently shown on the statement of financial position.

Recoverable amount is taken as the higher of:

1. Fair value less costs to sell (NRV)
2. Value in use

Question 2

Indicators of impairment

Answer 2

1. External sources of information.
   - the assets MV has declined more than expected.
   - changes in technological, market, economic or legal environment has had an adverse effect.
   - interest rates increased and thus increasing the discount rate used.
2. Internal sources of information.
   - evidence of obsolescence or damage to the asset.
   - changes in use of the asset.
   - evidence available from internal reporting indicating the economic performance of an asset is or will be worse than expected.

Question 3

Recognition and measurement of an impairment

Answer 3

Where there is an indication of impairment, an impairment review should be carried out.

1. The recoverable amount should be calculated.
2. The asset should be written down to recoverable amount.
3. The impairment losses should be immediately recognised in the statement of profit or loss.

Question 4

Cash generating units (CGUs)

Answer 4

It will not always be possible to base impairment review on individual assets.

• the value in use calculation will be impossible on a single asset because the asset does not generate distinguishable cash flows.
• in this case the impairment calculation should be based on a CGU.

The smallest identifiable group of assets which generates cash inflows independent of those of other assets.

Question 5

The impairment calculation

Answer 5

Assume the CGU is one unit.

Compare the carrying amount of the CGU (carrying amounts of all assets in CGU added together) to the recoverable amount of the CGU (recoverable amount of all assets in CGU added together).

An impairment exists if the carrying amount exceeds the recoverable amount.

Question 6

Impairment of a CGU

Answer 6

Deal with any impaired asset first, then impair the CGU.
IAS 36 requires that an impairment loss attributable to a CGU should be allocated to write down the assets in the following order:

1. Purchased goodwill.
2. The other assets in the CGU on a pro rata basis based on the carrying amount of each asset in the CGU.