F4 - Fixed Asset Impairment. Flashcards
How long does impairment test needed for fixed assets?
at least once year or whenever event or circumstance indicate that carrying amount may not be recoverable.
Memorize: What is the definition of test for recoverability under GAAP?
Under US GAAP, a fixed asset is tested for impairmant, the future cash flow expected to result from the use of the asset and its eventual disposition need to be estimated.
IF the sum of UNDISCOUNTED future cash flow is less than the carrying amount, an impairment loss needs to be recognized.
What is calculation of the impairment loss under US GAAP?
“2 step approach”.
Step 1: if you see fixed asset is finite life, then use UNDISCOUNTED future cash flow less carrying value. If positive, then no impairment loss. if NEGATIVE, then is is impairment. If the asset like goodwill is indefinite life, then use fair value less Net carrying value.
Step 2. if the assets held for use, then use FV or DCF less NCV = impairment loss. (RESTORATION NOT PERMITTED usder GAAP)
if the asset held for disposal, then FV or DCF less NCV = impairment loss + cost of disposal = total impairment loss
(RESTORATION is permitted).
What is the definition of impairment loss under IFRS?
it is calculated under “one-step model” and IFRS allow the reversal of impairment losses.
How to calculate the impairment loss under IFRS?
“One step approach”:
Fixed assets “recoverable amunt” (the greater of value in use PCVFCF or NRV=FV-coat to sell) less carrying value = impairment loss.
IS impairment loss extraordinary?
No, under GAAP, the impairment loss is reported as component of income from continuing operation before income tax or in a stmt of activities(related to non-for profit entities).
- What is the general rule when calculating impairment loss under GAAP?
- Determining the impairment- use undiscounted future net cash flows.
- Amount of impairment - use FV or discounted PV future net cash flow.
Under GAAP, does impairment loss recoverable?
A long-lived asset is impaired if the carrying amount of the asset is greater than its fair value.
A the impairment not recoverable. An impairment loss would then be recognized for the amount of the difference between book value and fair value.
Under IFRS, how to recognize the “recoverable amount”?
Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset’s recoverable amount. The recoverable amount is the greater of the asset’s fair value less costs to sell and the asset’s value in use (present value of future cash flows). In this problem, the fair value less costs to sell of $105,000 exceeds the value in use of $100,000, so the recoverable amount is $105,000.
Under GAAP, when the carrying value can be restored and cannot be restored?
Under U.S. GAAP, long-lived assets that are impaired can only have their carrying value restored if they are held for disposal. Assets that are held for continued use that are impaired are not permitted to have any restoration of carrying value. Keep in mind that any write-ups are limited to previous write-downs.
Under GAAP, what needs to be aware of noticing the necessary of recognizing the impairment loss?
The impairment loss is not the difference between the carrying value and the expected cash flows. To determine whether an impairment loss exists, undiscounted future cash flows are compared to carrying value. If an impairment loss exists, then the fair value of the asset can be used to determine the amount of the loss to be recognized. But, this calculation is used to determine whether there is an impairment loss. Use FV or discounted cash flow if you don’t know the FV.
Under GAAP, what is the key to determine the necessary of impairment loss?
Under U.S. GAAP, the first step in determining if a long-lived asset is impaired is to compare the carrying amount of the asset to the undiscounted expected future cash flows from the asset. If the undiscounted expected future cash flows exceed the carrying value of the asset, then there is no impairment. (Net carrying value must be greater than accumulated undiscounted future cash flow) In this problem, the expected future cash flows of $130,000 exceed the asset’s carrying value of $120,000, so there is no impairment, despite the fact that the fair value of the asset and the present value of the future cash flows are less than the carrying amount.
