Impairment

Question 1

What legislation deals with impairments in financial statements?

Answer 1

IAS 36

Question 2

What are the considerations that need to be considered when dealing with impairments?

Question 3

What is an impairment?

Answer 3

When the value of an asset has decreased and therefore needs to be decreased in the financial statements and therefore we impair the value

Question 4

What is the recoverable amount?

Answer 4

the higher of the value in use and the fair value less disposal costs of an asset

Question 5

How does one test of impairment is necessary?

Answer 5

Method 1
- compare the carrying amount to the higher of the value in use and the fair value less disposal costs (recoverable amount)

Method 2
- inspect to see if there is any damage

Method 3
- inspect how much income it is earning in comparison to previously

Question 6

How does one perform an impairment?

Answer 6

1. Check to see if you are working with a CGU or a single asset

Single asset
1. Calculate the difference between the carrying value and the higher of the value in use OR fair value less disposal costs (WITHOUT ANY INVENTORY BEING INCLUDED)
2. Debit impairment expense, credit the asset

If it’s a CGU
1. Calculate the difference between the carrying value and the higher of the value in use OR fair value less disposal costs (WITHOUT ANY INVENTORY BEING INCLUDED)
2. Allocate the impairment to Goodwill first
3. allocate the impairment to the rest of the assets in proportion to their values in the CGU but limit the amount to each asset to the RECOVERABLE AMOUNT (WITHOUT INCLUDING INVENTORY)
- whenever an amount is limited the next allocation calculation must only consider the proportions of the remaining assets and remaining impairment
4. IF THERE IS A CORPORATE ASSET
> Calculate the difference between the sum of all of it(the corporate asset and all related CGUs to which it was allocated) and the recoverable amount of all the related CGUs
> allocate the difference according to assets according to their value weightings but no asset can go below the RA

Question 7

How does one allocate goodwill within a business combination?

Answer 7

1. Identify all the CGUs and entities that are expected to benefit from the purchase that has just been made
2. Allocate some to the parent’s assets (individually) and some to the sub’s assets (individually) (know that the amount allocated to the sub then gets split between the parent an NCI

Question 8

How does one apportion the impairment when NCI is suffering some of the impairment with us (the parent)

Answer 8

1. First calculate the value of the impairment (if any) of the net identifiable assets together with the value of any goodwill
2. allocate it to the value of the goodwill first, limited to the goodwill assigned to NCI and the parent respectively
3. then allocate the rest of the impairment to the value of the assets assigned to NCI and the parent respectively following normal impairment rules