Ch 10 and 11 Additional topics and Examples

Ch 10 and 11 Additional topics and Examples - Additional...

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Additional Topics and  Examples Chapter 10/11
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2 Impairment: Overview Impairment occurs when the carrying amount of the long- lived asset (such as PP&E) is greater than its future economic benefit to the company There are many external and internal indicators that provide evidence of possible impairment Management needs to regularly evaluate assets for these indicators of impairment IFRS requires this at the end of each reporting period If there is an indicator of possible impairment, then the asset must be tested for impairment Two main approaches to measuring impairment losses are: Cost recovery impairment model Rational entity impairment model
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Impairment Models Cost recovery impairment model (PE GAAP) Rational Entity Impairment model (IFRS) Long-term capital asset management model The decision to continue using the capital assets depend on expected return (recoverable amount). 3
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4 Cost Recovery Impairment Model Under this model, an asset is impaired only if carrying amount cannot be recovered from using and eventually disposing of the asset (recoverability test) i.e. impaired if carrying amount > undiscounted future net cash flows Impairment loss is then measured as asset’s carrying amount less fair value Fair value of the asset is best measured by quoted market prices in active markets It is by its nature a present value or discounted measure Impairment losses cannot be reversed (new cost base) Applied by private entity and U.S. GAAP
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5 Rational Entity Impairment Model Impairment loss is measured by comparing the asset’s carrying amount and recoverable amount Recoverable amount is measured as higher of 1. Value in use, and (present value of future net cash flows) 2. Fair value less cost to sell If carrying amount < recoverable amount, then there is no impairment loss If carrying amount > recoverable amount, then impairment loss is difference between two values Impairment losses may be reversed Applied under IFRS
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Example The information that follows relates to equipment owned by TTC Limited at December 31, 2011: Cost $ 9,000,000 Accumulated depreciation to date 1,000,000 Expected future net cash flows (undiscounted) 7,000,000 Expected future net cash flows (discounted, value in use) 6,350,000 Fair value 6,200,000 Assume that TTC will continue to use this asset in the future. As at December 31, 2011, the equipment has a remaining useful life of 4 years. TTC uses the straight- line method of depreciation 6
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Cost Recovery Model  1. Assume that TTC is a private company that follows Canadian private entity GAAP and uses the cost recovery impairment model. Prepare the journal entry, if any, to record the impairment of the asset at December 31, 2011.
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Ch 10 and 11 Additional topics and Examples - Additional...

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