Learning Unit 5 - Impairment of assets

Question 1

IAS 36.6

What is the recoverable amount of an asset?

Answer 1

Recoverable amount is defined as:

the higher of an asset’s:

• fair value less costs of disposal (FV-CoD); and
• value in use (VIU)

Question 2

IAS 36.9 & 10

Under which instances does the recoverable amount need to be calculated?

Answer 2

The recoverable amount only needs to be calculated if:

• the indicator review suggests the asset may be impaired;
• the asset is an intangible asset with an indefinite useful life;
• the asset is an intangible asset not yet available for use; or
• the asset is goodwill acquired in a business combination.

Question 3

IAS 36.12 (a) - (d) and 13-14

What external information must be considered as a minimum when assessing impairment of an asset.

Answer 3

• a decrease in the value of the asset that is significant relative to normal usage over time
• a significant adverse change in the market within which the asset is used
• the net asset value per share is greater than the market value per share

Question 4

IAS 36.12 (e) - (h) and 13-14

What internal information must be considered as a minimum when assessing impairment of an asset.

Answer 4

1. significant changes adversely affecting the use of the asset including planned changes:
   - a plan to dispose of the asset at a date earlier than previously expected,
   - a plan that will result in the asset becoming idle
   - a plan to cease manufacturing a product line or close a factory that uses the asset; and
   - the reassessment of the useful life of an asset from indefinite to finite
2. Unusually low cash flow from use of an asset
3. Physical damage

Question 5

IAS 36.6

Define what is fair value.

Answer 5

Fair value is defined as:

• the price that would be
• received to sell an asset; or
• paid to transfer a liability
• in an orderly transaction between market participants
• at the measurement date

Question 6

IAS 36.6

Define cost of disposal

Answer 6

Costs of disposal are defined as:
- incremental costs
- Directly attributable to the disposal of an asset or cash generating unit;
- excluding finance costs and income tax expense

Question 7

IAS36.6

Define value in use.

Answer 7

Value in use is defined as:
- the present value of the
- future cash flows expected to be derived from
- an asset or cash-generating unit

Question 8

How do you calculate the value in use?

Answer 8

The present value of the expected annual cash flows.