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    Accm4200 Online A Week 4 - 137824 Danica Garcia

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    An impairment test determines whether an asset's value recorded on the balance sheet correctly reflects its value after use or impairment. An entity conducts an impairment test when indicators of asset value loss are identified, or annually for goodwill. External indicators include decreases in market value or changes increasing costs. Internal indicators include physical deterioration or restructuring plans. In the example, Asset B and E require impairment adjustments under the cost model as their recoverable amounts are less than carrying amounts, while all assets except D require revaluations under the revaluation model.

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    Accm4200 Online A Week 4 - 137824 Danica Garcia

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    An impairment test determines whether an asset's value recorded on the balance sheet correctly reflects its value after use or impairment. An entity conducts an impairment test when indicators of asset value loss are identified, or annually for goodwill. External indicators include decreases in market value or changes increasing costs. Internal indicators include physical deterioration or restructuring plans. In the example, Asset B and E require impairment adjustments under the cost model as their recoverable amounts are less than carrying amounts, while all assets except D require revaluations under the revaluation model.

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    Accm4200 Online a Week 4 - 137824 Danica Garcia

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    An impairment test determines whether an asset's value recorded on the balance sheet correctly reflects its value after use or impairment. An entity conducts an impairment test when indicators of asset value loss are identified, or annually for goodwill. External indicators include decreases in market value or changes increasing costs. Internal indicators include physical deterioration or restructuring plans. In the example, Asset B and E require impairment adjustments under the cost model as their recoverable amounts are less than carrying amounts, while all assets except D require revaluations under the revaluation model.

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    19 views3 pages

    Accm4200 Online A Week 4 - 137824 Danica Garcia

    Uploaded by

    ddga2003
    An impairment test determines whether an asset's value recorded on the balance sheet correctly reflects its value after use or impairment. An entity conducts an impairment test when indicators of asset value loss are identified, or annually for goodwill. External indicators include decreases in market value or changes increasing costs. Internal indicators include physical deterioration or restructuring plans. In the example, Asset B and E require impairment adjustments under the cost model as their recoverable amounts are less than carrying amounts, while all assets except D require revaluations under the revaluation model.

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    of 3

    Subject: ACCM4200- Online A

    Student Number: 137824

    Name: Danica Garcia Alvarado

    Comprehension questions: SOLUTION Week 4

    1. What is an impairment test?

    The impairment test is used to determine whether an asset recorded in the balance sheet is
    represented by the correct value after a period of use or impairment. This type of test can be
    used in commercial or tax accounts, it all depends on the country, accounting standards or tax
    jurisdictions, although most assume the IFRS regulations.

    2. Why is an impairment test considered necessary?

    This standard is necessary for companies to establish that their assets have the correct value
    that will be recorded on the balance sheet. With the application of the standard, companies
    have a clear notion of possible impairment unless it is an asset with an indefinite life.

    3. When should an entity conduct an impairment test?

    The asset impairment test must be carried out when the company identifies an indication of
    loss of value in one of its assets and, in the case of goodwill, it must be carried out at least
    annually. When this happens, a comparison must be made between the recoverable amount
    of this asset and its net book value.

    4. What are some external indicators of impairment?

    The external indicators are:

     Significant decrease in market value.


     Significant adverse changes in technological conditions.
     Significant adverse changes in the market.
     Economic or legal changes.
     Increase in market interest rates or rates of return.
     The carrying amount of the company's net assets exceeds the market capitalization.

    5. What are some internal indicators of impairment?

    The internal indicators are:

     Obsolescence or physical deterioration.


     Internal performance evidence available on the asset that is presumed to be worse
    than expected.
     Significant adverse changes in the company.
     Plans of interruption in the use of the asset or restructuring of an operation.
     Dispose of it ahead of schedule.
    Application and analysis exercises

    Exercise 7.1

    Determining recoverable amount and impairment adjustments

    Consider the following information relating to five different items of plant and

    equipment at the reporting date.

    Required

    1. Calculate the recoverable amount for each of the five items of plant and equipment.

    2. Assuming plant and equipment is carried under the cost model, determine the

    amount of any impairment adjustment necessary.

    3. Assuming plant and equipment is carried under the revaluation model, determine

    the amount of any revaluation adjustment necessary.

    (LO3 and LO4)

    1. Recoveral Amount = Higher of Fair Value – Cost of disponsal and Value in use

    Asset A: $ 110,000; 105,000- 3000= 102,000 < 110,000

    Asset B: $48,000 ; 45,000-1000 = 44,000 < 48,000

    Asset C: $83,000; 85,000-2000=83,000 > 82,000

    Asset D: $ 220,000; 190,000-5000= 185,000 < 220,000

    Asset E: $ 117,000 ; 120,000- 3000= 117,000 > 115,000

    2. Impairtment adjustment is necessary when RA < CA

    Impairment adjustment is necessary when RA < CA.

    Asset A: No impairment (RA of $110,000 > CA of $100,000)


    Asset B: Impairment adjustment of $2,000 (RA of $48,000 < CA of $50,000)

    Asset C: No impairment (RA of $83,000 > CA of $80,000)

    Asset D: No impairment (RA of $220,000 > CA of $200,000)

    Asset E: Impairment adjustment of $3,000 (RA of $117,000 < CA of $120,000)

    3. Under revaluation model, revalue to lower of FV and RA.

    Asset A: Revaluation increase of $5,000 (CA $100,000 FV $105,000 RA $110,000)

    Asset B: Revaluation decrease of $5,000 (CA $50,000 FV $45,000 RA $48,000)

    Asset C: Revaluation increase of $3,000 (CA $80,000 FV $85,000 RA $83,000)

    Asset D: Revaluation decrease of $10,000 (CA $200,000 FV $190,000 RA $220,000)

    Asset E: Revaluation decrease of $3,000 (CA $120,000 FV $120,000 RA $117,00

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