# Impairment of assets????

A machine has a net book value of £5000, could be sold for £4000 or retained with expected cash inflows of £1800 pa for each of next 3 years after which will expire worthless, current interest 10% pa.
Is the Machine impaired?

Current book value £5000 (get that)
NRV £4000 (assume this means what could be sold for)

Value in use £4476 (dont get that bit even with answers)

any suggestions???:confused1:

• Value in use is what its worth to the company as a profit making tool. Which is in the end the most important thing to the company.

However the value is the lower of this and NRV.
• Yeah I understand that but cant work out how they calculate value in use?
• 1800 div 1.1 1,636.36
1800 div 1.21 1,487.60 (1.1x1.1)
1800 div 1.331 1,352.37 (1.1x1.1x1.1)
4,476.33
• PGM wrote: »
1800 div 1.1 1,636.36
1800 div 1.21 1,487.60 (1.1x1.1)
1800 div 1.331 1,352.37 (1.1x1.1x1.1)
4,476.33

I have been doing these as well and the method of discounting the cash flows is not explained very well in my book. Are these amounts (1.1, 1.1x1.1, 1.1x1.1x1.1 etc) the same in any question or do they apply to the OP's question in particular?

Also, I thought that in impairment of assets an asset was impaired if the net book value was higher than whichever was higher - the net realisable value or the value in use. Not whichever was lower of NRV or VIU. Am I wrong here? :huh:

• Hi CelticStar,

You are correct - impairment of asset is tested by comparing the Book Value of an asset against it's 'recoverable' amount. Recoverable amount is found by determining the higher of NRV and Value in Use. In an exam I think you would be provided with a maths table to work out the Value in use not have to calculate it yourself, this would be found by looking up the factor for 10% 3 years (cumulative) - in this case would be 2.486.

If you really wanted to work out the discount factor yourself then:

(1/1.1^3) - 1 = 0.2486

0.2486 / .1 = 2.486

Hope is of some use.
• crispy wrote: »
Hi CelticStar,

You are correct - impairment of asset is tested by comparing the Book Value of an asset against it's 'recoverable' amount. Recoverable amount is found by determining the higher of NRV and Value in Use. In an exam I think you would be provided with a maths table to work out the Value in use not have to calculate it yourself, this would be found by looking up the factor for 10% 3 years (cumulative) - in this case would be 2.486.

If you really wanted to work out the discount factor yourself then:

(1/1.1^3) - 1 = 0.2486

0.2486 / .1 = 2.486

Hope is of some use.

That's massively helpful, Crispy, thank you very much. :001_smile:
• Flipflop wrote: »
A machine has a net book value of £5000, could be sold for £4000 or retained with expected cash inflows of £1800 pa for each of next 3 years after which will expire worthless, current interest 10% pa.
Is the Machine impaired?

Current book value £5000 (get that)
NRV £4000 (assume this means what could be sold for)

Value in use £4476 (dont get that bit even with answers)

any suggestions???:confused1:
Flipflop,

As I understand it, IAS36 (Impairment of Assets) requires tangible non-current assets (e.g. a machine) to be recognised in the balance sheet at the LOWER of:

the CARRYING amount ; or
the RECOVERABLE amount.

Such an approach is consistent with the prudence concept of accounting.

If the carrying amount is greater than the recoverable amount, the asset is impaired and must be written down to the recoverable amount.

In this particular case:

The CARRYING AMOUNT (i.e. the NET BOOK VALUE) is £5,000.
The RECOVERABLE amount is the HIGHER of:
Fair value, less costs to sell (£4,000 in this case) ; and
In-use value (£4,476 in this case)
So the recoverable amount is the in-use value of £4,476.

So we have an asset with a CARRYING amount of £5,000 and a RECOVERABLE amount of £4,476.

It is therefore impaired and must be written down from £5,000 to £4,476, i.e. BY £(5,000-4,476), i.e. £524, which is your IMPAIRMENT LOSS.

How you show this impairment loss in the accounts depends on whether you have a revaluation reserve at the time the loss first occurs.

If you have a revaluation reserve, you show it as a decrease in the reserve. The double-entry will be:

Dr Revaluation Reserve £524
Cr Non-current assets £524

If you DON'T have a revaluation reserve, you show the impairment loss as an expense in the income statement.

I hope this clarifies rather than confuses.
• Thank you that helps alot :001_smile: