CHAPTER

BLUE NOTES
25 S
L
Impairment of Asset is a decrease in the market value of an asset that makes its recoverable amount lower than its
carrying amount in the Statement of Financial Position.
Indications of impairment

External factors Internal Factors

significant decrease or decline in the market evidence of obsolescence or physical damage of
value of the asset. an asset.
significant change in the technological, market, significant change in the manner or extent in
legal or economic environment of the business in which the asset is used with an adverse effect on
which the asset is employed. the entity.

an increase in the interest rate or market rate of evidence that the economic performance of an
return on investment which will likely affect the asset will be worse than expected.
discount rate used in calculating the value in use.

the carrying amount of the net asset of the entity

is more than the market capitalization

Recoverable amount of an asset

 The fair value less cost to sell or value in use, whichever is higher.
Fair value less cost to sell
 The amount obtainable from the sale of an asset in an arm's length transaction between
knowledgeable, willing parties, less cost of disposal.
Cost to sell
 Incremental costs directly attributable to the sale of an asset or cash generating unit.
includes:
 legal costs
 stamp duty and similar transaction taxes
 costs of removing the asset
 direct incremental costs to bring the asset into condition for sale
Value in use
 the present value of estimated future net cash flows expected to be derived from an asset.
 cash flows are pretax cash flows and pretax discount rate is applied in determining the present value.

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Components of estimated future cash flows

Includes
 projections of cash inflows from the
continuing use of the asset.
 projections of cash outflows necessarily
incurred to generate the cash inflows from
the continuing use of the asset.
 net cash flows received or paid on the
disposal of the asset at the end of its
useful life in an arm's length transaction.
Excludes
 future cash flows relating to
restructuring to which the enity is not
yet commited.
 future costs of improving or enhancing
the asset's performance.
 cash inflows or outflows from financing
activities.
 income tax receipts or payments.

Recognition of impairment loss

 shall be recorded immediately by reducing the asset's carrying amount to its recoverable amount.
 the impairment loss is recognized in profit or loss and presented separately in the income statement.

ILLUSTRATION

On December 31,2014 an entity has a machinery with the following cost and accumulated depreciation:

Machinery 5,000,000
Accumulated depreciation (5-year life, 2 years expired) 2,000,000
Carrying amount 3,000,000

Assume that due to obsolescence and physical damage, the machinery is found to be impaired.

On December 31, 2014, the entity has determined the following with respect to the machinery:

Fair value less cost to sell 2,400,000

Value in use 2,200,000

Impairment is computed as follows:

Carrying amount 3,000,000
Fair value less cost to sell (higher than value in use) 2,400,000
Ipairment loss 600,000

ILLUSTRATION

On December 31, 2014 the following information are provide by the entity:

Machinery 60,000,000
Accumulated Depreciation 20,000,000

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94 USL Blue Notes Chapter 25 – Impairment of Assets

Carrying amount 40,000,000

Fair value less cost: 31,000,000

Cash flow from continued use (4 years remaining life)

Revenue Costs Depreciation Net cash flow

2015 24,000,000 10,000,000 14,000,000

2016 26,000,000 14,000,000 12,000,000
2017 25,000,000 16,000,000 9,000,000
2018 15,000,000 11,000,000 4,000,000
Total 90,000,000 51,000,000 39,000,000

Calculation of value in use:

Net cash flows PV of 1 Present Value

2015 14,000,000 .90912 726,000
2016 12,000,000 .8269 912,000
2017 9,000,000 .7516 759,000
2018 4,000,000 .6832 732,000
Total 39,000,000 32,129,000

Computation of impairment loss:

Carrying amount 40,000,000

Value in use (higher than fair value) 32,129,000
Impairment loss 7,871,000

Impairment of revalued asset

 Impairment loss is recognized directly against any revaluation surplus related to the asset and any
excess is recognized in profit or loss.

Cash generating unit

 The smallest identifiable group of assets that generate cash inflows from continuing use that are
largely independent of the cash inflows from other assets or group of assets.
 The recoverable amount of an asset shall be determined for the asset individually, if not possible,
entity shall determine the recoverable amount of the cash generating unit to which the asset
belongs.
ILLUSTRATION
Following information provided:

(carrying amounts)
Building 5,000,000
Equipment 3,000,000
Inventory 2,000,000

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Chapter 25 – Impairment of Assets USL Blue Notes 95

Carrying amount of CGU 10,000,000

Value in use of CGU 8,000,000

Fair value less cost to sell of building 4,500,000

Computation of impairment loss:

Carrying amount of CGU 10,000,000
Value in use 8,000,000
Impairment loss 2,000,000

Building (5/10 x 2,000,000) 1,000,000

Equipment (3/10 x 2,000,000) 600,000
Inventory (2/10 x 2,000,000) 200,000
Total impairment loss 2,000,000

*allocating 1,000,000 loss to the building makes its carrying amount lower than fair value less cost to sell of 4,500,000,
it shall only absorb 500,000 loss and the excess shall be allocated to other assets in prorata basis as follows:

Building Equipment Inventory

Allocated loss 1,000,000 600,000 400,000

Reallocated loss (5000,000)

3/5 x 500,000 300,000

2/5 x 500,000 200,000

Impairment loss 500,000 900,000 600,000

Reversal of impairment
 If the recoverable amount of an asset that has previously been impaired turns out to be higher than the
asset's current carrying amount, the carrying amount of the asset is increased to its new recoverable
amount.
 However, the increased carrying amount of an asset due to a reversal of an impairment loss shall not
exceed the carrying amount that would have been determined had no impairment loss been recognized for
the asset in prior years.
 The reversal of the impairment loss shall be recognized immediately in profit or loss but any reversal of an
impairment loss on a revalued asset shall be treated as a revaluation increase.

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