The recoverable amount of an asset is defined as “the higher of the asset’s fair value minus costs of disposal and its value in use.” The value in use is a discounted measure of expected future cash flows. Required Disclosures of Long-term operating Assets Held for Disposal. Question: D) Determine The Recoverable Amount Of Each Of The Following Assets And State The Amount Of The Impairment Loss, If Any, Which Should Be Recognised In Each Case. Current Carrying Value Fair Value Less Selling Costs Value In Use £ Alpha Beta Gamma 8,000 7,000 7,500 9,000 6,000 7,400 7,500 6,900 6,500 (4 Marks) A cash-generating unit is the smallest identifiable group of assets that generates cash inflows largely independent from the cash inflows from other assets or group of assets. Zhang Limited recognised an impairment loss on a Plant asset on the 30 th June. d. Record an impairment gain of $1 million. Under IFRS, an impairment loss is recognized if the carrying amount exceeds the recoverable amount of the asset. However, there may be circumstances where other adjustments may be more applicable In this case, the asset's fair value may be higher than its carrying value after the impairment. to the recoverable amount of the asset and the reduction amount (impairment loss) shall be recognised as an expense. Impairment of Intangible Assets other than Goodwill (USGAAP), Impairment of Intangible Assets other than Goodwill - Summary (USGAAP), Impairment of Intangible Assets other than Goodwill (IFRS), recoverable amount: the higher of fair value less costs of disposal/sell and asset's value in use (discounted cash flows), Evaluation of Goodwill Impairment (USGAAP), done at the cash-generating unit CGU (smallest identifiable group of assets that generates cash inflows). After the write-down, the firm reports goodwill at its revised carrying value. Oh no! recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell (sometimes called net selling price) and its value in use where: fair value is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, and. Recoverable amount The higher of an asset’s fair value less costs to sell and its value in use. it no longer provides a future economic benefit. recoverable amount: the higher of fair value less costs of disposal/sell and asset's value in use (discounted cash flows) if cv > recoverable amount then: impairment loss = carrying amount - recoverable amount If a firm cannot estimate the recoverable amount of the individual asset, then it groups assets. Long-term Operating Assets Held for Sale or Disposal. A significant decrease in the market price of a long-lived asset (asset group). If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. b. Revalue the asset to $2 million. If an asset is materially impaired, it must be written-down to its recoverable amount and an impairment loss recorded. After a write-down, conditions could change and the asset's future cash-flow generating ability could recover. The recoverable amount of an asset refers to the present value of the expected cash flows that are to arise from the sale or use of the asset and is calculated as greater of the two amounts, namely, the fair value of the asset as reduced by the related selling costs, and value in the use of such assets. Re­cov­er­able amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use * Prior to con­se­quen­tial amend­ments made by IFRS 13 Fair Value Mea­sure­ment, this was referred to as 'fair value less costs to sell'. The depreciable base is the $23,000 original cost minus the $3,000 salvage value, or $20,000. In general, an asset is impaired when its recoverable amount is less than its carrying amount (refer to NCAP 4.4 Recoverable Amount). When the asset's carrying value is greater than its fair value, a company reports an impairment loss, calculated as the carrying value less the fair value. If the asset‘s carrying amount is considered not recoverable, … Recoverable amount is the higher of an asset’s fair value less costs to sell (sometimes called net selling price) and its value in use. An asset is carried at more than its recoverable amount if its carrying amountexceeds the amount to be recovered through use or sale of the asset. Asset grouping is similar under US GAAP and IFRS, although there may be some differences in practice. IFRS also requires disclosure of whether the recoverable amount was fair value less costs to sell or value in use. Similar to US GAAP, a company assesses whether the indicators exist by considering both external factors (such as market interest rates, economic environment, technological breakthrough, or a decline in market capitalization) and internal factors (such as the evidence of obsolescence and restructuring activities in the entity). At the end of Year 6, Clarinette, as the result of certain changes in circumstances indicating that the carrying amount of these assets may not be recoverable, tested them for impairment. Value-in-use can be found by calculating the forecasted discounted cash flow that can be generated by the specific asset. The asset's recoverable amount is the greater of 1. A company selling or disposing of an asset measures the asset the lower of cost (carrying value) or net realizable value (fair value less selling costs). To ensure the best experience, please update your browser. Unlike US GAAP, IFRS impairment testing is similar for all types of long-lived assets other than goodwill. Intangibles can also be classified as: legal intangibles or competitive intangibles. Impairment testing for goodwill is significantly different from the impairment tests we have discussed thus far. If a write-down is necessary, then the loss is equal to the difference between the carrying value of the asset and its fair value net of selling costs. Reveal answer. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets makes amendments to Australian Accounting Standard AASB 136 Impairment of Assets. Record an impairment loss of $1 million. Recording Long-term operating assets held for sale or disposal. Firms associate goodwill with the group of net assets in the reporting unit (RU), which is an operating segment or one level below an operating segment. IFRS requires an impairment test for goodwill at least annually. The accounting procedures for the determination of impairment are identical for property, plant and equipment and finite-life intangible assets. Judgement used in estimating future cash flows can make a significant difference in the calculation of impairment losses. The recoverable amount after the loss is $900 and the asset has an estimated useful life of 5 years. Marking guide. Similar to accounting for impairment losses on PPE and finite-life intangible assets, US GAAP does not permit subsequent reversals of impairment losses. Oh no! Residual value The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. That reduction is an impairment loss. Before testing assets for impairment, a firm must determine whether to assess them as individual assets or in asset groups. Under IFRS, the asset group is called a cash-generating unit (CGU), which is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. It looks like your browser needs an update. IFRS uses a one-step impairment test that has 2 parts, Part 1: Determine the asset's recoverable amount, Measurement Subsequent to Impairment IFRS. Thus, the concept essentially focuses on the greatest value that can be obtained from an asset, either by selling or using it. c. Not record any transaction. The accounting for assets held for sale or disposal under US GAAP and IFRS is substantially converged. Cash and Cash Equivalents Cash and cash equivalents under the current assets section of a balance sheet represent the amount of money the company has in the bank, whether in the form of cash, savings bonds, certificates of deposit, or money invested in money market funds. MC Question 20 - September 2016 Specimen. Accounting for Impairments: Goodwill under IFRS. If impairment testing is required, it then performs a two-step test to determine if there is an impairment. The fair-value test determines the impairment loss for an indefinite-life intangible asset as the amount by which the carrying value of the asset exceeds the fair value of the asset. The method of accounting for the impairment of long-term operating assets depends upon the type of asset. If the impairment indicators suggest an impairment of a long-term operating asset, the firm assess the asset's recoverability. 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