Question

Impairment Loss On May 1, 2016, Smooth, In., purchased machinery for $360,000; the estimated useful life was eight years and the expected salvage value was $15,000. Straight-line depreciation is used. On May 1, 2018, economic factors cause the market value of the machinery to decrease to $190,000. On this date, Smooth evaluates whether the machinery is impaired. a. Assume that on May 1, 2018, Smooth estimates future cash flows relating to the use and disposal of the machinery to be $270,000. Is the machinery impaired at May 1, 2018? If it is impaired, what is the amount of the impairment loss? The machinery is impaired Impairment loss $ 0 b. Assume that on May 1, 2018, Smooth estimates future cash flows relating to the use and disposal of the machinery to be $230,000. Is the machinery impaired at May 1, 2018? If it is impaired, what is the amount of the impairment loss? Impairment loss = 0

Answer 1

Ans:

Impairment loss is measured as the excess of carrying amount of the asset over its recoverable amount.

-Recoverable amount: “The higher of its fair value less cost to sell and its value in use.”

Value in use: -Discounted expected future cash flows.

Lets calculate the carrying amount

Depreciation = (Cost of Purchase - Salvage value)/ Life of asset

= (360000-15000)/8

= 43,125

Lest calculate the book value

Year	Opening Balance	Depreciation	Closing value
1	$ 360,000	$       (43,125)	$        316,875
2	$ 316,875	$       (43,125)	$        273,750

Carrying value of asset $ 273,750

Expected Cash flow from machinery is $ 270,000

Since expected cash flow is less than carrying value

a.Impairment loss will be $3,750(273,750-270,000)

b.Carrying value of asset $ 273,250

Expected Cash flow from machinery is $ 230,000

Since expected cash flow is less than carrying value - there will be impairment of machinery

Impairment loss = carrying cost- Expected cash flow

=273,250 - 230000

= $43250

Note:

The above is Correct Under IFRS ,

Under IFRS Impairment loss is calculated as difference between carrying value less Recoverable Amount

Recoverable amount= The higher of its fair value less cost to sell and its value in use.”

Value in use: -Discounted expected future cash flows

Under US GAAP

Impairment loss is calculated as difference between carrying value less Market value if the undiscounted cash flows are lower than carrying value.

and In Case If you are following US GAAP

Then

Under US GAAP

1) Impairment loss = Carrying cost- Market value = 273,750- 190,000 =$ 83750