Task 2.

7
Explain impairment loss?

Impairment is the reduction in the recoverable amount of the non-current assets or

goodwill below its carrying value. If the carrying amount exceeds the recoverable
amount, an impairment expense amounting to the difference is recognized in the
period. If the carrying amount is less than the recoverable amount no impairment is
recognized. Impairment losses are accounted for in the profit and loss account.

Identify the circumstances which may suggest the

impairment of assets?

IAS 36 “Impairment of Assets” ensures that an entity's assets are not carried at
more than their recoverable amount (i.e. the higher of fair value less costs of disposal
and value in use). Entities are required to conduct impairment tests, with the
exception of goodwill, where there is an indication of impairment of an asset. The
test may be conducted for a 'cash-generating unit' where an asset does not generate
cash inflows that are largely independent of those from other assets.

What are the steps to calculate impairment of assets?

There are five steps to calculate impairment of assets:

 Firstly, Calculate the carrying value of a fixed asset.

Carrying value = Acquisition cost - Accumulated depreciation.

 Secondly, Calculate the fixed asset's fair value.

Fair value of a fixed asset = future cash flow it will + salvage value at the end
generate for the company generate for the company

 Thirdly, Compare the asset's carrying value to its fair value. If the
carrying value is greater than its fair value of the asset, then their difference
equals the impairment loss, which would be recorded on its books.
 Record a journal entry for the impairment loss. The company reports the
impairment loss as an expense on the income statement, which ultimately
 reduces net income for the year. The impairment also reduces the asset's net
carrying value on the balance after reducing the balance of the accumulated
depreciation account. The journal entry requires that you debit the impairment
loss expense and credit accumulated depreciation for the same amount.
 Recalculate future depreciation expenses. This is because the value report
for the fixed asset decreases, so must its annual depreciation expense.

Future depreciation expense of asset = the asset's fair value - salvage value
its remaining useful life.

www.iasplus.com/en/standards/ias/ias36

http://en.wikipedia.org/wiki/Impaired_asset