Questions and Answers
Match the following terms with their definitions:
Impairment Loss = The amount by which the carrying amount of assets exceeds its recoverable amount. Recoverable Amount = The higher of fair value less costs to sell or its value in use. Cash-Generating Unit (CGU) = The smallest identifiable group of assets that generates cash flow. Indefinite Useful Life = Assets that must undergo an impairment test annually regardless of indications.
Match the different types of indications of impairment with their categories:
External Indications = Fall in market value and increase in interest rates. Internal Indications = Evidence of obsolescence and physical damage. General Rule = No impairment test until there is an indication of impairment. Exception to the General Rule = Annual impairment test for goodwill regardless of indications.
Match the components of the recoverable amount with their descriptions:
Fair Value = Market price after subtracting the costs to sell. Value in Use = Present value of future cash flows. Present Value Formula = FCF divided by (1 + R) raised to N. Future Cash Flows (FCF) = Income expected from the asset over its use.
Match the order of impairment allocation over asset types:
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Match the types of changes that may indicate 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
This quiz covers IAS 36, focusing on impairment loss and recoverable amount. Participants will learn about the definitions, calculations, and components involved in determining whether an asset is impaired. Test your understanding of fair value, value in use, and cash-generating units.
