Impairment of Asset
Impairment loss
asset controlled by an entity will not bring, in whole or in part, expected economic benefits in the future
write-down of the book value of asset to its net selling price or to its fair value
Test asset for impairment
Carrying amount (value) of asset is greater than its recoverable amount
carrying amount - cost of acquisition less accumulated depreciation
recoverable amount is the higher of net selling price and value in use
net selling price is amount at which an asset could be disposed less any direct selling costs
value in use is the present value of future cash flows obtainable as result of asset's continued use (including residual value)
The revised carrying amount is then depreciated over remaining economic life.
Example 1
Test impairment for asset after first year of use.
Cost of acquisition of machine is 102 000 $.
After first year accumulated depreciation is 22 000 $.
Economic life - 10 years.
Residual value is 5 000 $.
Current net selling price 66 000 $.
Direct selling costs 1000 $
Future cash flows 15 000 $ for each year.
Discount rate 5 %.
Example 2
Test impairment for asset after second year of use.
Cost of acquisition of machine is 110 000 $.
Company uses straight-line method to calculate depreciation.
Economic life - 5 years.
Residual value is 10 000 $.
Current selling price 66 000 $.
Direct selling costs 1000 $
Future cash flows 10 000 $ for each year.
Discount rate 5 %.
Depreciation after impairment
Restoration of impairment loss
asset controlled by an entity will bring, in whole or in part, higher (after impairment) expected economic benefits in the future
Example 3
Test impairment for asset after third year of use.
Cost of acquisition of machine is 220 000 $.
Company uses straight-line method to calculate depreciation.
Economic life - 10 years.
Residual value is 20 000 $.
Current selling price 125 000 $.
Direct selling costs 5000 $
Future cash flows 29 500 $ for each year.
Discount rate 5 %.
Depreciation after impairment
After fifth year future cash flows 32 000 $ for each year
Net selling price 125 000 $