Questions and Answers
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.
recoverable
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.
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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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Description
Test your understanding of IAS 36 Impairment of Assets, focusing on key concepts like impairment loss and recoverable amount. This quiz covers the definitions and calculations relevant to both individual assets and cash-generating units (CGUs). Challenge yourself with scenarios and examples to reinforce your knowledge.
