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    CHAP 34 Impairment of asset

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    9 views10 pages

    CHAP 34 Impairment of Asset

    Uploaded by

    Mychie Lynne Mayuga
    notes

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 10
    CHAPTER 34 IMPAIRMENT OF ASSET Individual asset TECHNICAL KNOWLEDGE To know the basic principle for the recognition of impairment. To define fair value less cost of disposal. To define value in use. To know the measurement of recoverable amount. To a the proper accounting for an impairment 88. 840 Definition Impairment 180 fallin the marke value ofan aset so that the recoverable amount is maw less than the carrying amount in the Statement of franca pian tM Carmine omount ‘The COPDNE amount the amount at which am ans 8 recognized in the statemeat f fal pts after dec sccumulated deprecatin and accumulated smpasrment loss Basic principle ‘The basic principle underiyng impairment of asset as relatively straightforward, ‘There is an established prince tha an asset shall not be cormied ‘above the reeverabe amount. ‘An entity shall wnte down the carrying amount of an asset to the recoverable amount xf the carrying amount 1s not recoverable in full If the carrying amounts higher than the reawerable amount, the aseet is judged to have sued an impairment los ‘The’ asset shall therefore be reduced by the amount of the impairment los Accounting for impairment In this regard, there are three main accounting issues to consider, namely ‘a. Indication of possible impairment b. Measurement of the recoverable amount fe. Recognition of impairment loss an piven nye wit rere wwe rere Indication of impairment An entity shall assess at euch reporting date whether there ae indication that an asset may be impaired, » If any such indication exists, the entity shall estimate, recoverable amount of the asset te Fcevr reapecive of eter ther ty indent Hower rer lot intaneble ast nt ampere th ele am nt et indfini aefel e y conparng eae vt percent anu ‘The events and changes in circumstances that lead ty aq TTupairment of assets may be classified as external and interna) sources of information External sources ‘a. Signifcant decrease or decline inthe market value ofthe asst fase result of passage of time or normal ve ora new competitor ‘entering the market Significant change in the technological, market, legal er ‘cconomuc environment of the business in which the onset employed. ‘This could be as simple as a change in customer taste © An increase in the interest rate or market rate of return on investment which will likely affect the discount rate used in calculating the value in use. 4. Thecarrying amount of net asset of the entity i mo the “market capitalization.” ‘the entity is more than In other words, the on 1 eter worda the carrying amount exceeds the fir value ‘The market capitalization simply means the at aoeta the eng, Pt mene the fair value of internal sources oon of checkers + Foner i (oF physical damage of an anset- b, Sigmificant thangs io tbe manaer or extent in which the eet ple, the ume tt vere effect on the entity. For fexarnple, the aaset is part fore ee te oe, wale forthe anset is ve ortuning bel fi ce, Evidence that the esvmic performance of an asset will be crores than expected Perermasee of on For example, the unduersnted net cash flows from the asset are significsnly wor tha thne vugerd ‘The external and internal sources of information are not exhaustive. An entuty may dectiy other indications that an ‘Sheet may be impasted Measurement of recoverable amount ‘After establishing evidence that an asset has been impaired the next step is to determine the recoverable amount Dreparatory wo the rengnition of wn spairment one “The recoverable amount chan ase athe fair valueless cost of dieposal or value in use, whschever i higher Fair value less cost of disposal Foir value of on ase isthe price that would be received to well the coset in an ordery transaction between market participants fat the measurement date 1 of disposal san incremental cost directly attributable to Cre cnpoeal of ex ase or cash generating unit, excluding fisunce cost and income ix expen. example of cst of dipoal ned lega ot, arp duty and cae ltraneocton wax cont of removing the asset, and direct eae in bringzng the asset into nndition for eae fair value Jes ont of disposal ice fac asset mine ws equal to the In simple terme, a egal ea exit price or sll 7 548 NYAMINT NIRA eer irae a ar value ae lows: ty market for identical assets. ve a gute i a i tx adjustment. eee rere ese RE tar 8 np inte rc tam 3 Level 8 inputs are unobservable inputs for the asset. Unobservable inputs are usually developed by the entity the beet availabe information from the entity's ows data Active market and principal market An octive market is a market in which transactions forthe asset take place with sufficient regularity and volume to prove pricing information on an ongeing basis, A principal mark isthe market with the greatest volume and level of activity for the asset. mreatest vol The morketportiponts ace the buyers and sellers in Principal market who are: " sel ad ‘© Independent or unrelated parties Knowledgeable obaving re Knowledgeable r having «resonable understanding of © Willing or motivated but not forced and compelled. ory Value in use Vole i we san Sho ae ined Boe ao The cash fore ae rene is applied in determ, Calculation of value in use the present value or discounted sows nus outioms) expected ca ws and pean dat rte ing te preset aloe ‘The following should be considered in determining value 8 se: 1 Cash flow projections shail te based on reasonable and supportable assumptions bb. Cash flow projections shall te based on the most meen ‘budgets on financial forecast usally up to @ maxsona period of 5 years. unless a lnger period can be justified ‘e. Cash flow projections beyond the 5:year period shall be ‘estimated ty extrapelauag the Syear projections using & ‘steady ot declining grouth roe eachsubseqent year, unless fam increasing rate ean be justified Composition of estimates of future cash flows stimates of future cash fows include Projections of oh inflows ram the continuing use fhe asset B._ Propeetions of cash outface necessary incurred to generate ‘the cash inflows fom th continuing use ofthe asset ce. Net cash flac received on the dispnsal ofthe asset at the tnd of the use hfe in an arm’ length transaction ‘Estimates of future cash fows do na include ‘a. Future cash flows relating to restructuring to which the feniity 1 not yet commited bb. Futcre costs of improving or enhancing the asset's erformance " ee Bee atin or outlon frm nancingoxtitin 4. Income tax Ms tw pve * L Zs 4 ic a E i Mlustration At yearend, an entity has a machinery with the following cop ‘and accumulated depreciation: oe Macon 2.00, Mea aepecason Spare 2yeervenpied) 2000 ty Carmganoust 3,000.08 Due to obsolescence and physical damage, the machinery is found to be impaired. ‘The entity has determined the following information with respect tthe machinery at year-end: Fair value leas cost of depos 2.400.000 Value ia use 2300.00 Impairment ae 600,000 "Accumulated deprecation 600,000 Carmng amount 3,000,000 Fair value las cost ofdiposal (recoverable amount) 2.400,000, Impairment lout Nate hat the i vale lo cot of dapat is considered the revere anon and uae computing the npn! eae shih han he vale a oe Now further that the impaizment losis adjusted through accumulated depreciation acount Thcieinacardance th Enropean and Amencan practice Aer the recognition ofan impairment lus, the deprecation share fr the ust halle ajuted in fate periods aloo the aed coryeng amount less residual value on 0 selemole ver the remalning us if Aeptinsly the adjusted carrying amount which is equal to fhe faur value less cost of disposal of P2.400,000 ie allocated ‘ver the remaining use _ marin ual life of 9 years to get the annval 846 SS Another illustration ae , ese 2,201 tas mary with he rection. Machinery {60,000,000 ‘Recomulated depresaten ‘$6000: 00 Carrying amount aaa ‘The foir value tee cot of daposol of the machinery artormined wo be Px too gna, 2m of ACh ‘The future cash Sows fom the continued use ofthe machinery cover the remaining ust ife of 4 years are Conte, Net Revenue excudingdepreciation cash flows 2020 24000000 10.000, 14,000,000 Sout Homan ——1¢eoeon 1.000.000 3022 Bson0000 ——go0.000 8.000.000 3005 siseoeee ——_a.aeo.ce0 “The value in use calculated by dicounting the net cash flows at an appropriate dsount rate of 10% io wx wort Present valve 2020 309 2o2t # 2022 a 2023 as ow fr 2020 multnhed by the PY of 1 for one ‘The cau oy fo 2 ow for 221 by the BY of | for to Berio’ of ihe cath flow for 2022 by the PV of 1 for erode of 25 1h adhe ea low for 225 by the PY of 1"oe our ped of 888, an reco 2.128000 the recoverable amoun ‘The elu in neo Ta Per sb he far value Eee nt dpa of P0000 40,000,000 at yt yoweu . wap? OO P-WASMINT AAI Reversal of an impairment loss 14, provides that an impairment prot years shall be reversed if thet tate of the recoverable amoune PAS 26, paraeraph 1 feud ora cet TEES chan nthe em cher words th reoverable Mout of 0m a8 hat hay Ie th pated tara cut higher than the cur Exrmingmeauat the carne amount of Che asset shal ‘Rott tone neoerale ment However, PAS 36, paragraph 117, provides tha “th nce Sony meant fansite wa ever of a mpaimmee Uh sem the eorsinc amount ha would have ben SSevmined, hen smpareat lve teen recognized fo ie Seen por sears” The eeveraal ofthe impairment lose shall be recognie immediately as income in the income statement * But any reversal of an impairment loss on a revalued asset stall be cradited to income to the extent that It reverses 4 previous revaluation decrease and any excess credited Gigectly to revaluation surplus Mlustration (2 December 31,2019, the statement of financial position ‘shows the following balances: a Maciwry Aeramateddepmcnioe (year. 2,earsespeed) arog tne £000,000 00 000 © 400.000 (On the same date, the recoverable of the amount ofthe machinery is

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