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    Impairment of PPE

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    rg6w4fzddf
    The document discusses the concept of impairment from an accounting perspective. Impairment occurs when an event causes an asset to generate less economic benefit than expected, decreasing its value. An impairment test compares an asset's carrying value to its recoverable amount, which is the higher of fair value or value in use, discounted future cash flows. If carrying value exceeds recoverable amount, the asset is impaired by reducing carrying value to the recoverable amount through an impairment expense.

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    Impairment of PPE

    Uploaded by

    rg6w4fzddf
    19 views6 pages
    The document discusses the concept of impairment from an accounting perspective. Impairment occurs when an event causes an asset to generate less economic benefit than expected, decreasing its value. An impairment test compares an asset's carrying value to its recoverable amount, which is the higher of fair value or value in use, discounted future cash flows. If carrying value exceeds recoverable amount, the asset is impaired by reducing carrying value to the recoverable amount through an impairment expense.

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    In detail notes on Impairment of PPE(financial accounting).

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    The document discusses the concept of impairment from an accounting perspective. Impairment occurs when an event causes an asset to generate less economic benefit than expected, decreasing its value. An impairment test compares an asset's carrying value to its recoverable amount, which is the higher of fair value or value in use, discounted future cash flows. If carrying value exceeds recoverable amount, the asset is impaired by reducing carrying value to the recoverable amount through an impairment expense.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    19 views6 pages

    Impairment of PPE

    Uploaded by

    rg6w4fzddf
    The document discusses the concept of impairment from an accounting perspective. Impairment occurs when an event causes an asset to generate less economic benefit than expected, decreasing its value. An impairment test compares an asset's carrying value to its recoverable amount, which is the higher of fair value or value in use, discounted future cash flows. If carrying value exceeds recoverable amount, the asset is impaired by reducing carrying value to the recoverable amount through an impairment expense.

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    You are on page 1of 6

    What does it mean if we say something is impaired???

    example: My eye sight is impaired???


    what is damaged??? Eyes are damaged
    why is the eyes damaged??? There was an event that caused the eyes to damaged

    Impairment from accounting perspective:


    1) Assets - PPE

    a) Assets are acquired to generate economic benefit (benefit ito Profits, Income, Cash flow etc)
    b) Asset is impaired - economic benefit associated with the use of the asset also decreases
    c) Asset is impaired - amount we can recover from the asset (disposed of) will also decrease

    d) We also reflect the value the asset at its value in which it generates economic benefit

    e) There needs to be an event that will indicate that the Asset is impaired:
    Event is referred to as an indicator of impairment

    External indicator Internal Indicator


    1) Change in Technology 1) Damage to asset
    2) Change in the resell value 2) Greater wear and tear as result of harde
    3) Demand in the PPE 3) Not functioning properly - output is redu
    4) Changes in industry 4) Obselence

    If an indicator of impairment exists then we need to test whether an Asset needs to be impaired or not:

    Testing for impairment

    Carrying value of the asset 1) CV > RA = impairment. We need reduce the CV to R

    Compare it to the: 2) CV = RA = no impairment

    Recoverable Amount 3) CV < RA = no impairment

    Carrying value:

    Cost - Accumulated Depreciation = Carrying Value

    Recoverable Amount (RA)???


    Recoverable Amount is not the Residual Value.
    What is the Residual Value - value at the end of the useful life of PPE
    Recoverable Amount - Greater of FAIR VALUE OR VALUE IN USE
    Residual value is used to calculate depreciation
    Recoverable amount is used to calculate the value of impairment of assets

    IAS 36 defines the recoverable amount


    Greater of:

    a) Fair value of the asset


    Fair value is the amount you can receive if you sell the asset to a willing buyer on the open market
    Fair value = Market value
    How would FV/Market value be determined???
    - Perform an asset valuation - determine how much a willing buyer will pay for the asset in its current state
    - sworn appraisor or a valuator

    FV = Open Market value less any potential cost incurred to dispose of the asset
    selling cost, dismantling costs, advertising, professional
    Market value is not the Residual Value.
    What is the Residual Value - value at the end of the useful life of PPE
    Market value - the selling price the asset could be sold at any given time (potential proceeds of disposal)
    Residual is used to calculate depreciation
    Market value is used to calculate the value of impairment of assets

    or

    b) Value in use

    Future economic benefit that will flow to the enity through use of the asset over the remaining useful life
    Economic benefit is calculated on the basis of a discounted Future Net Cash Flow generated over the remaining useful life

    Future net cash flow

    Example

    Bought an asset on 1 Jan 2019


    Indicator of impairment 31 Dec 2020
    EUL of 5 years

    Year Cash inflows less Cash outflow = Net Cash Flow


    2021 100000 50000 50000
    2022 75000 125000 -50000
    2023 150000 100000 50000

    50000
    R10 in 2020
    Purchased:
    1 Box of matches
    Bubble gum
    apple

    2021 - will I be able to buy the same of goods as in 2020 for same R10???
    - Inflation
    - eroding of your purchase power
    - R1 today will be able to buy more today than R1 in the future

    Determine a rate at which R1 today will be different than R1 tomorrow:


    This rate is called the discount rate.
    will include things like:
    1) rate of inflation
    2) interest rates
    3) Return on Investment

    Step 1

    There indicator of impairment exists

    Step 2:

    Calculate the carrying value of the asset at the date the indicator exists

    CV = Cost - Acc Dep

    NB: Depreciate the asset for the period up until date of the indicator

    Step 3:

    Determine the Recoverable Amount

    Determing which is greater:

    a) Fair value or
    b) Value in use

    Step 4:

    Determine if the asset is impaired:


    4.1) Compare the CV to RA

    4.2) CV < RA = No impairment


    CV = RA = No impairment
    CV > RA = Impairment

    4.3) Calculate the value of the impairment


    Reducing the CV to RA

    CV les RA = value of the impairment

    4.4) Journalise the value of the impairment so the CV = RA

    Impairment Expense Dr
    Accumulated Impairment on…. Cr

    4.5) After the asset has been impaired, how is the carrying calculated???

    Carrying Value = Cost less Accumulated Depreciation less Accumulated impairment

    4.6) How is depreciation affected after an asset has been impaired???

    (Cost - ACC DEP - ACC IMP) - RV


    Remaining useful life of the asset

    = depreciation
    r wear and tear as result of harder use
    nctioning properly - output is reduced

    ment. We need reduce the CV to RA

    do not need to do anything


    s current state

    s of disposal)

    ng useful life
    over the remaining useful life

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