AFA 717 Lecture Notes - Lecture 9: Discounted Cash Flow, Impaired Asset, Book Value
• Long-lived assets with definite lives
• Review indicators to determine if possible impairment;
• If indicators suggest impairment, perform the test
• Long-lived assets with indefinite lives
• Test annually for impairment even if no factors indicate impairment
• Impairment losses may be reversed except for goodwill
• Impairment loss - the amount that the carrying amount of a cash generating unit (CGU) exceeds
its recoverable amount
• Cash generating unit (CGU) – smallest group of assets that will generate independent cash flows
• Recoverable amount – the higher of fair value less costs of disposal and value-in-use
• Fair value less costs to sell – amount received on sale less costs incurred
• Value-in-use – discounted cash flows from use of asset and disposal
• Identification of an asset or CGU;
• Review of external and internal impairment indicators;
• If required, annual impairment testing, which involves measurement of the recoverable amount;
and
• If impaired, record the impairment loss and allocate the impairment loss to various assets.
• CGU – the lowest level at which a company can identify cash flows for an asset, or a group of
assets
• Liabilities are included in the group only when required to determine the recoverable amount
• i.e. an asset can only be sold when the buyer also assumes the liability – such as a
mortgage or decommissioning obligations
• For a discontinued operations, the impairment test is done on the asset group
• Recoverable amount – the higher of fair value less costs to sell and value in use.
• Fair value less costs to sell – may be obtained from prices in an active market for the long-lived
assets. However, long-lived assets are not often sold and therefore there is no active market.
• Value in use – calculates a value for the CGU using a valuation model. This valuation model is
expected present value, using a probability-weighted discounted cash flow.
• Impairment loss may be allocated
• To a single asset – afterwards the useful life, residual value and depreciation method
should be reviewed
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Document Summary
Long-lived assets with definite lives: review indicators to determine if possible impairment; Test annually for impairment even if no factors indicate impairment. Impairment losses may be reversed except for goodwill. Impairment loss - the amount that the carrying amount of a cash generating unit (cgu) exceeds its recoverable amount. If required, annual impairment testing, which involves measurement of the recoverable amount; If impaired, record the impairment loss and allocate the impairment loss to various assets: cgu the lowest level at which a company can identify cash flows for an asset, or a group of assets. Liabilities are included in the group only when required to determine the recoverable amount i. e. an asset can only be sold when the buyer also assumes the liability such as a mortgage or decommissioning obligations. For a discontinued operations, the impairment test is done on the asset group: recoverable amount the higher of fair value less costs to sell and value in use.
