CHAPTER 2.2 Impairment FAI

IMPAIRMENTS
Recognizing Impairments
A long-lived tangible asset is impaired when a company is not
able to recover the asset’s carrying amount either through
using it or by selling it.
On an annual basis, companies review the asset for
indicators of impairments—that is, a decline in the asset’s
cash-generating ability through use or sale.
11-1 LO 5
If impairment indicators are present, then an impairment test

must be conducted.
ILLUSTRATION 11-15
Impairment Test
11-2 LO 5
Example: Assume that Cruz Company performs an impairment
test for its equipment. The carrying amount of Cruz’s equipment is
€200,000, its fair value less costs to sell is €180,000, and its
value-in-use is €205,000.
ILLUSTRATION 11-15
€200,000 €205,000
No
Impairment
€180,000 €205,000
11-3 LO 5
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss
ILLUSTRATION 11-15
€200,000 €180,000
€180,000 €175,000
11-4 LO 5
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss
ILLUSTRATION 11-15
€200,000 €180,000
Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000
11-5 LO 5
Impairment Illustrations
Case 1
At December 31, 2016, Hanoi Company has equipment with a cost of
VND26,000,000, and accumulated depreciation of VND12,000,000. The
equipment has a total useful life of four years with a residual value of
VND2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2016, is
VND14,000,000 (VND26,000,000 - VND12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation was
VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4] for 2016
and is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2016, is VND11,000,000.
4. The remaining useful life of the equipment after December 31,
2016, is two years.
11-6 LO 5
Case 1: Hanoi records the impairment on its equipment at

December 31, 2016, as follows.
VND3,000,000 Impairment Loss

ILLUSTRATION 11-15
VND14,000,000 VND11,000,000
Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment
3,000,000
11-7 LO 5
Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2016) VND 11,000,000
Hanoi Company determines that the equipment’s total useful life

has not changed (remaining useful life is still two years). However,
the estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the
following journal entry to record depreciation for 2017.
Depreciation Expense 5,500,000

5,500,000
11-8 LO 5
Case 2
At the end of 2015, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated
remaining useful life of five years. Because there is little market-related
information on which to base a recoverable amount based on fair value,
Verma determines the machine’s recoverable amount should be based on
value-in-use. Verma uses a discount rate of 8 percent. Verma’s analysis
indicates that its future cash flows will be $40,000 each year for five
years, and it will receive a residual value of $10,000 at the end of the five
years. It is assumed that all cash flows occur at the end of the year.
ILLUSTRATION 11-16
Value-in-Use Computation
11-9 LO 5
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss
ILLUSTRATION 11-15
$200,000 $166,514
Unknown $166,514
11-10 LO 5
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss
$200,000 $166,514

Accumulated Depreciation—Machinery
33,486
Unknown $166,514
11-11 LO 5
Reversal of Impairment Loss
Illustration: Tan Company purchases equipment on January 1,

2015, for HK$300,000, useful life of three years, and no residual
value.
At December 31, 2015, Tan records an impairment loss of

HK$20,000.
11-12 20,000 LO 5
Reversal of Impairment Loss
Depreciation expense and related carrying amount after the

impairment.
At the end of 2016, Tan determines that the recoverable amount of

the equipment is HK$96,000. Tan reverses the impairment loss.
Accumulated Depreciation—Equipment 6,000

Recovery of Impairment Loss 6,000
11-13 LO 5
IMPAIRMENTS
Cash-Generating Units
When it is not possible to assess a single asset for impairment
because the single asset generates cash flows only in
combination with other assets, companies identify the
smallest group of assets that can be identified that generate
cash flows independently of the cash flows from other assets.
11-14 LO 5
IMPAIRMENTS
Impairment of Assets to Be Disposed Of

 Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).
 No depreciation or amortization is taken on assets held
for disposal during the period they are held.
 Can write up or down an asset held for disposal in future
periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before
the impairment.
11-15 LO 5
IMPAIRMENTS
ILLUSTRATION 11-18
Graphic of Accounting for
Impairments
11-16 LO 5

CHAPTER 2.2 Impairment FAI

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CHAPTER 2.2 Impairment FAI

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IMPAIRMENTS

If impairment indicators are present, then an impairment test

Cruz makes the following entry to record the impairment loss.

Case 1: Hanoi records the impairment on its equipment at

VND3,000,000 Impairment Loss

Loss on Impairment 3,000,000

Equipment VND 26,000,000

Hanoi Company determines that the equipment’s total useful life

Depreciation Expense 5,500,000

Loss on Impairment 33,486

Illustration: Tan Company purchases equipment on January 1,

At December 31, 2015, Tan records an impairment loss of

Depreciation expense and related carrying amount after the

At the end of 2016, Tan determines that the recoverable amount of

Accumulated Depreciation—Equipment 6,000

Impairment of Assets to Be Disposed Of

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