IAS 36- IMPAIRMENT OF ASSETS

Question 1

Define impairment. diff between depn and impairment

Answer 1

-Sudden fall in the value of asset.
-Depreciation is the systematic allocation of the cost of an asset over its useful life, reflecting its diminishing value over time. it’s planned, gradual.
-impairment occurs when RA is less than CA, unexpected, sudden.

Question 2

what are some internal and external hints of impairment?

Answer 2

internal- damage, change in use or plan to sell
external- technology, change in legal and economic environment, increase in interest rate, carrying value of asset is greater than market capitalization.

Question 3

what is market capitalization?

Answer 3

total # of shares x share price.
if MC is less than SH equity, means there is impairment.

Question 4

how do we know if there is impairment?

Answer 4

if carrying value is greater than recoverable amount, we know there is impairment

Question 5

what is recoverable amount?

Answer 5

it is the higher of
a) Fair value less costs to sell
b) value in use (present value of future cash flows)

Question 6

difference between revaluation and impairment?

Answer 6

revaluation model is optional, apni khushi se karte ho. and it is an assumed loss. (RA can be higher than FV)
impairment is not optional and it is an actual loss, when RA falls means sab darwazay band.

Question 7

what are the 3 things for which annual impairment testing is must?

Answer 7

1- purchased goodwill
2- intangible asset with an indefinite useful life
3- intangible asset not yet available for use

Question 8

what is the journal entry for impairment?

Answer 8

debit: income statement or revaluation reserve if it exists.
credit: PPE

Question 9

what is the double entry for impairment reversal?

Answer 9

PPE debit
income statement / rev res credit

Question 10

is it allowed to take revaluation reserve above it’s historical depreciated cost / historical NBV/ ORIGINAL NBV after impairment reversal?

Answer 10

In cost model, you cant take it above more than “ carrying value had there been no impairment in the past.”

In revaluation model yes u can. Entry:

Ppe dr
Reval reserve credit (RA-original NBV)
PnL credit (impairment-reduced dep)

Question 11

how often are we required to review impaired assets to check for reversal?

Answer 11

review at each reporting date

Question 12

what is a CGU?

Answer 12

smallest group of assets that generate an independent cash flow. eg. a subsidary normally.

Question 13

how is impairment allocated to CGU?

Answer 13

step1- first write off obvious impairment
step 2- write off full goodwill
step 3- allocate remaining impairment on pro rata basis. dont allocate to cash or any current assets)

Question 14

which interest rate should be used when calculating PV of future cash flows?

Answer 14

company can use 3 types of discount rate:

-always use project specific discount rate.
-if not possible then use current market int. rate with the inclusion of different risks, like currency and exchange risk.
-u can also use your own WACC (but it should be current wacc, with current worthiness. not old)

Question 15

how to calculate RA when there is a binding sale agreement?

Answer 15

Use bid price instead of fair value.

Question 16

how to calculate RA for non tranferrable assets? eg. license given by government

Answer 16

fair value is irrelevant for this. use VIU only

Question 17

what cashflows should be included in VIU?

Answer 17

-dont include future capital expenditure and related revenue (irrelevant)
-ignore interest cash flow and tax cash flow (already included in discount rate)
-take cash flows of next 5 yrs only (if reliable, u can take more but disclose)

Question 18

what is decreasing growth rate for future cash flows?

Answer 18

if not using decreasing growth rate, disclose reason

Question 19

if whole industry is booking impairment and we are not

Answer 19

disclosure must be given

Question 20

do we need to analyse and investigate the differences between expected and actual cash flows?

Answer 20

yes. compare them to see how good ur budgeting is. auditor will also need it.

if there is negative variance in past cash flows
it means actual were less than budgeted.
these must be analysed and incorprated in current analysis

Question 21

assumptions used when making cash flows

Answer 21

must be disclosed

Question 22

how to reverse impairment when using revaluation model and fair value increases?

Answer 22

when impairment will be done we will expense the net amount (impairment less reduced depreciation)
so when reversing
we will reverse the net amount in PnL and rest we will add in revaluation reserve.

Question 23

for which 2 assets impairment reversal is not allowed?

Answer 23

-purchased goodwill once written off (because now it will be internally generated)
-when RA increased because of time value of money (unwinding of discount) (no change in cashflow or timings of cashflow) reversal not allowed because its not a real reversal)

Question 24

ias 36 does not apply on?

Answer 24

1-assets with their own impairment criteria like ias 2 (invetories) or ias 12(deffered tax asset)
-financial assets
-NCA held for sale

2-assets recorded at FV with changes taken to PnL (logic automatic impairment) eg. ias 40, ias 41

Question 25

impairment reason has to be disclosed?

Answer 25

yes