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Questions and Answers
Match the following terms with their definitions:
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:
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:
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:
Match the order of impairment allocation over asset types:
Match the types of changes that may indicate impairment:
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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