IAS 36- IMPAIRMENT OF ASSETS Flashcards
Define impairment. diff between depn and impairment
IMPAIRMENT= Sudden fall in the value of asset.
Depreciation= the systematic allocation of the cost of an asset over its useful life.
Impairment occurs when RECOVERABLE AMOUNT is less than CARRYING AMMOUNT.
what are some internal and external hints of impairment?
internal- damage, change in use, fall in sales, fall in market capitalization of the company
external- new technology, change in legal and economic environment, increase in interest rate, natural disaster
what is market capitalization?
total # of shares x share price.
if MC is less than SH equity, means there is impairment.
how do we know if there is impairment?
if carrying value is greater than recoverable amount, we know there is impairment
what is recoverable amount?
it is the higher of
a) Fair value less costs to sell (value which can be recovered by selling the asset)
b) value in use - value which org can generate if it keeps using the asset.
(present value of future cash flows)
difference between revaluation and impairment?
revaluation model is optional, and it is an assumed loss. (Recoverable Amount can be higher than Fair value)
impairment is not optional and it is an actual loss, when Recoverable Amount falls means sab darwazay band.
what are the 3 things for which annual impairment testing is must?
Assets which are not depreciated or amortised must be tested for impairment each year. (this rule does not apply on land)
1- purchased goodwill
2- intangible asset with an indefinite useful life
3- intangible asset for which commercial use has not started
all other assets which are depreciated and amortized in normal manner will only be tested for impairment if an indicator has arised.
land is not depreciated but only tested when indicator arises
how is impairment loss recorded?
debit: income statement or revaluation reserve if it exists.
credit: PPE/ asset
Impairment reversal, on what assets can it be done? restriction? double entry?
can be done for all assets except goodwill if RA has increased again
reversal of impairment is restricted at lower of:
-original impairment loss
-difference in CV of asset on date of reversal had there been no impairment and had there been impairment
entry:
debit: PPE/ asset
credit: income statement / rev res
is it allowed to take revaluation reserve above it’s historical depreciated cost (had there been no impairment?)
In cost model, you cant take it above more than “ carrying value had there been no impairment in the past.”
In revaluation model yes u can. Entry:
debit: PPE
credit: revaluation reserve (original NBV)
credit: PnL (reduced depreciation)
how often are we required to review impaired assets to check for reversal?
review at each reporting date
what is a CGU?
smallest group of assets that generate an independent cash flow. eg. a subsidary normally.
every organisation has different composition of CGU
WHOLE CGU has to be tested together for impairment
how is impairment allocated to CGU?
step1- first write off obvious impairment
step 2- write off full goodwill
step 3- allocate remaining impairment on pro rata basis. dont allocate to cash or any current assets)
usually CGU is tested for impairment when hint arises, however if goodwill is included in CGU then annual testing of whole CGU.
which interest rate should be used when calculating PV of future cash flows?
company can use 3 types of discount rate:
-always use project specific discount rate.
-if not possible then use current market int. rate with the inclusion of different risks, like currency and exchange risk.
-u can also use your own WACC (but it should be current wacc, with current worthiness. not old)
how to calculate RA when there is a binding sale agreement?
Use bid price instead of fair value.
