M8 - Impairment

Question 1

True or False: Under US GAAP, subsequent reversal or intangible asset impairment losses is prohibited unless the intangible asset is held for sale.

Answer 1

True

Question 2

A patent is a type of intangible asset that has a limited useful life. The recoverability test is only performed on intangible assets with a limited life. The recoverability test compares undiscounted future cash flows to the carrying value of the asset. If the carrying value is GREATER, then a fair value test would be performed. (true or false)

Answer 2

True.

Assets with an indefinite life such as goodwill, and a trademark with indefinite useful life can not perform the recoverability test.

Question 3

Under US GAAP what is the first step in determining if a long-lived asset is impaired?

Answer 3

Compare the carrying amount to the UNDISCOUNTED expected FUTURE cash flows from the asset.

If the undiscounted future cash flows EXCEED the carrying value of the asset, then there is no impairment.

Question 4

A long-lived asset is impaired and has an impairment loss if:
1) the carrying amount is (lesser or greater) than its fair value
2 the carrying amount (is or isn’t) recoverable

Answer 4

1. greater
2. Isn’t (the fair value would be recoverable, but the difference would not be).

An impairment loss would then be recognized for the amount of the difference between book value and fair value.

Question 5

Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset’s recoverable amount. The recoverable amount is the greater of the asset’s fair value less costs to sell and the assets value in use (present value of future cash flows).

Answer 5

Carrying Value > Recoverable amount

Recoverable amount = greater of:

                          FV-cost to sell
                                   or
           Present value of future cash flows

Question 6

The carrying amount of fixed assets should be tested for recoverability at least annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.(true or false)

Answer 6

true

Question 7

Reversal of impairment loss is permitted under IFRS (true or false)

Answer 7

true, even if the asset isn’t held for disposal

Question 8

Impairment losses are shown on the income statement net of tax. (true or false)

Answer 8

false, they are shown as a component of income from continuing operations before tax

Question 9

If a fixed asset fails the first test for impairment
1st Test: Carrying Amount > Undiscounted Future CFs
, an impairment loss must be recorded.

How do you calculate the impairment loss?

Answer 9

Carrying Amount - FV of the asset = impairment

Question 10

An intangible asset with an indefinite life is tested for impairment by comparing what?

Answer 10

The FV of the intangible asset to its carrying amount.

Question 11

Performance of an impairment test on fixed assets held for use and to be disposed of begins with a recoverability test, in which the

the sum of undiscounted future CFs is compared
with the
carrying amount of the asset

What has to happen for an impairment loss to be calculated?

Answer 11

The carrying amount has to be greater than the undiscounted future CFs.