Unit 3 - Impairment of Assets

Unit 3 - Impairment of Assets - Unit 3 Impairment of Assets...

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1 Unit 3 Impairment of Assets (HKAS 36)
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2 Impairment of Assets An entity’s assets are normally recorded at the value of transactions at the time when they are acquired Subsequently, the entity may revalue their assets as times go by to reflect their fair value of the assets as stated in the B/S However, if there is a decline in the value of assets i.e. the assets are impaired , the assets’ carrying amount should be written down to their recoverable amount according to HKAS 36 Impairment Loss: the amount by which the carrying amount of an asset or CGU exceeds its recoverable amount A cash-generating unit (CGU) means the smallest identifiable group of assets that can generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets i.e. a group of assets that all work together to generate income
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3 Concept of Impairment Loss Existing Carrying value Recoverable amount Value in use Fair value less costs to sell Higher of If the existing carrying value of an asset is higher than its recoverable value, then the asset is impaired . The carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
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4 Carrying Amount 1 Cost model (or Benchmark treatment) : Carrying amount / NBV = cost - accumulated amortisation (if any) - accumulated impairment losses (if any); or 1 Revaluation model (or Alternative treatment) : Carrying amount / NBV = revalued amount - subsequent accumulated amortisation (if any) - subsequent accumulated impairment losses (if any)
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5 Recoverable Amount Recoverable amount (i.e. the Value of Future Economic Benefits) means the higher of : 1 Assets’ fair value less costs to sell (i.e. Value in Exchange (VIE) = Net Realisable Value or Net Selling Price); and 1 Assets’ value in use (i.e. VIU = Net Present Value) Fair value less costs to sell (VIE) means the amount obtainable from the sale of an asset or cash-generating unit (CGU) in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal Value in use (VIU) means the present value of estimated future cash flows expected to arise from the continuing use of an asset or cash-generating unit (CGU) and from its disposal at the end of its useful life
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6 Estimation of Value in Use an asset the company $ Yr 1 $ Yr 2 $ Yr 3 Calculation of the value in use: Assumed interest rate is 10%, Value in use = $ Yr 1 + $ Yr 2 + $ Yr 3 (1+10%) (1+10%) 2 (1+10%) 3
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7 Example 1 A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same enterprise. X’s product are sold to Y at a transfer price that passes all margins to X. Eighty per cent of Y’s final production is sold to customers outside of the reporting enterprises. Sixty per cent of X’s final production is sold to Y and the remaining 40 per cent is sold to customer outside of the reporting enterprises. Questions :
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This note was uploaded on 03/21/2011 for the course ACCOUNTING 110 taught by Professor Mcwilliams during the Spring '09 term at San Jose State.

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Unit 3 - Impairment of Assets - Unit 3 Impairment of Assets...

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