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Questions and Answers
What is the primary purpose of an impairment test for assets?
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?
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)?
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?
What should be done if it is not possible to determine the recoverable amount of an individual asset?
What factors should be considered when identifying a cash-generating unit?
What factors should be considered when identifying a cash-generating unit?
Which statement is true about impairment loss reversals?
Which statement is true about impairment loss reversals?
A factory's machine operates in conjunction with other assets. How should its impairment be assessed?
A factory's machine operates in conjunction with other assets. How should its impairment be assessed?
What is a key indicator that an asset might require an impairment test?
What is a key indicator that an asset might require an impairment test?
What must be tested for impairment when goodwill is allocated to a cash-generating unit (CGU)?
What must be tested for impairment when goodwill is allocated to a cash-generating unit (CGU)?
In which scenario would a CGU not report an impairment loss?
In which scenario would a CGU not report an impairment loss?
What is the primary criterion for allocating impairment losses when a CGU with goodwill is impaired?
What is the primary criterion for allocating impairment losses when a CGU with goodwill is impaired?
What financial figure must be assessed at least annually to determine if an impairment loss on goodwill still exists?
What financial figure must be assessed at least annually to determine if an impairment loss on goodwill still exists?
If the carrying amount (CA) of a CGU exceeds its recoverable amount (RA), what is the outcome?
If the carrying amount (CA) of a CGU exceeds its recoverable amount (RA), what is the outcome?
When a CGU with goodwill is impaired, how are impairment losses allocated to other assets?
When a CGU with goodwill is impaired, how are impairment losses allocated to other assets?
What is one of the key indicators for re-evaluating previously recognized impairment losses?
What is one of the key indicators for re-evaluating previously recognized impairment losses?
In the provided factory example, what is the status of the patents after the impairment review?
In the provided factory example, what is the status of the patents after the impairment review?
What does an impairment loss occur for a cash-generating unit (CGU)?
What does an impairment loss occur for a cash-generating unit (CGU)?
How is the impairment loss allocated to each asset in a CGU?
How is the impairment loss allocated to each asset in a CGU?
What is the highest value to which the carrying amount of an individual asset can be reduced during an impairment?
What is the highest value to which the carrying amount of an individual asset can be reduced during an impairment?
When must goodwill be subjected to impairment testing?
When must goodwill be subjected to impairment testing?
Which of the following statements about goodwill is true?
Which of the following statements about goodwill is true?
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?
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?
What indicates that an impairment loss may need to be recognized in CGUs?
What indicates that an impairment loss may need to be recognized in CGUs?
Under what condition can goodwill be amortized?
Under what condition can goodwill be amortized?
In the cost model, what is one limitation regarding the reversal of an impairment loss for individual assets?
In the cost model, what is one limitation regarding the reversal of an impairment loss for individual assets?
What is the journal entry to record a reversal of an impairment loss for individual assets under the cost model?
What is the journal entry to record a reversal of an impairment loss for individual assets under the cost model?
How should impairment losses be allocated for a Cash-Generating Unit (CGU)?
How should impairment losses be allocated for a Cash-Generating Unit (CGU)?
What is the accounting treatment for an impairment loss recognized for goodwill according to LKAS 36?
What is the accounting treatment for an impairment loss recognized for goodwill according to LKAS 36?
What must be reassessed after the reversal of an impairment loss?
What must be reassessed after the reversal of an impairment loss?
What should be included in the financial statements related to impairment losses?
What should be included in the financial statements related to impairment losses?
In the revaluation model, how is the reversal of an impairment loss recognized if it was taken against the asset revaluation surplus?
In the revaluation model, how is the reversal of an impairment loss recognized if it was taken against the asset revaluation surplus?
What is the maximum carrying amount an asset can reach after a reversal of impairment loss?
What is the maximum carrying amount an asset can reach after a reversal of impairment loss?
Which of the following statements about reversal for specific assets in a CGU is correct?
Which of the following statements about reversal for specific assets in a CGU is correct?
What factor must be considered when determining the CA of a depreciable asset after an impairment reversal?
What factor must be considered when determining the CA of a depreciable asset after an impairment reversal?
What is the requirement for recognizing a reversal of an impairment loss?
What is the requirement for recognizing a reversal of an impairment loss?
In the context of good will impairment, which exception applies to the recognition of impairment reversals?
In the context of good will impairment, which exception applies to the recognition of impairment reversals?
What is a recommended approach when there is an improvement in economic indicators?
What is a recommended approach when there is an improvement in economic indicators?
What disclosure is NOT typically required in relation to impairment losses?
What disclosure is NOT typically required in relation to impairment losses?
Which parameter should be evaluated after a reversal for individual assets?
Which parameter should be evaluated after a reversal for individual assets?
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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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