Impairment of Assets Flashcards
What is IAS36?
Impairment of Assets
What does impairment apply to?
All intangible, intangible and financial assets
What assets does impairment NOT apply to and why?
- inventories
- assets arising from construction contracts
- deferred tax assets
- assets arising under employee benefits
- financial assets within the scope of IAS 32 Financial instruments presentation
- non-current assets held for sale
BASICALLY ALL ASSETS THAT ALREADY HAVE OTHER RULES FOR RECOGNISING AND MEASURING IMPAIRMENT
What is an impaired asset?
an asset that has a market value less than the value listed in the company’s balance sheet (book value)
Which assets are most likely to be impaired?
- accounts receivable
- long-term assets such as intangibles (goodwill)
- fixed assets
when an impaired asset’s value is written in the balance sheet, where else is a loss recognised?
In the statement of profit or loss
What causes impairment?
can be either external or internal factors
Regarding impairment, what are some examples of external factors (causes of impairment)?
-political e.g. wars
- covid
- brexit
- fall in the market value of the asset
- material adverse changes in the regulatory environment
- material adverse changes in the market
- material long-term increases in the market rates of return
Regarding impairment, what are some examples of internal factors (causes of impairment)?
- material changes in operations
- major reorganisation
- loss of key personnel
- loss of net cash outflow for a continuing period
What is the value in use?
present value of future cash flows expected to be derived from the asset
How is the carrying amount of an asset calculated?
cost-depreciation (NOT ACC DEP)
What is a Cash Generating Unit (GCU)?
The smallest group of assets which generates income that is largely independent of the company’s other income stream
What are Cash Generating Units used for?
When cash flows don’t arise from the use of a single non-current asset, impairment is measured for a CGU instead
How would you test goodwill for impairment
As a cash generating unit
What’s the only asset that you cant reverse impairment on and why?
Goodwill bc its internally generated
What are some benefits of using the recoverable amount instead of the carrying amount (regarding impairment)?
- considers future
- considers market
- more accurate
Regarding the recoverable amount (impairment), out of the selling price and the value in use, which figure should you use?
Whichever one is higher
When do you know if an impairment loss has occurred?
If the recoverable amount of an asset is less than its carrying amount in the statement of financial position
How do you deal with the impairment of an asset?
the asset’s carrying amount should be reduced to its recoverable amount in the statement of financial position
After reducing an asset to its recoverable amount, what should the depreciation charge be based on?
The new carrying amount, its estimated residual value (if any) and its estimated useful life
Do companies calculate impairment for each separate asset?
No, they do it all in one
not whole company but for example each department
What should each unit to which goodwill is allocated to do?
- represent the lowest level within the entity at which the goodwill is monitored for internal management purposes
- not be larger than a reporting segment determined in accordance with IFRS & Operating segments
What are some financial impacts of impairment?
- impairment losses will arise at irregular intervals
- profit figures will be more volatile
- analysts focus on earnings before impairment loss
