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Define impairment loss in the context of IAS 36.
Define impairment loss in the context of IAS 36.
Impairment loss is the amount by which the carrying amount of assets exceeds its recoverable amount.
What constitutes the recoverable amount of an asset?
What constitutes the recoverable amount of an asset?
The recoverable amount is the higher of fair value less cost to sell or its value in use, which is the present value of future cash flows.
List two external indications that may suggest an asset is potentially impaired.
List two external indications that may suggest an asset is potentially impaired.
1- Fall in market value; 2- Significant change in the technological, market, legal, or economic environment.
What is a Cash-Generating Unit (CGU) as defined in IAS 36?
What is a Cash-Generating Unit (CGU) as defined in IAS 36?
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Explain the order of allocation for impairment over a Cash-Generating Unit.
Explain the order of allocation for impairment over a Cash-Generating Unit.
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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 with this quiz. It covers key concepts such as impairment loss, recoverable amount, and cash-generating units. Assess your knowledge and enhance your expertise in asset valuation and accounting standards.
