Impairment of Assets

Question 1

An asset is impaired when its _______ is lower than its ________

Answer 1

An asset is impaired when its recoverable amount is lower than its carrying amount

Question 2

Recoverable amount is the ________ of _____ and ________.

Define both

Answer 2

Recoverable amount is the higher of NRV and Value in Use
Value in use: PV of future net cashflows including the disposal
NRV: Fair value less cost of sale. Amount obtainable from a sale, less cost to sell

Question 3

Principles on calculating Impairment. 4 (VIU 8)

Answer 3

• An entity should assess whether there are indicators for impairment at each reporting date
• when recoverable amount is higher than carrying amount, the asset is left at recoverable amount
• NRV’s selling costs includes legal cost, stamp duty, and other direct selling cost but does not include reorganization and redundancy cost
• Value in use
  a. CFP should be based on resoanble assumptions
  b. CFP should be based on asset’s curent condition and exclude expenditure to improve it
  c. discount rate should be pretax, consider time value of money, asset’s condition
  d. CFP should be pretax
  e. CFP should be in the local currency it would be earned in.
  f. CFP should be for max of 5 years. More than that should be necessary before used and growth rate should be steady, declining or zero.
  g. Mgt should assess accurancy by investigating variance between actual and projected CF.
  h. CFP should be based on continuing use. Inflow and outflow based on normal condition