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lgarsidelgarside Well-KnownRegistered Posts: 122
Hello I'm a little confused with impairment of assets. Do you just have to do this for assets which aren't depreciated? If an asset was in the balance sheet using the revaluation method I don't understand why you would then do the impairement aswell because surely the asset's carrying amount will be at the revalued amount?

Also I don't understand why if you do the discounted cashflow method you reduce the value of the asset. For example if the asset cost 5000 can be sold for 3000 but the discounted cashflow over 5 years amount to 3500 why do you reduce the asset by the whole amount i.e the carrying value of the asset at the end of the year is now 3500, don't you need to apprtion this impairment over the remaining years?

Last question........sorry!!!!!!!

Whae you revalue an asset does this new value show in the balance sheet? Or does it stay at historic cost and you just put this in the SOCE?

Many thanks for any help


  • peugeotpeugeot Experienced Mentor Registered Posts: 624
    IAS 36 (Impairment) covers all assets - not just those that aren't depreciated. If an asset is subject to the revaluation model, then as you quite rightly pointed out, the asset is in the balance sheet at its latest valuation. However, IAS 16 (property plant and equipment) only requires assets to be revalued in intervening periods when there has been a potentially material increase/decrease in the assets carrying value. It's probably best illustrating this with an example:

    If factory A has an item of plant on a production line which cost £100,000, in year 2006 the directors are aware that the value of this plant is much higher because of its innovative technological advances, so they uplift the cost to its market value by, say, £50,000. In 2007, the factory suffers a substantial decline in business and the production line and the machine's capacity is reduced by 50%. Even though the asset has been subject to the revaluation model in 2006, because of the present state of the production then the asset isn't worth what it was in the previous year, so it should be impaired.

    Re the discounted cash flow - you can only state assets in the balance sheet at their recoverable amount, this is why the asset has been reduced to the present value of the disposal proceeds. If the asset is on the balance sheet at a figure higher than the amount recoverable, it is 'impaired' and needs to be written down to its recoverable amount.

    Assets subject to revaluation are adjusted for as follows:

    Debit fixed asset - with the value required to bring the assets cost up to its revalued amount; and

    Credit revaluation reserve in the statement of changes in equity.

    Hope that helps.

    Kind regards
  • lgarsidelgarside Well-Known Registered Posts: 122

    Thanks Steve that does help, I'm still being a bit blonde and it's hard to get my head round the discounted cashflow bit. If say a factory had a machine bought for 50,000 and they can sell it for 20,000 and the NPR of the future cashflows over 15 years will be 27,000 it seems unfair that they have to put the value of the asset into the balance sheet as being 23,000 as of the year end date because this value raltes to the future years...?!?! Does this make sense, I know my logic is wrong!!!!!

    If you were using the revaluation model and you bought a factory for 100,000 and in the next year property prices fell so the factory was only worth 80,000 would this be a revaluation or would you have to do an impairment calculation aswell?
  • peugeotpeugeot Experienced Mentor Registered Posts: 624
    It is confusing - don't worry it does take some practice before you'll fully understand it.

    When you are working with impairments (IAS 36) you need to look at 2 component parts - Recoverable amount and carrying amount.

    Impairment loss is the amount by which the carrying value of the asset in the balance sheet exceeds its recoverable amount (recoverable amount = selling price).

    You then have to split 'recoverable amount' into two further component parts - 'value in use' and 'net selling price'. Recoverable amount is the higher of the value in use and net selling price.

    So, as I mentioned earlier, the asset should be stated in the balance sheet at no more than its recoverable amount.

    Where you have a revaluation loss, this is offset against SoCIE only to the extent of the previous revaluation gain. Any further loss is sent to the income statement.

    For example:

    If previous gain was £50,000;
    Revaluation loss = £60,000

    Then £50,000 would go to SoCIE (to cancel out the previous gain), the balance of £10,000 would go to impairment losses in the income statement. In the case of your example above, it would still be a revaluation.

    Hope that helps.

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