IMPAIRMENT OF ASSETS

Question 1

What is impairment?

Answer 1

Impairment is a fall in the market value of an asset so that THE RECOVERABLE AMOUNT IS LESS THAN THE CARRYING AMOUNT in the statement of financial position.

It is an established principle that AN ASSET SHALL NOT BE CARRIED AT ABOVE THE RECOVERABLE AMOUNT.

Question 2

What PAS covers impairment?

Answer 2

PAS 36

Question 3

What are the accounting issues to consider in impairment losses?

Answer 3

1. Indication of possible impairment
2. Measurement of the recoverable amount
3. Recognition of impairment loss

Question 4

T or F

Intangible assets with an indefinite useful life are tested for impairment monthly.

Answer 4

False. ANNUALLY.

Question 5

How is recoverable amount measured?

Answer 5

Recoverable amount of an asset is WHICHEVER IS HIGHER BETWEEN:

1. FAIR VALUE LESS COST OF DISPOSAL
2. VALUE IN USE

Question 6

T or F

Recoverable amount is measured whichever is lower between the FV less cost of disposal and Value in use.

Answer 6

FALSE, WHICHEVER IS HIGHER.

Question 7

What is the FV less cost of disposal.

Answer 7

FV is the price that would be received to sell an asset

Cost of disposal is an incremental cost directly attributable to the disposal of an asset EXCLUDING FINANCE COST AND INCOME TAX EXPENSE

Question 8

What are includible as costs of disposal?

Answer 8

1. Legal costs
2. Stamp duties and similar costs and taxes
3. Cost of removing the asset
4. Direct costs in bringing the asset into condition for sale

Question 9

Explain the Fair Value hierarchy used in best determining the FV.

Answer 9

A. Level 1 inputs - QUOTED PRICES IN AN ACTIVE MARKET FOR IDENTICAL ASSET

B. Level 2 inputs - Inputs observable either directly or indirectly including quoted prices for SIMILAR ASSETS

C. Level 3 inputs - unobservable inputs usually developed by the entity using the best available information.

Question 10

What is an active market?

Answer 10

An active market is a market in which transactions take place WITH SUFFICIENT REGULARITY AND VOLUME.

Question 11

What is a principal market?

Answer 11

A principal market is a market which has THE GREATEST VOLUME AND LEVEL OF ACTIVITY for the asset or liability.

Question 12

Who are the market participants in a principal market?

Answer 12

Market participants in a principal market are those who are:

a. Independent or unrelated parties
b. Knowledgeable
c. Willing

Question 13

What is Value in use?

Answer 13

Value in use is measured as THE PRESENT VALUE OR DISCOUNTED VALUE OF FUTURE CASH FLOWS EXPECTED TO BE DERIVED FROM THE ASSET.

Question 14

What discount rate is used in calculating the value in use?

Answer 14

The CURRENT PRE-TAX RATE.

Question 15

What is a cash generating unit?

Answer 15

A CGU is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets.

A CGU may be department/ product line or factory for which the output of product and input can be identified.

As a basic rule, the recoverable amount of an asset shall be determined for the asset INDIVIDUALLY. However, if it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the CGU to which the asset belongs.

Question 16

T or F
The CGU must be the largest aggregation of assets for which the cash flows can be identified and which are independent of cash flows from other assets or group of assets.

Answer 16

False. SMALLEST AGGREGATION.

Question 17

How is impairment loss distributed between a group of assets in a CGU?

Answer 17

Impairment loss is distributed in the following order:

1. GOODWILL
2. To all other NONCASH ASSET PRORATA based on their carrying amount.

HOWEVER, an assets’ carrying amount SHALL NOT BE REDUCED BELOW THE HIGHEST OF FAIR VALUE LESS COST OF DISPOSAL OR VALUE IN USE OR ZERO.

The excess impairment loss will be absorbed by other assets prorata.

Question 18

To which account is impairment loss charged?

Answer 18

To record impairment loss, a debit to impairment loss and a credit of accumulated depreciation (or asset account directly) is journalized.

Question 19

T or F

Liabilities are included in determining the carrying amount of the CGU.

Answer 19

False

Question 20

T or F

Cash and accounts receivable are included in determining the carrying amount of the CGU.

Answer 20

True

Question 21

T or F

Cash and accounts receivable share in the impairment loss along with other assets in the CGU.

Answer 21

False

Question 22

What are corporate assets?

Answer 22

Corporate assets are assets other than goodwill that contribute to the future cash flows of both the CGU under review and other cash generating units.

Essentially, corporate assets are administrative in nature and do not generate cash inflows independently.

Question 23

How is impairment loss of corporate assets determined?

Answer 23

The corporate assets are assigned a portion between several CGUs based on the CGU’s carrying amount. The value in use of the CGUs are then compared to the sum of each CGU plus the allocated portion of the corporate asset.

An impairment loss occurs when the value in use of a CGU is lower than the sum of the CGU plus the allocated portion of the corporate asset.

The impairment loss is then allocated between the CGU and the corporate asset based on the carrying amount of the CGU and the allocated portion of the corporate asset.

Question 24

T or F

An impairment loss recognized for goodwill shall NOT be reversed in a subsequent period.

Answer 24

True.

Question 25

What is the “maximum” carrying amount of an asset when reversing an impairment loss?

Answer 25

The maximum amount would be the carrying amount that would have been determined had there been no impairment.