Impairment of Assets and Assets Held-for-Sale

Question 1

What are the classifications of assets:

Answer 1

1) Assets held and are in use
2) Assets held for disposal (sale)
3) Assets to be disposed of other than sale (abandonment, spin-off to shareholders, or exchange for other assets)

Question 2

What are the steps to determining if there is an impairment?

Answer 2

Step 1) Are the future net cash flows recoverable? (if you can get enough cash flow equal to the asset’s value, then there is no impairment)

Step 2) If no, determine if it is for use or for sale

Step 3) if for use: Impairment loss CV-FV, Depreciate new Basis, No reversal of Sale

Step 4) Impairment= CV - FV less cost to sale, no depreciation, reversal permitted.

Question 3

What are some indicators of potential impairment?

Answer 3

Significant decrease in FV

Change in the way the asset is used or physical change in asset

Legal factors/ change in business climate/ lawsuits/regulatory ruling

If the assets costs are more than planned

Operating or cash flow are in a loss position

Question 4

What is the impairment test for assets held for use?

Answer 4

An asset is impaired if the carrying value will not be recovered. Recoverability is determined by comparing CV to undiscounted cash flows. UCF= Gross cash inflows from an asset less outflows to obtain net inflows

Question 5

What is the journal entry for an impairment loss?

Answer 5

Loss DB

Accumulated Depreciation CR

Question 6

T/F: Disclosures are required for impairments?

Answer 6

True

Question 7

After you compare the CV to the undiscounted cash flows, what is the final step to impairment?

Answer 7

Compare the CV to the FV of the asset. The difference is equal to the impairment loss!

Question 8

Under IFRS, what is the process for impairment?

Answer 8

Compare the recoverable amount to CV to determine if it is impaired.

Discounting is required under IFRS. IFRS allows impairment is reversed unlike US GAAP.