Acctg.
202-a Impairment
IMPAIRMENT
It is the 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.
Indicators of Impairment
An asset is impaired when its carrying amount exceeds its recoverable amount.
An entity shall assess at the end of each reporting period whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
External sources - Significant decline in market value; Unfavorable changes in technological, market, economic or
legal environment; Decrease in interest rates; Low market capitalization.
Internal sources – evidence of obsolescence or physical damage; discontinuance, disposal or restructuring plan;
declining asset performance.
Impairment Loss – Carrying amount of Asset or Cash-generating unit > Recoverable amount.
Recoverable amount – Higher amount between an asset or a CGU’s FV less costs to sell and its Value in use.
Fair Value less costs to sell (FVLCTS) – amount obtainable from the sale of an asset or CGU in an arm’s length
knowledgeable, willing parties, less the costs to dispose.
Value in Use (VIU) – present value of estimated future cash flows expected to arise from the continuing use of an asset
and from its disposal at the end of its useful life.
Determining Recoverable Amount
If FVLCTS or VIU > CA – not necessary to calculate the other amount because the asset is not impaired.
If FVLCTS cannot be determined, the recoverable amount is the VIU.
For Assets to be disposed of, recoverable amount is FVLCTS.
Recognition of Impairment Loss (individual asset)
An impairment loss should be recognized whenever recoverable amount is below carrying amount.
The impairment loss is an expense in the income statement unless it relates to a revalued asset where the value
changes are recognized directly in equity.
Adjust depreciation or amortization charges for future periods.
Reversal of Impairment
The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss
shall not exceed the carrying amount that would have been determined had no impairment loss been
recognized for the asset in prior years (WHBCA).
Recognized immediately in PL unless carried at revalued amount.
Depreciation charges shall be adjusted in future periods.
Recognition of Impairment Loss (Cash-Generating Unit)
RA > CA – the unit or goodwill allocated to that unit is not impaired.
RA < CA – the entity must recognize an impairment loss.
The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the
following order:
1. Reduce the carrying amount of any goodwill allocated to the CGU and,
2. Then reduce the carrying amount of the other assets of the unit pro rata on the basis of their book values.
Straight Problem 1
X Co. purchased a construction crane on January 1, 2019 for P25,000,000. The crane is being depreciated using the SLM
with 20 years useful life and 10% residual value. On December 31, 2022, the entity determined that indicators of impairment
exist for the asset. On this date, the entity estimated that the crane has a remaining useful life of 10 year, that its resid ual
value will be zero. It was also determined that the net cash inflows from the asset will total P2,000,000 per year, and that
its fair value less cost to sell is P10,000,000. The appropriate discount rate is 8%. How much is the impairment loss on
December 31, 2022? How much is the depreciation expense in 2023?
Straight Problem 1A
Assuming, on January 1, 2024, it was determined that the recoverable amount of the asset is P14,000,000. A gain on
reversal on impairment loss was recognized on such date. How much is the gain on reversal of impairment on January 1,
2024?
Straight Problem 2
CGU-1 pertains to the X Co.’s electronic division. The entity calculated the value in use of the division and is P8,000,000.
The carrying amounts of the assets are as follows: Building P5,000,000, Equipment P3,000,000, Inventory P2,000,000. The
entity has also determined that the fair value less cost to sell of the building is P4,500,000. How much impairment loss
allocated to the assets by X Co.?
SP 1-Solution
Initial Cost 25,000,000
Residual value 2,500,000
Depreciable cost 22,500,000
Useful life 20 years
Depreciation 1,125,000
Initial Cost 25,000,000
AD (2019-2022) 4,500,000
Carrying amount 12/31/22 20,500,000
FVLCTS 10,000,000
VIU(PV annuity 2M, 10yrs, 8%) 13,420,163***
Recoverable amount (higher) 13,420,163 whichever is higher between FVLCTS or VIU
Carrying amount 12/31/22 20,500,000
Recoverable amount 13,420,163
Impairment loss 7,079,837
New carrying amount 1/1/23 13,420,163
Remaining useful life 10 years
Depreciation 2023 1,342,016
SP 1A-Solution
Carrying amount 1/1/23 13,420,163
Depreciation 2023 1,342,016
Carrying amount 1/1/24 12,078,147
Carrying amount 1/1/24 12,078,147
Recoverable amount 1/1/24 14,000,000
Gain on Reversal 1,921,853
SP 2-Solution
Carrying amount CGU 10,000,000
Recoverable amount 8,000,000
Total Impairment loss 2,000,000
Allocated to:
Building (5/8 x 2M) or 500,000 500,000 whichever is lower since the problem provides FVLCTS of building
Equipment (3/8 x 2M) 1,500,000 remaining of IL to consume all remaining balance of IL
