Impairment of Assets

Question 1

Under ASPE, how are impairment losses measured?

Answer 1

Measured by the amount of which the carrying amount exceeds fair value, which is based on the higher of:

1. Market price (ie: Amount it can be sold for)
2. PV of expected cash flows
3. Amount obtained from collateral

Question 2

Under IFRS, how are impairment losses measured?

Answer 2

Impairment loss is based on the recoverable amount, which is carrying amount less (see below):

The higher of (Recoverable amount):

1. Fair value less costs of disposal (FVLCD), OR…
2. Value in use (VIU)

If the carrying amount exceeds the recoverable amount, impairment exists

Question 3

So, how do you calculate Fair value less costs of disposal?

Also, how do you calculate the value in use?

Answer 3

FVLCD = Sale price - Costs to sell

VIU = PV of future cash flows

Question 4

Under ASPE, what are some indicators of impairment?

Answer 4

Internal indicators:
- Market price declined significantly
- Legal factors and business climate

External indicators:
- Manner in which its used or its physical condition
- Costs exceed expectations for acquisitions or constructions
- Continuing losses associated with its use
- Sold/disposed before end of useful life
- Costs significantly greater than the amount originally expected for its acquisition or construction

Question 5

Under IFRS, what are some indicators for impairment?

Answer 5

External:
- Significant decline in market value
- Changes in tech, market, economic or legal factors
- Changes in interest rates
- CV of net assets is more than its market capitalization

Internal:
- Evidence of obsolescence or physical damage
- Discontinuance, disposal, or restructuring plans
- Declining asset performance