IMPAIRMENT OF ASSETS Flashcards
What is impairment?
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.
What PAS covers impairment?
PAS 36
What are the accounting issues to consider in impairment losses?
- Indication of possible impairment
- Measurement of the recoverable amount
- Recognition of impairment loss
T or F
Intangible assets with an indefinite useful life are tested for impairment monthly.
False. ANNUALLY.
How is recoverable amount measured?
Recoverable amount of an asset is WHICHEVER IS HIGHER BETWEEN:
- FAIR VALUE LESS COST OF DISPOSAL
- VALUE IN USE
T or F
Recoverable amount is measured whichever is lower between the FV less cost of disposal and Value in use.
FALSE, WHICHEVER IS HIGHER.
What is the FV less cost of disposal.
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
What are includible as costs of disposal?
- Legal costs
- Stamp duties and similar costs and taxes
- Cost of removing the asset
- Direct costs in bringing the asset into condition for sale
Explain the Fair Value hierarchy used in best determining the FV.
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.
What is an active market?
An active market is a market in which transactions take place WITH SUFFICIENT REGULARITY AND VOLUME.
What is a principal market?
A principal market is a market which has THE GREATEST VOLUME AND LEVEL OF ACTIVITY for the asset or liability.
Who are the market participants in a principal market?
Market participants in a principal market are those who are:
a. Independent or unrelated parties
b. Knowledgeable
c. Willing
What is Value in use?
Value in use is measured as THE PRESENT VALUE OR DISCOUNTED VALUE OF FUTURE CASH FLOWS EXPECTED TO BE DERIVED FROM THE ASSET.
What discount rate is used in calculating the value in use?
The CURRENT PRE-TAX RATE.
What is a cash generating unit?
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.
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.
False. SMALLEST AGGREGATION.
How is impairment loss distributed between a group of assets in a CGU?
Impairment loss is distributed in the following order:
- GOODWILL
- 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.
To which account is impairment loss charged?
To record impairment loss, a debit to impairment loss and a credit of accumulated depreciation (or asset account directly) is journalized.
T or F
Liabilities are included in determining the carrying amount of the CGU.
False
T or F
Cash and accounts receivable are included in determining the carrying amount of the CGU.
True
T or F
Cash and accounts receivable share in the impairment loss along with other assets in the CGU.
False
What are corporate assets?
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.
How is impairment loss of corporate assets determined?
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.
T or F
An impairment loss recognized for goodwill shall NOT be reversed in a subsequent period.
True.
What is the “maximum” carrying amount of an asset when reversing an impairment loss?
The maximum amount would be the carrying amount that would have been determined had there been no impairment.
