Chapter 33
Impairment of Asset
1. What is the meaning of impairment of asset?
It is a fall in the market value of an asset so that the recoverable amount is now less than the
carrying amount in the statement of financial position.
The recoverable amount of an asset is the fair value less cost of disposal or value in use, whichever is
higher.
Fair value of an asset is the price that would be received to sell the asset in an orderly transaction
between market participants at the measurement date.
Cost of disposal is an incremental cost directly attributable to the disposal of an asset or cash
generating unit, excluding finance cost and income tax expense.
Examples of cost disposal include legal cost, stamp duty and similar transaction tax, cost of removing
the asset, and direct cost in bringing the asset into condition for sale.
Value in use is measured as the present value of estimated future net cash flows expected to be
derived from an asset.
The cash flows are pretax cash flows and pretax discount rate is applied in determining the present
value.
2. Explain the “fair value hierarchy”
The following fair value hierarchy or best evidence of fair value are enumerated in descending order:
Level 1 inputs – the quoted prices in an active market for identical assets.
Level 2 – the quoted prices for similar assets in an active market and quoted prices for identical or
similar assets I a market that is not active.
Level 3 inputs – the unobservable inputs for the asset that are usually developed by the entity using
the best available information from the entity’s own data.
3. What are the components of estimated future cash flows for purposes of determining value in use?
Estimates of future cash flows include:
Projections of cash inflows from the continuing use of the asset.
Projections of cash outflows necessarily incurred to generate the cash inflows from the continuing
use of the asset.
Net cash flows received or paid on the disposal of the asset at the end of its useful life in an arm’s
length transaction.
Estimates of future cash flows do not include:
Future cash flows relating to restructuring to which the entity is not yet committed.
Future costs of improving or enhancing the asset’s performance.’
Cash inflows or outflows from financing activities.
Income tax recipients or payments
4. How is the impairment loss recognized?
The basic principle is that if the recoverable amount of an asset is lower than the carrying amount,
the asset is judged to have suffered an impairment loss.
There is no impairment if the recoverable amount is higher than carrying amount.
The impairment loss is recognized in profit or loss and presented separately in the income
statement.
5. Explain the recognition of an impairment loss of a cash generating unit
A cash generating unit is the smallest identifiable group of assets that generate cash inflows from
continuing use that are largely independent of the cash inflows from other assets or group of assets.
When an impairment loss is recognized for a cash generating unit, such loss shall be allocated to the
assets of the unit in the following order:
First, to the goodwill allocated to the cash generating unit.
Then, to all other noncash assets of the cash generating unit pro rata based on carrying amount.
The carrying amount of an asset shall not be reduced below the highest of fair value less cost of
disposal, value in use and zero.
The amount of impairment loss that would otherwise have been allocated to the asset shall be allocated
prorate to the other assets of the unit.
6. Explain the reversal of an impairment loss.
If the recoverable amount of an asset that has previously been impaired turns out to be higher than
the asset’s current carrying amount, the carrying amount of the asset shall be increased to the new
recoverable amount.
However, the increased carrying amount of an asset due to a reversal of an impairment loss shall
not exceed the carrying amount that would have been determined had not impairment loss been
recognized for the asset in prior years.
The reversal of the impairment loss shall be recognized immediately in profit or loss.
But any reversal of an impairment loss on a revalued asset shall be treated as a revaluation increase.
An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
