In general assets or disposal groups held for sale are not depreciated and are

In general assets or disposal groups held for sale

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In general, assets (or disposal groups) held for sale are not depreciated and are subject to impairments. They are presented separately in the statement of financial position.
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Asset Impairments In general, the following conditions must be met for an asset (or Cash-Generating Unit) to be classified as held for sale management is committed to a plan to sell or the asset is available for immediate sale an active programme to locate a buyer is initiated the sale is highly probable, within 12 months of classification as held for sale the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn Operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned)
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Asset Impairments Cash-Generating Unit (CGU) In some cases, a single asset generates cash flows only in combination with other assets it may not possible to assess the single asset for impairment. E.g., one operating unit manufactures products and transfers to another unit that markets the products to end customer. The cash flows are interdependent with each other. CGU is subject to impairment test together.
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Asset Impairment 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
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Asset Impairment Recognizing Impairments If impairment indicators are present, then an impairment test must be conducted.
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Asset Impairment Recoverable amount is the higher of fair value less cost to sell or value-in-use Fair value less costs to sell is the price that the asset could be sold for less costs of disposal Fair value is determined using the following value hierarchy Price in a binding sale agreement Market price Appropriate estimation Costs to sell include: Legal fees Stamp duty Costs of removing the asset
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Asset Impairment Recoverable amount is the higher of fair value less cost to sell or value-in-use Value-in-Use is the present value of the cash flows expected from the future use and eventual sale of the asset or cash- generating unit Objective overall is to: Estimate future cash flows. Projections should be based on, for example, management best estimates, external evidence, or budgets / forecasts covering a minimum 5 year period Apply a discount rate The entity’s WACC The entity’s incremental borrowing rate Other market borrowing rates
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Impairments
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Impairments Case 1: Discount rate = 6% Solution: 1. Compute the carrying amount (CA) Accumulated Depreciation = (500,000 - 50,000)/5 * 2 = 180,000 Book Value = 500,000 - 180,000 = 320,000 2. Compute the Recoverable Amount (RA): Higher of Fair Value Less To Sell = 300,000 - 25,000 = 275,000 Value-in-Use = 120,000 * PV factor (i=6%,n=3) = 120,000 * 2.6730 = 320,760 3. Compare CA and RA RA = 320,760 > CA = 320,000, no impairments
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  • Winter '18
  • jane smith

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