Imparement help needed

cornflower

Can someone help me with this question

A company has an asset which is a CGU. The net book value is $70k and realisable value is $50k with a useful economic life of 10 years and nil residual. Forecast cash flows annually are $10 k occurring at the end of each year and the cost of capital is 10%.

Required: calculate any impairment losses.

I'm just stuck with nowhere to go!

beverly hudson

The answer is in your question. Realisable value is lowerthan carrying value by €20,000 so this is the impairment.

Steve Collings

Under IAS 36 it's generally more in depth than comparing book values against realisable values as you have to work out value in use from the cash flows stated in the Q - remember if this was a question given in an exam always bear in mind that information is not put in the scenario for no reason. Here the question is giving you information concerning the future cash flows - this is to allow you to work out value in use. In IAS 36 (and in the UK's FRS 11 for that matter) an asset is impaired if its carrying amount exceeds its recoverable amount. You then sub-divide recoverable amount as follows:

Recoverable amount is the HIGHER of:
- fair value less costs to sell; and
- value in use.

Because the discount rate is given we can say:

1 / r(1 + r) to the power of 'n'

Where:
r = the discount rate which can be expressed as a decimal number of periods
n = the number of periods

Step 1: Work out the value in use

VIU = $10,000 x [1 / 0.1 1 / 0.1(1 + 0.1)to the power of 10] = $61,446
Net realisable value is ........................................................$50,000

Step 2: Determine the recoverable amount

Recoverable amount is the higher of value in use and net realisable value. In this Q this figure is $61,446.

Step 3: Work out the impairment loss

Carrying value is $70,000, recoverable amount is $61,446 so the impairment loss is ($70,000 less $61,446) = $8,554.

The written-down value of $61,446 would then be depreciated over the remaining useful life of the asset.

Hope that helps.

Regards
Steve