Lecture 7 - Impairment Of Assets

Question 1

What are ‘impairment losses’?

Answer 1

Impairment losses re irregular reductions in the value of an asset

Question 2

What is the purpose of ‘impairment losses’?

Answer 2

The purpose is to ensure that assets aren’t overstated in the accounts of a firm

Question 3

When is an asset deemed to be impaired?

Answer 3

When the carrying value (cost less depreciation) is more than its recoverable value

Question 4

What is the ‘recoverable value’ of an asset?

Answer 4

The value the firm can expect to receive from either keeping the asset or selling the asset

Question 5

For what assets must ‘impairment tests’ be conducted annually?

Answer 5

• Intangibles with infinite lives
• Intangibles not yet available for use
• Goodwill acquired through business combination

Question 6

Impairment tests are conducted when there is evidence of a change in value, what are the external sources of indication of impairment?

Answer 6

• Decline in the market value of an asset
• Adverse changes in the entity’s environment
• Increases in interest rates (this increases the value of a firms assets)
• The market value of the entity’s equity is below the book value of equity

Question 7

Impairment tests are conducted when there is evidence of a change in value, what are the internal sources of indication for impairment?

Answer 7

• Physical damage/ Obsolesce of an asset
• Change in asset use (plan to dispose of an asset)
• Economic underperformance of an asset

Question 8

Under IAS 36, what assets don’t require impairment tests?

Answer 8

• inventories
• Assets arising from contracts with customers
• Deferred tax assets
• Assets arising from employee benefits
• Financial assets
• Investment property carried at fair value
• Certain agricultural assets carried at fair value
• Insurance contract assets
• Non-current assets held for sale

Question 9

Under IAS 36, what assets require impairment tests?

Answer 9

• Land
• Buildings
• Machinery and equipment
• Acquired Intangible assets
• Goodwill
• Investment property carried at cost
• Investment in subsidiaries, associates and joint ventures

Question 10

What is the most common reason for goodwill to be written down?

Answer 10

A lack of sales or predicted sales being too optimistic

Question 11

Once a impairment test has took place, there are two possible outcomes, what are they?

Answer 11

Carrying Amount is less than recoverable value - nothing further to do .

Carrying Amount is more than recoverable value - recognition of an impairment loss

Question 12

What does IAS 36 define as the recoverable value?

Answer 12

‘The higher of its value less cost of disposal and its value in sale’

Question 13

Is it necessary for firms to calculate both fair value (less cost of disposal) and the value in use?

Answer 13

No, if one of the two is greater than the carrying amount, it follows that the asset cannot be impaired.

Question 14

What are the two methods used to calculate ‘Fair value less cost of disposal’?

Answer 14

1. Market approach
   - Relies on direct estimates from similar transactions of similar assets.
2. Discounted cash flow approach
   - Builds on the market expectation of future cash flow s=discounted at the discount rate.

Question 15

In what case is the ‘discounted cash flow method’ used to calculate the fair value of an asset?

Answer 15

When there isn’t much market data

Question 16

In the ‘Fair value Hierarchy of IFRS 13’, level 1 refers to…

Answer 16

The most accurate estimations. These estimations come from the ‘quoted market price for identical assets or liabilities’

Question 17

In the ‘Fair value Hierarchy of IFRS 13’, level 2 refers to…

Answer 17

Less reliable estimates calculated from market observation of near identical assets or liabilities.

Level 2 uses things such as changes in interest rates

Question 18

In the ‘Fair value Hierarchy of IFRS 13’, level 3 refers to…

Answer 18

Estimates of the worst reliability, they’re calculated using an entities own data.

Question 19

What are the two methods of determining the recoverable value?

Answer 19

Fair value less cost of disposal: (legal fees, stamp duty, cost of removing assets).

Value in use: The estimated future cash flows of an asset.

Question 20

When an asset is accounted for under the cost model, the impairment is recognised immediately in the…

Answer 20

Income statement

Question 21

When the asset is accounted for under the revaluation model, the impairment loss is treated as…

Answer 21

Revaluation decrease. The revaluation loss is deducted from any ‘revaluation reserve’ (OCI), the remained is subtracted from the income statement

Question 22

After a impairment loss has been charged to an asset, depreciation…

Answer 22

Must be re-calculated (after the subtraction of the impairment loss from the carrying amount)

Question 23

What is meant by the term ‘Cash-generating units’ (CGUs)?

Answer 23

Cash-generating units (CGUs) are the smallest identifiable group of assets that generate cash flows that are largely independent of the cash flow of other assets

Question 24

If the carrying amount of a CGU is greater than its recoverable value and an impairment loss is generated, it is charged to the CGU in 4 steps:

Answer 24

1. The impairment loss is charged to the CGUs GOODWILL FIRST.
2. The remaining impairment losses are allocated proportionality to the other assets in the CGU.
   (This is the first allocation)
3. The carrying amount of the CGU must be assessed against its lower bounds. (The carrying amount cannot fall below the recoverable value or Zero).
4. If the first allocation results in a CGU being carried below its fair value, the excess is distributed proportionally to the other assets in the group

Question 25

The journal entry for the impairment loss is a Debit/Credit

Answer 25

Debit

Question 26

When writing down a CGU, what is always written down first as far as possible?

Answer 26

Goodwill

Question 27

Goodwill impairment cannot…

Answer 27

Be reversed

Question 28

Reversal of impairment losses for individual assets…

Answer 28

Can be reversed but only to the value before the initial impairment loss.

(Cannot be reversed above its initial value).