Impairment of Assets

Question 1

What happens with a downwards revaluation? (3 things)

Answer 1

1. Decrease in market value
2. Written-off against revaluation reserve up to the value of its balance
3. Remainder to the SOPL as an impairment

Question 2

What happens if a previously impaired asset’s market value increases

Answer 2

1. If a previously impaired asset’s market value increases
2. Previous impairment reversed, up to values previously written-off, to SOPL
3. Balance (if any) to revaluation reserve

Question 3

Example

Answer 3

Question 4

IAS __ Impairment of Assets

Objective (2)

Answer 4

IAS 36 Impairment of Assets

Objective:

• Ensure that assets are carried at no more than their recoverable amount
• Where the recoverable amount is lower than the carrying value an impairment loss must be recognised immediately

Question 5

Carrying Value definition

Answer 5

Carrying value

• “Initial cost less depreciation, amortisation and impairment i.e. value on SoFP”

Question 6

Fair value (____ __) definition

Answer 6

Fair value (IFRS 13):

• “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 fair value – costs to sell is sometimes referred to as ‘net selling price’

Question 7

Cost to sell (_____ __) definition

Answer 7

Costs to sell (IFRS 13):

• “Costs directly attributable to the disposal of the asset”

Question 8

Recoverable amount – higher of fair value less costs to sell and value in use

Answer 8

Recoverable amount

• higher of fair value less costs to sell and value in use

Question 9

Value in use

Answer 9

Value in use

• present value of future cash flows from use and disposal

ACC2005 / ACC2025: do not need to calculate value in use – it will be provided

Question 10

Measurement of Impairment Losses (picture)

Answer 10

Question 11

Answer 11

Question 12

IAS __ Impairment of assets

• Assets should be individually tested for ______________
• Both ___________ and ______________ assets
• If cash flows do not arise from a ________ asset then from the ______________ ________ of ________ which generates an _________________ _________

  - Cash generating unit (CGU)

• Extremely ________________
• Allocation of impairment losses
  not required for ACC2005

Answer 12

IAS 36 Impairment of assets

• Assets should be individually tested for impairment
• Both tangible and intangible assets
• If cash flows do not arise from a single asset then from the smallest group of assets which generates an independent income

  - Cash generating unit (CGU)

• Extremely judgemental
• Allocation of impairment losses
  not required for ACC2005

Question 13

Indications of impairment (2)

Answer 13

Internal and external indications of impairment

Internal:

• e.g. physical evidence of reduction in asset’s condition

External:

• e.g. a legal or market condition has changed meaning the asset can no longer be used

Need to use judgement for each scenario

Question 14

____ _ Non-current assets held for sale and discontinued operations

When are non-current assets classified as ‘held for sale’

Answer 14

IFRS 5 Non-current assets held for sale and discontinued operations

Non-current assets are classified as ‘held-for-sale’ if: their carrying amount will be recovered principally through a sale transaction rather than continuing use. They must be:

• Available for immediate sale in their present condition; and
• The sale must be highly probable:

  1. **management** is **committed** to a **plan** to **sell** the asset and an active **programme** has been initiated to **locate** a **buyer** and complete the plan; and
  2. the **asset** is being actively **marketed** at a **sale** **price** that is reasonable in relation to its **current** **fair** **value**; and
  3. a **completed** sale is **expected** within **one** **year** from the **date** of **classification** (although this period may be extended if any delay is caused by circumstances beyond the entity's control); and
  4. it is **unlikely** that there will be any **significant** **changes** to the **plan** or that the plan will be **withdrawn**.

If these criteria are not satisfied at the end of the reporting period, the asset should not be classified as held for sale. If the criteria are satisfied after the end of the period, but before the financial statements are authorised for issue, the fact that the asset is now classified as held for sale should be disclosed in the notes to the financial statements.

Question 15

Measurement and presentation of AHFS

Assets held for sale should: (3)

Answer 15

• Be measured at the lower of carrying amount and fair value less costs to sell
• Not continue to be depreciated, and
• Be presented separately on the face of the SOFP
• Additional disclosures are required in the notes

Question 16

Discontinued operations under ____ _

A component of the entity that either: (2,3)

Answer 16

Discontinued operations under IFRS 5

A component of the entity that either:

• Has been disposed of or
• Has been classified as held for sale and also:

  - **Represents** a **major** line of **business** or **geographical** area of **operations** or
  - Is **part** of a single **coordinated** **plan** to **dispose** of a **separate** **major** **line** of business or **geographical** area of **operations** or
  - Is a **subsidiary** **acquired** exclusively for **resale**

Question 17

Discontinued operations

Minimum disclosure (3)

Answer 17

• Results from discontinued operations disclosed separately in the SOPL
  Minimum disclosure:
  • Total of post-tax profit of discontinued operations
  • Post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets constituting the discontinued operation
  • Further analysis required on the face of the statement of comprehensive income or in the notes

Question 18

____ _: Accounting Policies, Changes in Accounting Estimates and Errors

What does it deal with? (3/3,2,2,2)

Answer 18

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

Deals with criteria for selecting and changing accounting policies, treatment of changes in estimates, and corrections of errors.

Policy Changes:

• New IFRS
• Relevant and reliable information
• Restate comparatives

Estimates:

• Accounted for prospectively
• No requirement to restate prior periods

Prior Period Errors:

• Mistakes, fraud, materiality
• Accounted for retrospectively

Question 19

___ __ Events after the reporting period (2/2,1) and note?

Answer 19

IAS 10 Events after the reporting period

Adjusting Events:

• Provide evidence of conditions that existed at the reporting date.
• Must be material.

Non-Adjusting Events:

• Indicative of conditions that arose after the reporting period.

Note: Dividends declared after the end of the reporting period are non-adjusting events; they are disclosed but not recognized.

Question 20

___ __: Example adjusting events (4)

Answer 20

• The bankruptcy of a customer after the year end
• The discovery of material fraud or errors in the financial statements
• The settlement of a court case which was ongoing at year end
• An indication that inventory had a lower NRV at year end

Question 21

___ __: Example non-adjusting events (4)

Answer 21

• Disposal of an asset after year end
• Restructuring announced after year end
• Disasters such as fire after year end
• Dividends proposed after year end