Chapter 5 Impairment Of Assets

Question 1

Recoverable amount

Answer 1

Ensure assets are carried in the financial statements at no more than their recoverable amount.

Recoverable amount = Higher of

1. Fair value less cost of disposal
   The price received to sell the asset at the measurement date less the direct incremental costs attributable to the disposal of the asset.
2. Value in use
   Present value of future cash flows derived from the asset or CGU.

If there is any indication that an asset may be impaired, the entity should estimate its recoverable amount.
If the recoverable amount is less than the carrying amount, the carrying amount of the asset should be reduced to the recoverable amount.

An impairment loss is the amount the carrying amount or cash generating unit (CGU) exceeds its recoverable amount.

Question 2

Impairment indicators

Answer 2

1. External sources
   - Observable indicators the asset’s value has declined during the period significantly more than expected.
   - Significant changes with an adverse effect in the technological, market, economic or legal environment.
   - Increased market interest rates or other market rates or return affecting discount rates and thus reducing value in use.
   - Carrying amount of net assets of the entity exceeds market capitalisation.
2. Internal sources
   - Evidence of obsolescence or physical damage.
   - Significant changes with an adverse effect on the entity.
   - Internal evidence available that asset performance will be worse than expected.

Question 3

Cash generating units (CGU) (IAS 36)

Answer 3

A cash generating unit is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Question 4

Recognition of impairment losses

Answer 4

1. Assets carried at historical cost
   The impairment loss is recognised as an expense in profit or loss.
2. Revalued assets
   The impairment loss is recognised under IAS 16 PPE.
   The revaluation decrease is charged first to other comprehensive income and any remainder as an expense in profit or loss.

Question 5

Allocation of impairment losses for a CGU

Answer 5

1. Any goodwill allocated to the unit.
2. Other assets of the unit on a pro rata basis on the carrying amount of each asset in the unit.

No asset can be reduced below the higher of its recoverable amount (or zero).

Question 6

After the impairment review

Answer 6

The depreciation or amortisation charge for the asset is adjusted in future periods to allocate the assets revised carrying amount less its residual value over its remaining useful life.