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Questions and Answers
Impairment loss is the amount by which the carrying amount of assets exceeds its ______.
Impairment loss is the amount by which the carrying amount of assets exceeds its ______.
recoverable amount
The fair value less cost to sell or value in use is used to determine the ______ amount.
The fair value less cost to sell or value in use is used to determine the ______ amount.
recoverable
A cash-generating unit (CGU) is the smallest identifiable group of assets that generates ______.
A cash-generating unit (CGU) is the smallest identifiable group of assets that generates ______.
cash flow
In the absence of indications of impairment, an annual ______ test is required for assets with indefinite useful life.
In the absence of indications of impairment, an annual ______ test is required for assets with indefinite useful life.
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Physical damage and obsolescence must be ______ first in order of allocation of impairment.
Physical damage and obsolescence must be ______ first in order of allocation of impairment.
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Study Notes
Definition of Impairment Loss
- Impairment Loss represents the difference between the carrying amount of an asset and its recoverable amount.
Recoverable Amount
- Defined as the higher of fair value less costs to sell or value in use (present value (PV) of future cash flows).
- Value in Use formula: ( \text{PV} = \frac{\text{FCF}}{(1 + R)^N} ).
- Applicable to both Individual Assets and Cash Generating Units (CGUs) based on current usage.
Cash Generating Unit (CGU)
- The smallest identifiable group of assets that generates cash flows.
Identifying a Potentially Impaired Asset
- General Rule: Impairment testing is not required until there is an indication of impairment.
- Exception: Annual impairment tests for intangible assets with indefinite useful lives, such as Goodwill.
External Indicators of Impairment
- Decline in market value of assets.
- Significant changes in technology, market conditions, legal circumstances, or economic environment.
- Rising interest rates impacting asset value.
- Market price of shares falls below the net assets.
Internal Indicators of Impairment
- Evidence of asset obsolescence.
- Physical damage to the asset.
- Adverse changes in asset use or economic performance.
Allocation of Impairment
- Impairment should first be allocated to assets with physical damage or obsolescence.
- Goodwill is impaired after addressing physical damages.
- Non-current assets are impaired pro-rata based on their value.
- Current assets are the last to be considered for impairment allocation.
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