CFA Level IFinancial Statement AnalysisHard
Under IFRS, a company's equipment has a carrying amount of $500,000. Its fair value less costs to sell is $420,000, and its value in use is $450,000. What impairment loss, if any, should be recognized?
- A$130,000, based on the lower of the two amounts subtracted from carrying value
- B$50,000, based on the recoverable amount of $450,000
- C$80,000, based on the recoverable amount of $420,000
- D$0, because value in use exceeds fair value less costs to sell
Show answer & explanationAnswer & explanation
Correct answer: B. $50,000, based on the recoverable amount of $450,000
Under IFRS, the recoverable amount is the higher of fair value less costs to sell ($420,000) and value in use ($450,000), which is $450,000. Impairment loss = Carrying amount − Recoverable amount = 500,000 − 450,000 = $50,000.
Why the other options are wrong
- A. Incorrect — this incorrectly subtracts the lower amount rather than the higher recoverable amount.
- C. Incorrect — this incorrectly uses the lower value as the recoverable amount.
- D. Incorrect — the carrying amount exceeds the recoverable amount, so an impairment must be recognized.
IFRS Impairment Test (Recoverable Amount)
Under IFRS, an asset is impaired when its carrying amount exceeds its recoverable amount, defined as the higher of fair value less costs to sell and value in use.
- Recoverable amount = higher of FV less costs to sell and value in use
- Impairment loss = Carrying amount − Recoverable amount
- IFRS impairments can be reversed (except for goodwill); US GAAP impairments generally cannot
Memory trick: Recover the HIGHER value, then subtract from carrying amount