Question

What is impairment? Discuss how to determine when long-lived asset impairment exists (i.e. tangible and intangible). Give specific examples of assets that are regularly tested for impairment. What is the journal entry when it has been determined that an asset has been impaired.

Answer 1

WHAT IS IMPAIRMENT-

An asset is carried at more than its recoverable amt if its carrying amt exceed the amt to be recover through use or sale of the assets. This is the case the asset is describe as impaired and treat accordingly.

EXAMPLES OF ASSETS-

Fixed assets and investment property. Not applicable to financial assets(Debtor, billsrl receivable, cash ,deferred tax assets or investment in shares etc.)

ACCOUNTING TREATMENT

Revaluation Reserve a/c Dr.

Profit and loss a/c . Dr.

To provision for impairment loss a/c

HOW TO DETERMINE-

External Sources of Information (a) there are observable indications that the asset's value has declined during the period or normal use significantly more than would be expected as a result of the passage of time significant changes with an adverse effect on the entity have taken place during the pe or will take place in the near future, in the technological, market, econom environment in which the entity operates or in the market to which an asse b) period ic or legal dedicated t is (c) market interest rates or other market rates of return on investments have in the period, and those increases are likely to affect the discount rate use asset's value in use and decrease the asset's recoverable amount materially creased during d in calculating an the carrying amount of the net assets of the entity is more than its market capitalisation. (d) nternal Sources of Information a) evidence is available of obsolescence or physical damage of an asset. (b) significant changes with an adverse effect on the entity have taken place during the period or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite. evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. (c) (d) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from the investment and evidence is available that: (i)the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee's net assets, including associated goodwill; or (i) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.