impairment of asset

[kamranACA]

Dear Sohail,

I personally don't like to answer such questions because these are more of an academic nature than the professional one. Further, in so many of such easier questions, I see a reflection of meager effort put in by the questioning person/student for finding out the solutions, which is not a good trend. Students must apply their knowledge to find the solutions and ask only those questions which are totally not resolvable by them.

Anyway, it is my personal feeling and may not be matching with the thought of others. At the moment, I give hereunder relevant provisions of IAS-36 "Impairment of Assets" which throw sufficient light on how you can get to the solution of this question. Read these paragraphs conceptually, apply them to your question and get the solution. If still it does not work then again come back. These relevant paragraphs of IAS 36 are given below

QUOTE

Measuring recoverable amount

18 This Standard (IAS 36) defines recoverable amount as the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use. Paragraphs 19–57 set out the requirements for measuring recoverable amount. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit.


19 It is not always necessary to determine both an asset’s fair value less costs to sell and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount


Fair value less costs to sell

25 The best evidence of an asset’s fair value less costs to sell is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset.


26 If there is no binding sale agreement but an asset is traded in an active market, fair value less costs to sell is the asset’s market price less the costs of disposal. The appropriate market price is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate fair value less costs to sell, provided that there has not been a significant change in economic circumstances between the transaction date and the date as at which the estimate is made.

27 If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available to reflect the amount that an entity could obtain, at the end of the reporting period, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an entity considers the outcome of recent transactions for similar assets within the same industry. Fair value less costs to sell does not reflect a forced sale, unless management is compelled to sell immediately.

28 Costs of disposal, other than those that have been recognised as liabilities, are deducted in determining fair value less costs to sell. Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in IAS 19) and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset.

29 Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs to sell is available for both the asset and the liability. Paragraph 78 explains how to deal with such cases.


Value in use

30 The following elements shall be reflected in the calculation of an asset’s value in use

(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows;

(c) the time value of money, represented by the current market risk-free rate of interest;

(d) the price for bearing the uncertainty inherent in the asset; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

31 Estimating the value in use of an asset involves the following steps

(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and

(b) applying the appropriate discount rate to those future cash flows.

32 The elements identified in paragraph 30 (b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, ie the weighted average of all possible outcomes. Appendix A provides additional guidance on the use of present value techniques in measuring an asset’s value in use.


UNQUOTE


Apart from the above paragraphs which I feel relevant to your question, I also recommend you to study the whole text of IAS 36 to understand the Impairment issue conceptually.

Please inform me on this forum, if your question is still not resolved.


Regards,



KAMRAN.