economic conditions that will exist over the remaining useful life of the asset.-The most recent financial budgets/forecasts but for a maximum period of 5 years.-Extrapolation of cash flow projections for the periods beyond 5 years using a steady or declining growth rate for subsequent years.In your cash flow estimations, you shall include:-Projections of cash inflows from the continuing use of the asset.-Projections of cash outflows to generate the cash inflows from continuing use of the asset and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset.-Net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life.In your cash flow estimations, you shall NOT include:-Cash inflows from receivables.-Cash outflows from payables.-Cash outflows expected to arise from future restructurings to which an entity is not yet committed.-Cash outflows expected to arise from improving or enhancing the asset’s performance.-Cash inflows and cash outflows from financing activities.-Income tax receipts and payments.Step 2: Determine discount rate.
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The discount rate shall be a pre-tax rate that reflects current market assessment of both the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted.The best way to select your discount rate is to look on the market and pick a market rate of return. Here, please be careful! Market rates of return are usually quoted as POST-tax rate and you need PRE-tax rate, so you need to determine pre-tax rate from post-tax rate yourself.15.3.3 Recognition and measurement of an impairment loss for an individual asset.If the asset’s recoverable amount is lower than its carrying amount, then an entity must recognize an impairment loss as a difference between these 2 amounts.Where an asset is measured using the cost modelimpairment loss is recognised immediately in profit or loss. When impairment occurs, there is no need to write off any existing accumulated depreciation or create a separate accumulated impairment account. The impairment write-down can be included in accumulated depreciation, preferably referred to as ‘Accumulated Depreciation and Impairment Losses’.Hence, if an asset having a carrying amount of $100 (original cost $160) has a recoverable amount of $90, the appropriate journal entry to account for the impairment loss is:Dr. Impairment loss10Cr. Acc. Depreciation and impairment loss10Where an asset is measured using revaluation model any impairment loss is treated as a revaluation increase and accounted for as set out in IAS 16. If an asset at the end of an accounting period has a carrying amount of $100, being previously calculated as fair value of $120 less accumulated depreciation of $20, and the asset's recoverable amount (and possibly its fair value) at the end of the period is determined to be $90, the accounting entry is:Dr. Acc. Depreciation20
Cr. Asset20(Write-down of asset)Dr. Loss – downward revaluation of asset (PL)10Cr. Asset10(Revaluation of asset)
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