Summary 2nd TERM FINANCIAL ACCOUNTING NOTES

CHAPTER 7 – IMPAIRMENT OF ASSETS

RECOVERABLE AMOUNT = Higher of Fair Value – Cost to sell and Value in use
VALUE IN USE = PV (Continuous use and cash flow generated through sale at FV – CTS)
FAIR VALUE – COST TO SELL = Price assets could be sold for – cost of disposal
o Cost of disposal = legal costs, transaction taxes, cost to remove asset, direct incremental cost
DISCOUNT RATE =Current market rate before tax

INDICATION OF IMPAIRMENT


HIGHER OF 1. Value in use

CALCULATE THE RA 2. Fair value – Cost to sell


IMPAIRMENT LOSS = CA – RA
Loss = CA>RA
Entire impairment loss must be recognised


Asset @ COST PRICE Asset previously
revalued




1. Revaluation surplus written down to 0 – OCI
SCI
2. Balance of impairment loss – SCI

[impairment loss – revaluation surplus = IL in SCI]

RECOVERABLE AMOUNT:
Value in use: Fair value less cost to sell:

PV – Calculate this Price at which the asset could be sold on the measurement date
after the deduction of cost of disposal.
N – Remaining useful life
INCLUDES: (-)
PMT – Estimate annual cash INFLOW – OUTFLOW
Legal costs
FV – Net cash inflow from expected sale at end of life Transaction taxes
Cost of removing asset
I/YR – discount rate before tax Direct costs to bring asset for condition for sale
(Values used must be before tax values) EXCLUDES:
- Rxx / 0,72 Costs already provided for
Income tax
Financial costs
If annual cash inflow differs, use CFj
Cost to re-organise entity as result
instead of PMT & FV and NPV instead of PV
Termination benefits
for value. Year-end: Begin of year:
CFj0 = 0 CFj0 = xx
CFj1 = xx
CFj2 = Sale amount + xx

,RECOGNITION OF IMPAIRMENT LOSS:

Assets carried at Cost Price:

• Carrying Amount decreased to Recoverable Amount (Loss goes to SCI)
Impairment loss = CA – RA

Impairment Loss (SCI)
Accumulated Impairment Loss (SFP)


Revalued assets:

1. If there is a revaluation surplus, the impairment first decrease s it through OCI in
SCI until it has a balance of 0.
2. Any more impairment loss goes to SCI.

Revaluation Surplus (OCI -SCI)
Impairment Loss (SCI)
Accumulated Impairment Loss (SFP)

Revaluation Reserve (SFP)
Revaluation Surplus (OCI – SCI)


STATEMENT OF COMPREHENSIVE INCOME
Profit/(Loss) before tax
(Income tax expense)
Profit for the year
Other comprehensive income
Revaluation:
-Surplus Revaluation
-(Impairment loss) (A)
-Reversal of impairment loss F

Total comprehensive income/(loss)


STATEMENT OF FINANCIAL POSITION
Non-Current
PPE

Current

Equity
Retained earnings (see SCE)
Revaluations surplus (see SCE)

,STATEMENT OF CHANGES IN EQUITY
Revaluation Retained
Reserve Earnings
Opening balance
Profit/(loss) for the year
(Revaluation x 0,72)
Revaluation of PPE
Realised through depreciation
(New dep – Old dep x 0,72) (Rxx) Rxx
(Impairment loss of PPE) (A)
(Effect of revaluation on revaluation surplus) – make balance 0
Reversal of impairment loss
(Effect of reversal on revaluation surplus)
Closing balance


NOTES
2. Profit/(Loss) before tax

Profit/(Loss) is shown after the following was takin into account

Depreciation
Impairment loss
Reversal of impairment loss

4. PPE
Carrying amount
Cost Price/GRV/NRV
(Accumulated depreciation)
(Accumulated impairment loss)

Revaluation
(Depreciation)
(Impairment loss) (C)
Reversal of impairment

Carrying amount
Cost Price/GRV/NRV
(Accumulated depreciation)
(Accumulated impairment loss) (C)

, REVERSAL OF IMPAIRMENT LOSS


What would the carrying amount been if no i mpairment was previously recognised?


Reversal = RA limited to historical CA – Current CA


Asset @ COST PRICE
Revalued asset




1. Revaluation surplus written down to 0 – OCI
SCI
2. Balance of impairment loss – SCI

[impairment loss – revaluation surplus = IL in SCI]



If the Recoverable amount increases, to exceed the Carrying amount:

• Previously recognised IL may be reversed
• CA must be adjusted upward to new RA
• The increased CA is limited to what the CA would have been if no impairment loss was
recognised in prior years.


Assets carried at Cost Price:

• Reversal of IL is recognised in P/L in SCI
• Reversal is limited to historical CA
Reversal = (RA limit Historic CA) – (Current CA)

Accumulated Impairment Loss (SFP)
Reversal of Impairment Loss (SCI)

Revalued Assets:

• Reversal of IL is recognised as INCOME in SCI up till IL is reversed to 0.
• Remaining balance is recognised as an increase in revaluation surplus through OCI in the SCI.
• Reversal is limited to the revalued CA that the asset would have been with no previous IL.

Accumulated Impairment Loss (SFP)
Reversal of Impairment Loss (SFP)
Revaluation Surplus (SFP)

Revaluation Surplus (OCI-SCI)
Revaluation Reserve (SFP)