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CONCEPT OF IMPAIRMENT
Some
non-current assets are subjected to a sudden, dramatic drop in market value due to a substantial decline in value of the assets, economic changes, technological advancements and fluctuation in market interest rate. these factors would lead to a phenomenon which called impairments value or benefits of assets declined to the value expected to be recovered from the use of the assets.
All
The
Applicable to impairment of: Property, Plant and Equipment (MFRS 116) Intangible assets (MFRS 138) Goodwill (MFRS 3) Investment in subsidiary (MFRS 127) Investment in associate (MFRS 128) Interest in joint venture (MFRS 131)
RECOGNITION OF IMPAIRMENT
Para 59: an asset is considered as impaired when:
carrying amount > recoverable amount
Carrying amount (PPE) = cost accumulated depreciation Recoverable amount: = The higher of,
RECOGNITION OF IMPAIRMENT
carrying
value should be reduced to the recoverable amount loss = carrying amount recoverable amount recoverable amount > carrying amount: an asset is not impaired
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Impairment
If
RECOGNITION OF IMPAIRMENT
Example 7.1: Cost Accumulated depreciation Carrying amount Recoverable amount Impairment loss 1,000 400
RECOGNITION OF IMPAIRMENT
200
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External Sources of Information i) Assets market value has declined significantly more than would be expected as a result of the passage of time or normal use. ii) Significant changes with an adverse effect on the entity have taken place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. iii) Market interest rates or other market rates of return on investments have increased during the period. iv) The carrying amount of the net assets of the entity is more than its market capitalization.
Internal Sources of Information i) Evidence is available of obsolescence or physical damage of an asset. ii) 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. iii) Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.
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(c)
(d)
(e)
(f)
Physical damage to an asset Significant decline in the market value of an asset Lower-than-expected economic performance of a segment Discontinuance or restructuring of operation Significant changes in the technological, economic or legal environment Significant change in the interest rate
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Best resource - price in a binding sale agreement in an arms length transaction minus cost of transaction If unavailable but the asset has active market - market price minus its selling cost. If both unavailable - refer to most recent transaction.
Cost to sell = legal cost, stamp duty, cost of removing the assets.
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= present value of the future cash flow expected to be derived from an asset. for estimate =
Bases
1.
2.
cash flow projection on reasonable and supportable assumption cash flow projection on most recent financial budget approved by management
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2012 2013
Value in use
740 800
0.57175 0.49718
423 398
2,102
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15
cost model
revaluation model
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Journal entry:
Dr Impairment loss XXX Cr Accumulated Impairment ( to record impairment loss during the year ) XXX
Suggested solution:
Recoverable amount = RM60,000 (the higher is net selling price) Carrying amount of machine = [RM150,000 (RM150,000/5 x 2)] = RM90,000 Impairment loss = RM30,000
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New carrying amount (end 2007) = 150,000(cost) 60,000(acc. Dep.) - 30,000(acc.impairment) = 60,000 (equal to recoverable amount) The calculation of depreciation for 2008, will be based on new carrying amount. If the expected useful life is unchanged, the depreciation charge for 2008 is RM20,000 (RM60,000/3 years).
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If indication that led to the recognition of impairment loss is cease, the company needs to estimate the new recoverable amount based on current asset situation. Impairment loss which was recognized in the previous year may need to be reversed, or the carrying amount of the asset be increased to a new recoverable amount the increased carrying amount of an asset attributable to a reversal of an impairment loss should not be more than the carrying amount that would have been determined had no impairment loss been recognized for the asset in previous years.
the amount of write-back should be reduced by the amount20 that would have been recognized as depreciation, if the write-down had not occurred.
The standard requires that the increase in carrying amount should not exceed the carrying amount that would have been determined if no impairment loss had been recognized for the asset in previous years.Thus, the increment should not exceed RM60,000, or in this case, the new carrying amount after reversal is RM60,000.
The journal entry: Dr Accumulated impairment 30,000 Cr Accumulated depreciation 10,000 Write-back of impairment loss 20,000
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The amount of write-back would be equal to the reinstatement of the RM30,000 previously written down, reduced by the amount of depreciation of RM10,000 [150,000/5 (depreciation with no impairment) RM20,000 (depreciation after impairment) ] that had not been recorded in 2008 because of the impairment.
After the reversal, the carrying amount of the machine will be RM60,000 [cost RM150,000 accumulated depreciation (30,000 3), as it would have been without the impairment recognition in 2007 and the reversal in 2008.
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assets are carried at revalued amount less any subsequent accumulated depreciation and accumulated impairment Impairment loss is recorded as a revaluation decrease (or increase) and the journal entry:
Dr Revaluation Reserve RMXXX Cr Accumulated Impairment ( to record impairment loss during the year )
RMXXX
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A piece of land was acquired in 2006 at the cost of RM20,000. In 2007, the company revalued the asset to RM25,000 and the journal entry will be: Dr Assets RM5,000 Cr Revaluation reserve RM5,000
In 2008, the company did an impairment test and found that the recoverable amount was RM23,000. The impairment loss of RM2,000 is accounted as revaluation decrease as journalized below: Dr Revaluation reserve RM2,000 Cr Accumulated impairment RM2,000
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Reversal of an impairment loss recognized previously for revalued asset should be treated as a revaluation increase If impairment has eliminated the entire revaluation capital account, and an excess loss has been reported in earnings as impairment loss, then a reversal later should be reported in earnings(provided the earlier write-down had been so reported), with any balance taken directly to revaluation reserve account.
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2006
2007 2008 2009
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5,000 5,000
5,000 2,000
7,000
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3,000 2,000
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Impairment test for goodwill cannot be tested on its own not identifiable At acquisition date, goodwill should be allocated to each cash generating units (CGU) CGU- represent the smallest identifiable group of assets that generate cash inflows from other group of assets.
Impairment test for goodwill should be performed annually and whenever there is indication that the unit may impaired.
Impairment loss for a CGU should be allocated to reduce the carrying amount of the assets of the units according to the following order:
i)
Reduce the carrying amount of any goodwill allocated to the CGU Reduce the carrying amount of other assets of the unit on pro-rata basis.
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ii)
Cost
1.2 m
4m
5.2 m
Depreciation
Carrying amount
1.2 m
0.1 m
3.9 m
0.1 m
5.1 m
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1m
1m
2.
The impairment loss first is allocated to goodwill, writing down to zero. The balance will be allocated to carrying amount of identifiable assets on pro-rata basis.
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The journal entry: Dr Impairment loss Cr Goodwill Dr Impairment loss Cr Accumulated depreciationBuilding and Equipment* Cr Inventory (0.3m x 0.25) 1.2 m
1.2 m
0.3 m 0.225 m 0.075 m
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Reason- any increase in the recoverable amount of goodwill is likely to be an increase in internally generated goodwill (the recognition is prohibited under MFRS 138 Intangible Assets.
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