IAS 36 - Impairment of Assets

Question 1

fair value

Answer 1

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the date of the valuation)

Question 2

recoverable amount

Answer 2

the higher of an asset’s fair value, less costs of disposal, and its value in use

Question 3

value in use

Answer 3

the present value of the future cash flows expected to be derived from the asset, including cash from its ultimate disposal

Question 4

impairment loss

Answer 4

the amount by which the carrying amount of an asset exceeds its recoverable amount

Question 5

impairment review

Answer 5

remember carrying amount, recoverable amount, if carrying amount > recoverable amount

Step 1:
-identify the asset’s carrying amount (ie cost/revaluation less accumulated depreciation/amortisation to date)

Step 2:
-identify the asset’s recoverable amount, ie the higher of “fair value less costs of disposal” (the net realisable value of the asset) and “value in use” (the present value of the future cash flows expected to be derived from the asset, including cash from its ultimate disposal)

Step 3:

• if “carrying amount” > “recoverable amount”, then the asset is impaired and should be written down to its recoverable amount in the SOFP.
• the amount of the impairment loss is recognised as an expense in the SOPL and other comprehensive income (unless it relates to a previously revalued asset, when it is recognised as a decrease in other comprehensive income and is debited to the revaluation surplus within equity — to the extent of the revaluation surplus for that particular asset)

Question 6

internal indicators of impairment

Answer 6

• remember “oat”*
• obsolescence or physical damage to the asset
• adverse effects on the asset of a significant reorganisation within the entity
• the economic performance of the asset is worse than expected
• Additional notes*

Other indicators (from financial statements) remember 3 “a fall in” and “profit from operations, cash flows from operations, budgeted”

• a fall in the profit (or an increase in the loss) from operations
• a fall in the cash flows from operations or a negative cash flow
• a fall in budgeted cash flows, or budgeted profit from operations

Question 7

external indicators of impairment

Answer 7

• a significant fall in the asset’s market value
• adverse effects on the entity caused by technology, markets, the economy, laws remember “t-mel”
• increases in interest rates
• the stock market value of the entity is less than the carrying amount of net assets