Chapter 7 (impairment of assets)

Question 1

Give an example of indication of an impairment that arises from an external source of information

Answer 1

IAS36 requires entities to determine the recoverable amount of an asset only if there is some indication that the asset might be impaired.

Examples of such indications listed by IAS36 include:

External sources of information:

1. There are observable indications that an asset’s value has declined during the period by significantly more than expected
2. Significant and adverse changes have occurred (or will occur in the near future) in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated
3. Interest rate increases have occurred which are likely to increase the discount rate used in calculating an asset’s value in use (see later in this chapter) and so cause a material decrease in the asset’s recoverable amount
   (iv) the carrying amount of the entity’s net assets exceeds its market capitalisation (i.e. the market value of its entire share capital, in the case of a company).

Question 2

Can an asset be impaired if there is evidence that the economic performance of an asset will be worse than expected?

Answer 2

Yes

Question 3

For which assets must the recoverable amount be determined every year?

Answer 3

Intangible assets and goodwill!

There are two types of assets for which the recoverable amount must be determined every year, regardless of whether or not there are any indications of impairment.

These are:

1. Intangible assets which have an indefinite useful life or which are not yet available for use
2. Goodwill acquired in a business combination

Question 4

How is value in use calculated?

Answer 4

Precis som IRR från tidigare kurser.

Value in use is “the present value of the future cash flows expected to be derived from an asset or cash-generating unit”

“The sum of the discounted future cash flows from an asset”

Question 5

What is a CGU?

Answer 5

“Cash generating unit and is used in the valuation of goodwill”

IAS36 defines a cash-generating unit as “the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets”.