Subject: ACCM4200- Online A

Student Number: 137824

Name: Danica Garcia Alvarado

Comprehension questions: SOLUTION Week 4

1. What is an impairment test?

The impairment test is used to determine whether an asset recorded in the balance sheet is
represented by the correct value after a period of use or impairment. This type of test can be
used in commercial or tax accounts, it all depends on the country, accounting standards or tax
jurisdictions, although most assume the IFRS regulations.

2. Why is an impairment test considered necessary?

This standard is necessary for companies to establish that their assets have the correct value
that will be recorded on the balance sheet. With the application of the standard, companies
have a clear notion of possible impairment unless it is an asset with an indefinite life.

3. When should an entity conduct an impairment test?

The asset impairment test must be carried out when the company identifies an indication of
loss of value in one of its assets and, in the case of goodwill, it must be carried out at least
annually. When this happens, a comparison must be made between the recoverable amount
of this asset and its net book value.

4. What are some external indicators of impairment?

The external indicators are:

 Significant decrease in market value.

 Significant adverse changes in technological conditions.
 Significant adverse changes in the market.
 Economic or legal changes.
 Increase in market interest rates or rates of return.
 The carrying amount of the company's net assets exceeds the market capitalization.

5. What are some internal indicators of impairment?

The internal indicators are:

 Obsolescence or physical deterioration.

 Internal performance evidence available on the asset that is presumed to be worse
than expected.
 Significant adverse changes in the company.
 Plans of interruption in the use of the asset or restructuring of an operation.
 Dispose of it ahead of schedule.
Application and analysis exercises

Exercise 7.1

Determining recoverable amount and impairment adjustments

Consider the following information relating to five different items of plant and

equipment at the reporting date.

Required

1. Calculate the recoverable amount for each of the five items of plant and equipment.

2. Assuming plant and equipment is carried under the cost model, determine the

amount of any impairment adjustment necessary.

3. Assuming plant and equipment is carried under the revaluation model, determine

the amount of any revaluation adjustment necessary.

(LO3 and LO4)

1. Recoveral Amount = Higher of Fair Value – Cost of disponsal and Value in use

Asset A: $ 110,000; 105,000- 3000= 102,000 < 110,000

Asset B: $48,000 ; 45,000-1000 = 44,000 < 48,000

Asset C: $83,000; 85,000-2000=83,000 > 82,000

Asset D: $ 220,000; 190,000-5000= 185,000 < 220,000

Asset E: $ 117,000 ; 120,000- 3000= 117,000 > 115,000

2. Impairtment adjustment is necessary when RA < CA

Impairment adjustment is necessary when RA < CA.

Asset A: No impairment (RA of $110,000 > CA of $100,000)

Asset B: Impairment adjustment of $2,000 (RA of $48,000 < CA of $50,000)

Asset C: No impairment (RA of $83,000 > CA of $80,000)

Asset D: No impairment (RA of $220,000 > CA of $200,000)

Asset E: Impairment adjustment of $3,000 (RA of $117,000 < CA of $120,000)

3. Under revaluation model, revalue to lower of FV and RA.

Asset A: Revaluation increase of $5,000 (CA $100,000 FV $105,000 RA $110,000)

Asset B: Revaluation decrease of $5,000 (CA $50,000 FV $45,000 RA $48,000)

Asset C: Revaluation increase of $3,000 (CA $80,000 FV $85,000 RA $83,000)

Asset D: Revaluation decrease of $10,000 (CA $200,000 FV $190,000 RA $220,000)

Asset E: Revaluation decrease of $3,000 (CA $120,000 FV $120,000 RA $117,00