Analysis of Long-Term Assets

Question 1

Impairment

Answer 1

Unanticipated decline in a long-term asset’s value, causing it to fall below the carrying value

Impaired when BV > recoverable amount

Question 2

Recoverable amount of an asset

Answer 2

Greater of: “fair value less sellin costs” and “value in use” (PV of future cash flows)

Question 3

Identification of impairment (US GAAP)

Answer 3

Step 1 of impairment rules. Asset is impaired when BV > assets estimated future undiscounted cash flows

Question 4

Loss recognition (US GAAP)

Answer 4

If impaired, write down asset to fair value (or discounted value of future cash flows if fair value unknown) and recognise lloss in incoe statement

Question 5

Impact of impairment on balance sheet

Answer 5

Decreased assets
Decreased equity

Question 6

Impact of impairment on income statemet

Answer 6

Decreases current net income (impairment charge)
Increases future net income (lower depreciation, because of recalculated dep)

Question 7

Impact of impairment on cash flows

Answer 7

Unaffected because they are non-cash charges

Question 8

When are assets tested for impairment

Answer 8

When transferred from held for use to held for sale. Depreciation expense no longer recognised

Question 9

Total useful life of an asset

Answer 9

historical cost / annual depreciation

Question 10

Avg age of an asset

Answer 10

Accumulated depreciation / Annual depreciation