L5 | Impairment of Assets

Question 1

What does impairment refer to?

Answer 1

carried out when the asset is losing value or that its actual value is less than its carrying amount

Question 2

Why is IAS 36 necessary?

Answer 2

ensures that assets are not carried at a figure greater than their recoverable amount

Question 3

What is the impairment test?

Answer 3

1. Take the higher out of the asset’s value in use or fair value less costs to sell and call it the recoverable amount
2. Compare this value to the carrying amount
3. If CA < RA -> no action, but if CA > RA -> carry out impairment.

Question 4

What are the indications of impairment (external sources)?

Answer 4

• decline in asset’s market value
• adverse changes in technological, market, economic or legal environment
• market interest rates (reduce value in use)
• carrying amount of the net assets is more than market capitalisation (for whole company)

Question 5

What are the indications of impairment (internal sources)?

Answer 5

• obsolescence or physical damage of an asset
• plans for a significant reorganisation/discontinuation or sale of an asset
• evidence that an asset’s performance is worse than expected

If such an indication exists, entity should consider the recoverable amt. of the asset (higher of FV less costs to sell and VIU of asset)

Question 6

What is meant by fair value?

Answer 6

Price that will be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 7

What is meant by costs of disposal?

Answer 7

• incremental costs directly attributable to disposal of an asset
• e.g. legal costs, stamp duty

Question 8

What is meant by value in use?

Answer 8

• “discounted net cash inflows that we’d expect over its life plus any income that we would generate at the end of its useful life”
• Asset’s NPVs

Question 9

If there’s no active market, what should the recoverable amount be taken as?

Answer 9

recoverable amount should be taken as the value in use as FV can’t be calculated

Question 10

What is the treatment of impairment?

Answer 10

• recognised as an expense in the statement of profit or loss and other comprehensive income
• but if asset carried at revalued amount (IAS 16/38), account for in the same way as a revaluation decrease

Question 11

What is the accounting entries for impairment losses?

Answer 11

• An impairment loss is written off to profit and loss
  Dr - Impairment loss
  Cr - Asset carrying amount
  … unless the asset is carried at revalued amount and a revaluation surplus exists in relation to the asset
• In this case, impairment loss is treated as a decrease in revaluation (to the extent that the surplus exists):
  Dr - Revaluation surplus
  Cr - Asset carrying amount
  … and recognised in Other comprehensive income

Question 12

What is a cash-generating unit (CGU)?

Answer 12

“The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets”

Question 13

How are impairment losses allocated for CGUs?

Answer 13

Allocate to assets of CGU in proportion to their carrying amounts

Question 14

How is the impairment loss for CGU with goodwill allocated?

Answer 14

1. to any specific impairment
2. to goodwill allocated to CGU
3. to other assets of the unit on a pro-rota basis, based on carrying amount of each asset

Question 15

When allocating an impairment loss to the assets, the carrying value of each asset should not be reduced below the highest of:

Answer 15

• Fair value less costs to sell
• Value in use
• Zero

Question 16

How do we reverse impairments?

Answer 16

Usually recognised as income immediately in income statement, except…
* if asset is carried at revalued amount
* …Treat as a revaluation increase under IAS 16, IAS 38