Impairment of Assets Flashcards
Look at L8 for examples
What is Impairment of Assets?
An asset’s carrying/book value exceeds its recoverable amount, so asset’s value has declined significantly and permanently, requiring a write-down.
What are External Indicators for Testing Impairment?
- Observable indications (market price)
- Significant changes with an adverse effect in tech, market, economic, or legal environment
- Increase in interest (discount) rate – affected “value in use”
- Net assets of the entity exceed market capitalisation
What are Internal Indicators for Testing Impairment?
- Physical damage
- Significant changes in business that effects how asset is used
- Poor economic performance
What is the Impairment Test?
Compare carrying amount with recoverable amount.
If RA > CA, no impairment.
If CA > RA, impairment loss where asset is written down to that lower cost.
What is the Carrying Amount?
Amount at which an asset is currently valued in financial statement.
After accumulated depreciation and previous impairment charges.
What is the Recoverable Amount?
Fair value – cost to sell,
* Fair value is price received if sold.
* If there is an active market, check market price.
* Estimate cost to sell.
Value in use (VIU),
* Present value of future cash flows obtainable as a result of assets continued use (including ultimate disposal).
What are the Issues with Impairment?
Difficult to make reliable estimates of values:
* Understanding impact of changes in market
* Net realisable values
* Estimates of future cash flows (derived from future sales volumes/selling prices/direct input costs, etc…)
* Discount factors for use in PV calculations.
What is the Accounting Treatment of Impairment Losses Under IAS 36?
Asset write-down expensed in SoPL as impairment loss. If asset is carried at revalued amount:
1. Debit impairment loss to revaluation reserve, up to any credit balance previously existing in revaluation reserve for same asset.
2. Any excess impairment loss is recognised as expense in P/L.
What is the Formula for Impairment of Assets?
Impairment of Assets = Accounting for Impairment - Depreciation and Amortisation
How should Depreciation be Charged After Impairment Loss has been Recognised?
Depreciation charge for asset shall be adjusted in future periods to allocate asset’s revised carrying amount – residual value (if any), on a systematic basis over its remaining useful life.
How do Reversal of Impairment Losses work Under IAS 36?
End of period, must check whether previous impairment losses have decreased or no longer exist.
Impairment losses for goodwill cannot be reversed.
Asset’s increased carrying amount shouldn’t exceed pre-impairment amount, excess treated as revaluation surplus. Reversal usually recognised as income on SoPL.
What are Cash Generating Units?
CGU include the smallest identifiable group of assets that generate cash inflows that are largely independent of cash flows from other assets or groups of assets.
What are the Rules for Recoverable Amount and Carrying Amount of CGU?
Impairment loss recognised if CGU’s recoverable < CA.
Only include CA of assets directly attributed to CGU.
Exclude CA of CGU’s liabilities unless RA cannot be determined without these liabilities.
What Assets must be Allocated Amongst more than One CGU?
Goodwill
Corporate Assets
How are Impairment Losses Allocated for CGU?
If CGUs RA < CA, impairment loss allocated between CGUs assets:
* Against any goodwill allocated to CGU.
* Other assets of CGU in proportion to their carrying amounts
And CA of asset shouldn’t be reduced below the highest of:
* Assets FV – cost of disposal
* Assets value in use
* 0
- If above restrictions apply, impairment loss that would be allocated to asset is allocated pro-rata between other assets of the CGU.
