Impairment

Question 1

What is impairment

Answer 1

impaired when carrying amt is more than recoverable amount

Question 2

Reversal of impairment

Answer 2

ASPE = no reversal

Items other than goodwill
Should be written up to lower of new recoverable amount or NBV if it had not been impaired at time of new rec. amt

Dr. Equipment, net
Cr. Recovery of impairment loss

Question 3

ASPE 3063 Recoverable

Answer 3

Greater of:
Fair Value - selling costs
Undiscounted CFs

Question 4

IFRS Recoverable

Answer 4

Greater of:
Value in use
Fair Value - selling costs

Question 5

Impairment Triggers

Answer 5

Asset “not performing well”

decline of asset/market value/asset damaged

Question 6

Impairment Analysis

Answer 6

1. assess indicators of impairment with case facts (external n internal)
2. group impaired assets to a CGU
3. Determine impairment amt
   =recoverable - carrying

DR Impairment loss
CR Asset

Question 7

Differences between ASPE n IFRS

Answer 7

ASPE 3063:

• Events trigger need for impairment
• no reversals
• undiscounted CF
• asset groups

IAS 36

• each reporting period
• reversals yaaas
• discounted CFs
• CGUs

Question 8

Firestone Company has identified a piece of manufacturing equipment that is potentially impaired. The cost of the asset was $420,000 when it was acquired two years ago. To date, depreciation of $140,000 has been recorded (straight-line over six years). This past year, the market for its product has softened due to technology in new machines producing more uniform products.

Firestone estimates that the net cash flows expected from this asset’s use and eventual disposal will be $50,000 in each of the next four years, with a $20,000 salvage value at the end of the fourth year. The asset’s fair value, based on recent sales prices of similar assets, is estimated to be $180,000. The appropriate discount rate for the risk of the asset is 5%.

Required

Perform an impairment test and determine the required writedown, if any, for the equipment under IFRS. For simplicity, assume that net cash flows are received at the end of each period.

Answer 8

Steps 1 and 2: These have been provided for you, as the question indicates that the equipment has cash flows that are measurable, and that there are indications of impairment.

Step 3: Recoverable amount

The recoverable amount is the higher of:

1. Fair value less cost of disposal
2. Value in useFair value less cost of disposal = $180,000Value in use = PV (5%, 4, $50,000, $20,000)= $193,752Value in use is higher. The recoverable amount is, therefore, $193,752.

Step 4: Impairment test and loss

Recoverable amount = $193,752

Carrying value = $280,000 ($420,000 – $140,000)

The asset is therefore impaired and needs to be written down to $193,752.

Dr. Impairment loss

$86,248

Cr. Equipment, net *

$86,248

Question 9

Firestone Company has identified a piece of manufacturing equipment that is potentially impaired. The cost of the asset was $400,000 when it was acquired two years ago. To date, depreciation of $160,000 has been recorded. This past year, the market for its product has softened due to technology in new machines producing more uniform products.

Firestone estimates that the net cash flows expected from this asset’s use and eventual disposal will be $50,000 in each of the next four years, with $20,000 at the end of the fourth year. The asset’s fair value based on recent sales prices of similar assets is estimated to be $180,000. Firestone has a borrowing rate of 5%.

Required
Perform an impairment test and determine the required writedown, if any, for the equipment under ASPE. For simplicity, assume that net cash flows are received at the end of each period.

Answer 9

Answer

New technology has emerged that enables new production machinery to produce more uniform products. Firestone has observed that the market has reacted favourably to this change. As a result, demand for products produced by Firestone’s asset group has softened. It therefore needs to conduct a test for impairment.

Step 1: Compare carrying amount to undiscounted cash flow.

Undiscounted cash flow = $220,000 ($50,000 × 4 + $20,000)

Carrying value = $240,000 ($400,000 – $160,000)

The undiscounted cash flow is less than the carrying value; therefore, the asset is impaired.

Step 2: Determine fair value and compare it to the carrying amount to calculate the writedown.

Fair value = $180,000

Carrying value = $240,000

The asset is, therefore, impaired and needs to be written down to $180,000. An impairment loss of $60,000 is recognized.

Note that, under ASPE, this loss cannot be reversed.