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Impairment Testing and CGUs Overview
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Impairment Testing and CGUs Overview

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Questions and Answers

What is the primary purpose of an impairment test for assets?

  • To assess the producer's profit margins.
  • To determine the market value of the asset.
  • To evaluate whether the carrying amount of an asset exceeds its recoverable amount. (correct)
  • To calculate depreciation over the asset's useful life.

    • When should an impairment test be conducted for an asset?

  • Only at the end of the financial year.
  • When there are indications that the asset may not be recoverable. (correct)
  • When the asset is sold.
  • Every time the asset is revalued.

    • What is a cash-generating unit (CGU)?

  • The smallest identifiable group of assets generating largely independent cash inflows. (correct)
  • Any asset that produces revenue.
  • A financial entity responsible for cash management.
  • A grouping of assets that cannot be sold individually.

    • What should be done if it is not possible to determine the recoverable amount of an individual asset?

    <p>Determine the recoverable amount of the CGU to which it belongs.</p> Signup and view all the answers

    What factors should be considered when identifying a cash-generating unit?

    <p>How management monitors operations and makes asset decisions.</p> Signup and view all the answers

    Which statement is true about impairment loss reversals?

    <p>They cannot exceed the initial impairment loss recognized.</p> Signup and view all the answers

    A factory's machine operates in conjunction with other assets. How should its impairment be assessed?

    <p>As part of the cash-generating unit it belongs to.</p> Signup and view all the answers

    What is a key indicator that an asset might require an impairment test?

    <p>A significant decline in the asset's market value.</p> Signup and view all the answers

    What must be tested for impairment when goodwill is allocated to a cash-generating unit (CGU)?

    <p>The CGU as a whole, including goodwill</p> Signup and view all the answers

    In which scenario would a CGU not report an impairment loss?

    <p>Carrying amount is less than recoverable amount</p> Signup and view all the answers

    What is the primary criterion for allocating impairment losses when a CGU with goodwill is impaired?

    <p>To reduce the carrying amount of goodwill first</p> Signup and view all the answers

    What financial figure must be assessed at least annually to determine if an impairment loss on goodwill still exists?

    <p>Recoverable amount of the cash-generating unit</p> Signup and view all the answers

    If the carrying amount (CA) of a CGU exceeds its recoverable amount (RA), what is the outcome?

    <p>An impairment loss occurs</p> Signup and view all the answers

    When a CGU with goodwill is impaired, how are impairment losses allocated to other assets?

    <p>Pro-rata to the carrying amounts of the remaining assets</p> Signup and view all the answers

    What is one of the key indicators for re-evaluating previously recognized impairment losses?

    <p>Evidence suggesting the previous loss no longer exists</p> Signup and view all the answers

    In the provided factory example, what is the status of the patents after the impairment review?

    <p>They are now considered worthless</p> Signup and view all the answers

    What does an impairment loss occur for a cash-generating unit (CGU)?

    <p>When the carrying amount of the CGU assets is greater than the recoverable amount.</p> Signup and view all the answers

    How is the impairment loss allocated to each asset in a CGU?

    <p>Based on the carrying amount of each asset relative to the total carrying amount.</p> Signup and view all the answers

    What is the highest value to which the carrying amount of an individual asset can be reduced during an impairment?

    <p>The highest of FV-CD, VIU, or zero.</p> Signup and view all the answers

    When must goodwill be subjected to impairment testing?

    <p>Annually.</p> Signup and view all the answers

    Which of the following statements about goodwill is true?

    <p>Goodwill is a residual balance after a business combination.</p> Signup and view all the answers

    If the present value of future cash flows of a CGU is Rs. 800,000, and its fair value less costs of disposal is Rs. 750,000, what is the recoverable amount?

    <p>Rs. 750,000.</p> Signup and view all the answers

    What indicates that an impairment loss may need to be recognized in CGUs?

    <p>A decrease in the market value of the CU's assets.</p> Signup and view all the answers

    Under what condition can goodwill be amortized?

    <p>Goodwill cannot be amortized at all.</p> Signup and view all the answers

    In the cost model, what is one limitation regarding the reversal of an impairment loss for individual assets?

    <p>The new carrying amount cannot be higher than the recoverable amount.</p> Signup and view all the answers

    What is the journal entry to record a reversal of an impairment loss for individual assets under the cost model?

    <p>Dr Accumulated Depreciation xx, Cr Income xx</p> Signup and view all the answers

    How should impairment losses be allocated for a Cash-Generating Unit (CGU)?

    <p>On a pro-rata basis across all assets in the CGU.</p> Signup and view all the answers

    What is the accounting treatment for an impairment loss recognized for goodwill according to LKAS 36?

    <p>It is not to be reversed in later periods.</p> Signup and view all the answers

    What must be reassessed after the reversal of an impairment loss?

    <p>The depreciation parameters for the asset.</p> Signup and view all the answers

    What should be included in the financial statements related to impairment losses?

    <p>The amount of impairment losses recognized in the profit and loss and OCI.</p> Signup and view all the answers

    In the revaluation model, how is the reversal of an impairment loss recognized if it was taken against the asset revaluation surplus?

    <p>Dr Asset xx, Cr Asset Revaluation Surplus xx</p> Signup and view all the answers

    What is the maximum carrying amount an asset can reach after a reversal of impairment loss?

    <p>Equal to the cost that would have been determined had no impairment loss been recognized.</p> Signup and view all the answers

    Which of the following statements about reversal for specific assets in a CGU is correct?

    <p>They cannot exceed the recoverable amount.</p> Signup and view all the answers

    What factor must be considered when determining the CA of a depreciable asset after an impairment reversal?

    <p>The depreciation that would have occurred.</p> Signup and view all the answers

    What is the requirement for recognizing a reversal of an impairment loss?

    <p>The impairment loss must have been previously recognized.</p> Signup and view all the answers

    In the context of good will impairment, which exception applies to the recognition of impairment reversals?

    <p>There are no reversals allowed for goodwill impairment.</p> Signup and view all the answers

    What is a recommended approach when there is an improvement in economic indicators?

    <p>Reassess estimates for individual assets and CGUs.</p> Signup and view all the answers

    What disclosure is NOT typically required in relation to impairment losses?

    <p>The reason behind each impairment loss.</p> Signup and view all the answers

    Which parameter should be evaluated after a reversal for individual assets?

    <p>The useful life and depreciation rate.</p> Signup and view all the answers

    Study Notes

    Impairment Testing

    • The purpose of the impairment test is to ensure that assets are recorded at their recoverable amount which is the higher of Fair Value Less Costs of Disposal (FV-CD) and Value in Use (VIU).
    • The impairment test is used to evaluate the value of assets that may have decreased in value.
    • An impairment loss is a reduction in the carrying amount of an asset when the recoverable amount is less than the carrying amount.

    Cash Generating Units (CGUs)

    • A CGU is the smallest identifiable group of assets that generates cash flows independently from other assets or groups of assets.
    • A CGU is identified based on the way management monitors and makes decisions about the entity's operations.
    • An impairment test is applied to the CGU if the recoverable amount of an individual asset cannot be determined.

    Impairment Loss of CGU

    • An impairment loss arises when the carrying amount of the CGU's assets is greater than its recoverable amount.
    • The impairment loss is allocated to each asset in the CGU on a pro-rata basis.
    • The carrying amount of an asset cannot be reduced below the highest of its FV-CD, VIU or Zero.

    Impairment Loss of CGU with Goodwill

    • Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired.
    • Goodwill is allocated to the lowest level at which management monitors the goodwill.
    • The CGU with goodwill must be tested for impairment at least annually or more frequently if there is an indication that the CGU may be impaired.
    • If the recoverable amount is less than the carrying amount, an impairment loss is recognised.
    • The impairment loss is first allocated to the goodwill and then to other assets of the CGU on a pro-rata basis.

    Reversal of Impairment Loss

    • Impairment reversals are allowed and can be recognised if there is an indication that the impairment loss does not exist or has decreased.
    • The reversal of an impairment loss for individually identifiable assets is allowed up to the recoverable amount of the asset.
    • The reversal of an impairment loss for CGUs is allocated to the assets of the CGU, excluding goodwill, based on a pro-rata basis.
    • Impairment losses recognized for goodwill are not permitted to be reversed.

    Disclosures

    • The amount of impairment loss and reversals recognized in the profit or loss and other comprehensive income (OCI) should be disclosed.
    • The line item in the statement of profit or loss/OCI where the amounts are included should be identified.

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    Description

    This quiz covers the fundamentals of impairment testing and cash generating units (CGUs). You will learn how to evaluate asset values, identify CGUs, and understand impairment losses. Test your knowledge on the practical applications and importance of these concepts in financial reporting.

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