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    43 - Impairment of Asset

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    The document discusses impairment of assets under PAS 36. It defines impairment as when an asset's recoverable amount falls below its carrying amount. The recoverable amount is the higher of fair value less costs of disposal or value in use. Value in use is the present value of future cash flows from an asset. If impairment exists, a loss is recognized in profit/loss. The loss is first allocated to goodwill then other assets of the cash generating unit. An impairment loss may be reversed except for goodwill, but the increased carrying amount cannot exceed what it would have been without prior impairments.

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    43 - Impairment of Asset

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    jsemlpz
    66 views7 pages
    The document discusses impairment of assets under PAS 36. It defines impairment as when an asset's recoverable amount falls below its carrying amount. The recoverable amount is the higher of fair value less costs of disposal or value in use. Value in use is the present value of future cash flows from an asset. If impairment exists, a loss is recognized in profit/loss. The loss is first allocated to goodwill then other assets of the cash generating unit. An impairment loss may be reversed except for goodwill, but the increased carrying amount cannot exceed what it would have been without prior impairments.

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    The document discusses impairment of assets under PAS 36. It defines impairment as when an asset's recoverable amount falls below its carrying amount. The recoverable amount is the higher of fair value less costs of disposal or value in use. Value in use is the present value of future cash flows from an asset. If impairment exists, a loss is recognized in profit/loss. The loss is first allocated to goodwill then other assets of the cash generating unit. An impairment loss may be reversed except for goodwill, but the increased carrying amount cannot exceed what it would have been without prior impairments.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    66 views7 pages

    43 - Impairment of Asset

    Uploaded by

    jsemlpz
    The document discusses impairment of assets under PAS 36. It defines impairment as when an asset's recoverable amount falls below its carrying amount. The recoverable amount is the higher of fair value less costs of disposal or value in use. Value in use is the present value of future cash flows from an asset. If impairment exists, a loss is recognized in profit/loss. The loss is first allocated to goodwill then other assets of the cash generating unit. An impairment loss may be reversed except for goodwill, but the increased carrying amount cannot exceed what it would have been without prior impairments.

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    of 7

    CHAPTER 43: IMPAIRMENT OF ASSET

    QUESTION 43-1

    What is the meaning of impairment of asset?

    ANSWER 43-1

    Impairment of asset is a fall in the market value of an asset so that the recoverable amount is
    now less than the carrying amount in the statement of financial position.

    The recoverable amount of an asset is the fair value less cost of disposal or value in use,
    whichever is higher.

    Fair value of an asset is the price that would be received to sell the assèt in an orderly transaction
    between market participants at the measurement date.

    Cost of disposal is an incremental cost directly attributable to the disposal of an asset or cash
    generating unit, excluding finance cost and income tax expense.

    Examples of cost of disposal include legal cost, stamp duty and similar transaction tax, cost of
    removing the asset, and direct cost in bringing the asset into condition for sale.

    Value in use is measured as the present value of estimated future net cash flows expected to be
    derived from an asset.

    The cash flows are pretax cash flows and pretax discount is applied in determining the present
    value.

    QUESTION 43-2

    Explain the fair value hierarchy.

    ANSWER 43-2

    PFRS 13, paragraph 72, enumerates the following fair value hierarchy or best evidence of fair
    value in descending order:

    a. Level 1 inputs - The quoted prices in an active market for identical assets.
    b. Level 2 inputs - The quoted prices for similar assets in an active market and quoted
    prices for identical or similar assets in a market that is not active.
    c. Level 3 inputs - The unobservable inputs for the asset that are usually developed by the
    entity using the best available information from the entity's own data.
    QUESTION 43-3

    What are the components of estimated future cash flows for purposes of determining value in
    use?

    ANSWER 43-3

    Estimates of future cash flows include:

    a. Projections of cash inflows from the continuing use of the asset.


    b. Projections of cash outflows necessarily incurred to generate the cash inflows from the
    continuing use of the asset.
    c. Net cash flows received or paid on the disposal of the asset at the end of its useful life in
    an arm's length transaction.

    Estimates of future cash flows do not include:

    a. Future cash flows relating to restructuring to which the entity is not yet committed.
    b. Future costs of improving or enhancing the asset's performance.
    c. Cash inflows or outflows from financing activities.
    d. Income tax receipts or payments.

    QUESTION 43-4

    How is the impairment loss recognized?

    ANSWER 43-4

    The basic principle is that if the recoverable amount of an asset is lower than the carrying
    amount, the asset is judged to have suffered an impairment loss.

    There is no impairment if the recoverable amount is higher than the carrying amount.

    The impairment loss is recognized in profit or loss and presented separately in the income
    statement.

    QUESTION 43-5

    Explain the recognition of an impairment loss of a cash generating unit.

    ANSWER 43-5

    A cash generating unit is the smallest identifiable group of assets that generate cash inflows
    from continuing use that are largely independent of the cash inflows from other assets or group
    of assets.
    PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash
    generating unit, such loss shall be allocated to the assets of the unit in the following order:

    a. First, to the goodwill allocated to the cash generating unit.

    b. Then, to all other noncash assets of the cash generating unit prorata based on carrying
    amount.

    Paragraph 105 further provides that the carrying amount of an asset shall not be reduced
    below the highest of fair value less cost of disposal, value in use and zero.

    The amount of impairment loss that would otherwise have been allocated to the asset shall be
    allocated prorata to the other assets of the unit.

    QUESTION 43-6

    Explain the reversal of an impairment loss.

    ANSWER 43-6

    If the recoverable amount of an asset that has previously been impaired turns out to be higher
    than the asset's current carrying amount, the carrying amount of the asset shall be increased to
    the new recoverable amount.

    However, PAS 36, paragraph 117, provides that the increased carrying amount of an asset due to
    a reversal of an impairment loss shall not exceed the carrying amount that would have been
    determined had no impairment loss been recognized for the asset in prior years.

    The reversal of the impairment loss shall be recognized immediately in profit or loss.

    But any reversal of an impairment loss on a revalued asset shall be treated as a revaluation
    increase.

    PAS 36, paragraph 124, explicitly provides that an impairment loss recognized for goodwill shall
    not be reversed in a subsequent period.

    QUESTION 43-7 Multiple choice (PAS 36)

    1. Which statement best describes impairment loss?


    a. The removal of an asset from the statement of financial position.
    b. The amount by which the carrying amount of an asset exceeds the recoverable
    amount.
    c. The systematic allocation of cost of an asset less residual value over the useful life.
    d. The amount by which the recoverable amount of an asset exceeds the carrying
    amount.
    2. What is the recoverable amount of an asset?
    a. Fair value less cost of disposal.
    b. Value in use.
    c. Fair value less cost of disposal or value in use, whichever is higher.
    d. Fair value less cost of disposal or value in use, whichever is lower.
    3. What is fair value of an asset?
    a. The price that would be received to sell an asset in an orderly transaction between
    market participants at the measurement date.
    b. The price that would be paid to transfer a liability in an orderly transaction between
    market participants at the measurement date.
    c. The discounted value of future cash flows expected to be derived from an asset.
    d. The undiscounted value of future cash flows expected to be derived from an asset.
    4. Which statement best describes value in use?
    a. The present value of estimated future cash flows expected to arise from the
    continuing use of an asset and from the ultimate disposal.
    b. The amount of cash that could currently be obtained by selling an asset in an orderly
    disposal.
    c. The amount which an entity expects to obtain for an asset at the end of the useful life.
    d. Undiscounted future net cash flows.
    5. What is the best evidence of fair value?
    a. Quoted price in an active market for identical asset.
    b. Quoted price in an active market for similar asset.
    c. Quoted price in an inactive market for identical asset.
    d. Quoted price in an inactive market for similar asset.
    6. Which statement is incorrect concerning the estimate of future cash flows?
    a. Future cash flows shall be based on reasonable and supportable assumptions.
    b. Future cash flows shall be based on the most recent budget, usually up to a maximum
    of 5 years.
    c. Future cash flows do not include income tax.
    d. The discount rate used in estimating future cash flows shall be the current rate after
    tax.
    7. The estimates of future cash flows in calculating value in use include all of the following,
    except
    a. Cash inflows from the continuing use of the asset
    b. Cash outflows incurred to generate the cash inflows from the continuing use of the
    asset
    c. Net cash flows from the disposal of the asset at the end of the useful life
    d. Income tax payments

    8. What is a cash generating unit?


    a. The smallest business segment
    b. Any group of assets that generate cash flows
    c. Any group of assets reported separately to management
    d. The smallest group of assets that generate independent cash flows from continuing
    use

    QUESTION 43-8 Multiple choice (IFRS)

    1. If the fair value less cost of disposal cannot be determined


    a. The asset is not impaired.
    b. The recoverable amount is the value in use.
    c. The net realizable value is used.
    d. The carrying amount of the asset remains the same,
    2. If the assets are to be disposed of
    a. The recoverable amount is the fair value less cost of disposal.
    b. The recoverable amount is the value in use.
    c. The asset is not impaired.
    d. The recoverable amount is the carrying value.
    3. When deciding on the discount rate to be used, which factor should not be taken into
    account?
    a. The time value of money.
    b. Risk specific to the asset for which future cash flow estimate has not been adjusted.
    c. Risk specific to the asset for which future cash flow estimate has been adjusted.
    d. Pretax rate.
    4. What is the allocation of an impairment loss recognized for a cash generating unit?
    a. Across the assets of the unit based on carrying amount.
    b. Across the assets of the unit based on fair value.
    c. First, to any goodwill, and the balance to the other assets prorata based fair value.
    d. First, to any goodwill, and the balance to the other assets prorata based on carrying
    amount.
    5. An impairment loss that relates to an asset that has been revalued shall be recognized in
    a. Profit or loss
    b. Revaluation surplus that relates to the revalued asset
    c. Opening retained earnings
    d. Any reserve in equity
    6. Which of the following is not relevant in determining value in use?
    a. The expected future cash flows from the asset
    b. The carrying amount of the asset
    c. Expectation about possible variation in the amount and timing of future cash flows
    d. The time value of money
    7. Which of the following statements is not true with regard to impairment of asset?
    a. If impairment indicators are present, the entity must conduct an impairment test.
    b. The impairment test compares the carrying amount of the asset with the lower of fair
    value less cost of disposal and value in use.
    c. If the recoverable amount is lower than carrying amount, an impairment loss is
    recognized.
    d. If recoverable amount is higher than carrying amount, no impairment loss is
    recognized.
    8. When impairment testing a cash generating unit, any carporate assets should
    a. Be allocated on a reasonable and consistent basis.
    b. Be separately impairment tested.
    c. Be included in the head office assets and impairment tested along with that cash
    generating unit.
    d. Not be allocated to cash generating units.

    QUESTION 43-9 Multiple choice (IFRS)

    1. Impairment loss for productive asset is reported


    a. As an extraordinary item.
    b. As a component of discontinued operation.
    c. As a component of income from continuing operations.
    d. As a change in accounting estimate.
    2. Long-lived assets are reviewed for impairment
    a. Every three years at the end of reporting period.
    b. When the asset is fully depreciated.
    c. When circumstances indicate that the carrying amount of an asset might not be
    recoverable.
    d. Every year at the end of reporting period.
    3. Which condition must exist in order for an impairment loss to be recognized?
    a. The carrying amount is less than fair value.
    b. The carrying amount of the asset is not recoverable
    c. The carrying amount is less than value in use.
    d. The carrying amount is recoverable.
    4. The impairment rules for long-lived assets apply to all, except
    a. Building currently used in business
    b. Financial instrument
    c. Land
    d. Computer used to run a production process

    5. Estimates of future cash flows normally would cover projections over a maximum of
    a. Five years
    b. Ten years
    c. Fifteen years
    d. Twenty years

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