F4 - Fixed Asset Impairment

Front 1

Test for Recoverability (U.S. GAAP)

Back 1

When a fixed asset is tested for impairment, the future cash flows expected to result from the use of the asset and its eventual deposition need to be estimated. If the sum of undiscounted expected (future) cash flows is less than the carrying amount, an impairment loss needs to be recognized.

Front 2

Calculation of Impairment Loss - General (U.S. GAAP)

Back 2

The impairment loss is calculated as the amount by which the carrying amount exceeds the fair value of the asset.

Front 3

Calculation of the Impairment Loss (IFRS)

Back 3

Fixed asset impairment loss is calculated using one-step model where carrying value of the fixed asset is compared to fixed asset's recoverable amount. The recoverable amount is the greater of the asset's FV less costs to sell & the present value of future cash flows expected from the fixed asset. IFRS allow reversal of impairment loss.

Front 4

Reporting the Impairment Loss - General (U.S. GAAP)

Back 4

The impairment loss is reported as a component of income from continuing operations before income taxes or in a statement of activities (related to not-for-profit entities). The impairment loss is recognized by reducing carrying value of asset to its lower FV. Restoration of previously recognized impairment losses is prohibited under U.S. GAAP.

Front 5

Jan 2, Yr 1, Reed purchased a machine for $800,000 w/ annual depreciation of $100,000 over an 8-yr life. Yr 4, after issuing Yr 3 FSs, Reed concluded: (1) the machine suffered permanent impairment & (2) $200,000 is the estimated amount to be recovered for Jan 1, Yr 4 - Dec 31, Yr 8. In the Dec 31, Yr 4 B/S, what should be the reported carrying amount?

Back 5

$160,000. When a permanent impairment has occurred, the book value is reduced with a credit to accumulated depreciation. Depreciation of the remaining balance is taken over the remaining life. The $200,000 is depreciated over 5 years, or $40,000 for Year 4. The carrying amount on December 31, Year 4 is $200,000 - $40,000 = $160,000.

Front 6

A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. What amount of impairment loss should be reported under U.S. GAAP?

Back 6

$0. Under GAAP, 1st step in determining impairment is to compare carrying amount of to the undiscounted expected future cash flows. If the undiscounted expected future cash flows > carrying value of the asset, there is no impairment.

Front 7

Which of the following conditions must exist in order for an impairment loss to be recognized under U.S. GAAP?

I. The carrying amount of the long-lived asset is less than its fair value.

II. The carrying amount of the long-lived asset is not recoverable.

Back 7

c. II only. A long-lived asset is impaired if the carrying amount of the asset is greater than, not less than, its fair value and if that carrying amount is not recoverable (the fair value would be recoverable, but the difference would not be). An impairment loss would then be recognized for the amount of the difference between book value and fair value.

Front 8

A company has a long-lived asset with a carrying value of $120,000, undiscounted expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a fair value less costs to sell of $105,000. What amount of impairment loss should be reported under IFRS?

Back 8

$15,000. Under IFRS, impairment exists when the carrying value of a fixed asset exceeds the fixed asset's recoverable amount. The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use (present value of future cash flows).

Front 9

Last year, Katt Co. reduced carrying amount of long-lived assets from $120,000 to $100,000, in connection with its annual impairment review. During the current year, Katt determined the FV of the assets to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year's financial statements under U.S. GAAP?

Back 9

$0. There will be no amount recorded because a subsequent reversal of an impairment loss is prohibited under U.S. GAAP. Note that reversal of impairment loss is permitted under IFRS.

Front 10

When should the carrying amounts of fixed assets held for use & to be disposed of be reviewed for impairment?

Back 10

Annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Front 11

Under U.S. GAAP, restorations of carrying value for long-lived assets are permitted if an asset's fair value increases subsequent to recording an impairment loss for which of the following?

- Held for use

- Held for disposal

Back 11

- Held for use: No - Held for disposal: Yes

Under GAAP, long-lived assets that are impaired can only have their carrying value restored if they are held for disposal. Assets that are held for continued use that are impaired are not permitted to have any restoration of carrying value.

Front 12

Which statement concerning the impairment of fixed assets under U.S. GAAP is true?

I. Impairment losses are shown on the income statement net of tax.

II. Recoverability test compares present value of all expected future cash flows produced by the fixed asset to its carrying value.

III. To determine the amount of any impairment loss, fair value must be used.

Back 12

III. The 1st statement is incorrect, since impairment losses are shown as a component of ICO, before tax. The 2nd statement is also false. To determine impairment loss, undiscounted future cash flows are compared to carrying value. If an impairment loss exists, then FV of the asset can be used to determine the amount of the loss to be recognized.

Front 13

Hudson's factories have a historical cost of $200 million. Near the end of the year, a change in business climate indicated to Hudson's that the $170 million carrying amount of one of Hudson's factories may not be recoverable. Management estimated the undiscounted future cash flows over the remaining life is $150 million. FV is $135 million. What amounts is the impairment loss?

Back 13

$35 million. First tested for impairment. If sum of undiscounted future cash flows < carrying amount, it's impaired. Carrying value is $170 million & undiscounted future cash flows are $150 million. The impairment loss is the amount by which the carrying amount exceeds the FV of the asset: $170 million carrying amount – $135 million =$35 million.