Impairment of Assets

Question 1

What is IAS36?

Answer 1

Impairment of Assets

Question 2

What does impairment apply to?

Answer 2

All intangible, intangible and financial assets

Question 3

What assets does impairment NOT apply to and why?

Answer 3

• 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

Question 4

What is an impaired asset?

Answer 4

an asset that has a market value less than the value listed in the company’s balance sheet (book value)

Question 5

Which assets are most likely to be impaired?

Answer 5

• accounts receivable
• long-term assets such as intangibles (goodwill)
• fixed assets

Question 6

when an impaired asset’s value is written in the balance sheet, where else is a loss recognised?

Answer 6

In the statement of profit or loss

Question 7

What causes impairment?

Answer 7

can be either external or internal factors

Question 8

Regarding impairment, what are some examples of external factors (causes of impairment)?

Answer 8

-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

Question 9

Regarding impairment, what are some examples of internal factors (causes of impairment)?

Answer 9

• material changes in operations
• major reorganisation
• loss of key personnel
• loss of net cash outflow for a continuing period

Question 10

What is the value in use?

Answer 10

present value of future cash flows expected to be derived from the asset

Question 11

How is the carrying amount of an asset calculated?

Answer 11

cost-depreciation (NOT ACC DEP)

Question 12

What is a Cash Generating Unit (GCU)?

Answer 12

The smallest group of assets which generates income that is largely independent of the company’s other income stream

Question 13

What are Cash Generating Units used for?

Answer 13

When cash flows don’t arise from the use of a single non-current asset, impairment is measured for a CGU instead

Question 14

How would you test goodwill for impairment

Answer 14

As a cash generating unit

Question 15

What’s the only asset that you cant reverse impairment on and why?

Answer 15

Goodwill bc its internally generated

Question 16

What are some benefits of using the recoverable amount instead of the carrying amount (regarding impairment)?

Answer 16

• considers future
• considers market
• more accurate

Question 17

Regarding the recoverable amount (impairment), out of the selling price and the value in use, which figure should you use?

Answer 17

Whichever one is higher

Question 18

When do you know if an impairment loss has occurred?

Answer 18

If the recoverable amount of an asset is less than its carrying amount in the statement of financial position

Question 19

How do you deal with the impairment of an asset?

Answer 19

the asset’s carrying amount should be reduced to its recoverable amount in the statement of financial position

Question 20

After reducing an asset to its recoverable amount, what should the depreciation charge be based on?

Answer 20

The new carrying amount, its estimated residual value (if any) and its estimated useful life

Question 21

Do companies calculate impairment for each separate asset?

Answer 21

No, they do it all in one
not whole company but for example each department

Question 22

What should each unit to which goodwill is allocated to do?

Answer 22

1. represent the lowest level within the entity at which the goodwill is monitored for internal management purposes
2. not be larger than a reporting segment determined in accordance with IFRS & Operating segments

Question 23

What are some financial impacts of impairment?

Answer 23

• impairment losses will arise at irregular intervals
• profit figures will be more volatile
• analysts focus on earnings before impairment loss