Topic 8 Impairment of assets

Question 1

what kind of assets does IAS 36 impairment of assets relate to?

Answer 1

IAS 16 PPE and IAS 38 Intangible assets

Question 2

when does an impairment of asset occur?

Answer 2

An impairment occurs when the recoverable amount of an asset is lower than the carrying amount that is currently recognised on the statement of financial position.

This means that we are currently overstating assets and we need to impair the asset to adjust this.

Question 3

what is the recoverable amount? higher of..

Answer 3

The recoverable amount is the HIGHER of:

• The fair value of the asset less any costs to sell, or:
• The value in use (the present value of future cashflows expected from the asset)

Question 4

what are external sources of indicators of impairment

2 examples

Answer 4

External sources of information:

• Changes in the market (declining, legal changes, economic changes.
• Interest rate changes

Question 5

what are internal sources of indicators of impairment

2 examples

Answer 5

Internal sources of information:

• There is damage to the asset which means the value should reduced
• It can be seen that the asset is not as highly performing as is expected

Question 6

what is a simple journal for impairment

Answer 6

Dr Impairment expense

Cr NCA

Question 7

What is the journal for impairment for something that has previously been revalued and included in a revaluation reserve account

Answer 7

Dr Reval Reserve
Cr NCA

Also shown in OCI

Question 8

What is cash generating units and an example

Answer 8

A cash generating unit is a collection of assets which are seen as a set which generate a single income.

Therefore, the assets cannot be valued without each other, as they need each other to earn cash.

miners
train to carry coal
warehouse

Question 9

what is the definition of CGU according to IAS 36 Impairments

Answer 9

‘the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets’.-

i.e. A cash‐generating unit is the smallest identifiable group of assets for which independent cashflows can be identified.

Question 10

how do you calculate the impairment allocation of CGU

Answer 10

When impairing a CGU, the impairment is calculated on the CGU as a whole. The important step to this is
allocating the overall impairment to the individual assets within a CGU.

The impairment is allocated as follows:

1. Goodwill (allocate goodwill first, as far as possible)
2. Any other assets within the CGU

Question 11

so if a question tells you there is a CGU with xxx values and that one of the assets e.g. building however has a market value of higher than carrying value, what process do you follow to find the balance on the building?

Answer 11

In a CGY no asset should be impaired below it’s recoverable amount. so if a valuation has revealed that the market value is higher than carrying amount then LEAVE IT as it is- do NOT IMPAIR.

leave it at it’s carrying value just like how you skip the current assets like cash