Melville Chapter 7 - Impairment

Question 1

What is impairment?

Answer 1

The amount by which the carrying amount of an asset of a cash-generating unit exceeds its recoverable amount

Question 2

Concept of ‘recoverable amount’

Answer 2

The higher of its fair value less costs of disposal and its value in use

Question 3

Impairment – to which assets does this apply?

Answer 3

Applies to all assets other than those for which other standards prescribe the required accounting treatment. e.g.

1. Inventories
2. Assets arising from contracts with customers (IFRS15)
3. Deferred tax assets (IAS12)
4. Assets arising from employee benefits (IAS19)
5. Most financial asset s (ifrs9)
6. Investment property measured at fair value (IAS40)
7. Non-current assets classified as held for sales IFRS5

Question 4

What are the indicators of impairment? External

Answer 4

External:

1. there are observable indications that an assets value has declined during the period by significantly more than expected.
2. significant adverse changes have occurred macro-economically
3. Interest rate increases have occurred which is likely to increase the discount rate used when calculating assets value in use.
4. The carrying amount of the entity’s net assets exceeds its market cap

Question 5

Accounting treatment of impairment losses?

Answer 5

In general should be recognised as an expense. However, if the asset is carried at a revalued amount, the impairment loss is account for in the same way as a revaluation decrease.

• the impairment loss is debited to the revaluation reserve (as a negative) and shown in other comprehensive income to the extent of any credit balance previously existing i the revaluation reserve in respect of that same asset.
• any excess is recognised as an expense.

Question 6

What are the indicators of impairment? Internal

Answer 6

1. There is evidence of obsolescent of an assets or physical damage to an asset.
2. significant adverse changes have occurred
   - asset becoming idle
   - plans to discontinue the operation in which the asset is used
   - plan to dispose of the asset earlier than expected
   - reassessing the assets useful life
3. there is evidence that the economic performance of the asset will be worse than expected

Question 7

Which assets must be tested for impairment each year?

Answer 7

Intangible assets which have an indefinite useful life or not yet available for use

goodwill

Question 8

What is fair value?

Answer 8

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurable date

Question 9

What are the costs of disposal?

Answer 9

Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit

Question 10

What is value in use?

Answer 10

The present value of the future cash flows expected to be derived from
an asset or cash-generating unit

Question 11

What is fair value less costs of disposal?

Answer 11

Assets fair value should be determined in accordance with IFRS13. If the type of asset in question is traded in an active market involving identical assets, then a “market approach” can be used and the quoted price in that market will provide a level 1 input.

Question 12

IAS36 Disclosures

Answer 12

For each class of assets, should disclose:

1. the amount of impairment losses recognised as expenses during the period and in the line items in the soci in which these impairment losses are included.
2. The amount of reversals of impairment losses recognised as income during the period
3. the amount of impairment losses and reversals on revalued assets recognised in other comp income.

Question 13

For each impairment loss or reversal that has been recognised during the period, the
entity should disclose:

Answer 13

(i) the events that led to the recognition of the impairment loss or reversal
(ii) the amount of the impairment loss or reversal
(iii) the nature of the impaired asset or a description of the impaired CGU
(iv) the recoverable amount of the asset or CGU and whether this is its fair value less
costs of disposal or its value in use
(v) if recoverable amount is fair value less costs of disposal, the level of the fair
value inputs (see Chapter 5) which have been used to determine the fair value of
the asset or CGU
(vi) if recoverable amount is value in use, the discount rate used when calculating the
value in use figure.