Impairment and fair value

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Naz
Naz Registered Posts: 18 New contributor 🐸
Impairment and Fair value

Hi Everyone

I'm preparing for my financial statements exam. I've been staring into the book looking at these two areas and just cant grasp it!

Any help will be appreciated



Thanks in advance

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  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
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    I've only just read this part of the book myself, but I'll try and explain how I understood it and maybe we can help each other out.

    Impairment is when an item loses value. So, I own a combined printer/fax/scanner which I bought for £500. The accumulated depreciation is £200 so NBV = £300.

    One day I spill a cup of coffee all over my lovely printer/fax/scanner which lets of some sparks and is generally unhappy about being fried by my mocha. After the accident the fax no longer works on the machine ( hah as if anyone even uses faxes any more... anyway....) and the engineering guy who works at the printer/fax/scanner shop says "you'll be lucky to get £100 if you sell that now". The item is "impaired" because it is now worth less than its Net Book Value and it is not likely to ever regain that value. (Note: some items may regain value e.g. property, so this would not be an example of impairment, but rather it would require a revaluation to be made in the form of a reserve. )

    We need to make an adjustment in the accounts to show that the item is now only worth £100 due to impairment.

    Fair value is a bit woolly in my opinion. I like to compare it to ebay shopping !

    The Seller goes - "hey here is my fantastic collection of original "neighbours" memorabilia - I've kept a record of what I paid for it and what other sellers have currently sold their similar collections for and I'd like to sell it to you for £10,000.

    Buyer "I'm an expert in memorabilia pertaining to antipodean soap operas that were popular in the late 1980's and early 1990's. I believe £10,000 to be a very fair price for such a collection"

    Basically "fair price" would be the price that an experienced buyer and seller would agree on being reasonable. the above example could have gone like this....

    "I'd like to sell for £10,000"

    "come off it, that I <3 Scott Robinson Poster is torn and tatty I reckon you are having me on - its only worth £7,500"

    "You got me there. Go on its yours for £7,500"

    There are loads of possible ways the negotiations could go, but basically think of what a seller would want to sell at, and what a buyer would want to pay - aim in the middle of those figures and you have a fair price.

    Um thats it. In my own words.
  • Naz
    Naz Registered Posts: 18 New contributor 🐸
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    Hello uknitty



    Lol interesting examples but will definitely help me in the exam as I had no idea what the two are. I find that kaplan books tend to confuse me a lot.




    Thanks a lot
  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
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    I always make up really crazy OTT examples because it makes it stick in my mind :D
  • exam panic
    exam panic Registered Posts: 157 Dedicated contributor 🦉
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    good to know how it calculate but usually they give you that figure in the question .
  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
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    exam panic wrote: »
    good to know how it calculate but usually they give you that figure in the question .

    I've not read that far ahead yet ;)
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