Case The company controller, Barry Melrose, has asked for your help in interpret
ID: 2601560 • Letter: C
Question
Case The company controller, Barry Melrose, has asked for your help in interpreting the au cation; intangible assets. "We have a significant vant of our divisions is currently considering disposing of a large group of depreciable assets. ature that addresses the recognition and measurement of impairment losses for property. P amount of goodwill on our books from last year's acquisition of Chur chill Corporation. Also, I think we may have a problem with the assets of some of our factories outW Your task as assistant controller is to research the issue. and ative Required: lant, and equip- 1. Obtain the relevant authoritative literature on accounting for the impairment of property, p at the ment and intangible assets using the FASB Accounting Standards Codification. You might gain access plant, and mnt FASB website (www.fasb.org). Cite the reference locations regarding impairment of property plant, ent le equipment and intangible assets n should property, plant, and equipment and finite-life intangible assets be tested for impairment? 2. When he process for measuring an impairment loss for property, plant, and equipment and finite-life intan- gible assets to be held and used. t are the specific criteria that must be met for an asset or asset group to be classified as held-for-sale? What is the specific citation reference from the FASB Accounting Standards Codification that contains these 5. Explain the process for measuring an impairment loss for property, plant, and equipment and finite-life intan- At the beginning of 2016, the Healthy Life Food Company purchased equipment for $42 million to be used in the 4. Wha criteria? gible assets classified as held-for-sale. frozon fonds The enuinment was estimated to have a 10-year service lifeExplanation / Answer
Impairmnet :
In the United States, assets are considered impaired when net carrying value (book value) exceeds expected future cash flows. This means that a business spent money on an asset, but changing circumstances cause the purchase to be a net loss. Several acceptable testing methods can identify impaired assets. If the impairment is permanent, the company should use an allowable method for measuring impairment loss to be recognized in the financial statements.
Impairment recognition and measurement is jointly regulated by the Internal Revenue Service, the Financial Accounting Standards Board and the Governmental Accounting Standards Board.
2. When should property, plant & equipment be tested for impairment :
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). Standards has given a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated.
External sources:
Internal sources:
3. Process of measuring impairment of property:
The first step is to identify the factors that lead to the asset's impairment. Some factors may include changes in market conditions, new legislation or regulatory enforcement, turnover in the workforce or decreased asset functionality due to aging. In some circumstances, the asset itself may be functioning as well as ever, but new technology or new techniques may cause the fair market value of the asset to drop significantly.
Fair market calculation is key; asset impairment cannot be recognized without a good approximation of fair market value. Fair market value is the price the asset would fetch if it was sold on the market. This is sometimes described as the future cash flow the asset would expect to generate in continued business operations. Another term for this value is "recoverable amount." Once the fair market value is assigned, it is then compared to the carrying value of the asset as represented on the business' financial statements. Carrying value does not need to be recalculated at this time since it exists in previous accounting records. If the calculated costs of holding the asset exceed the calculated fair market value, the asset is considered to be impaired. If the asset in question is going to be disposed of, the costs associated with the disposal must be added back into the net of the future net value less the carrying value.
Impairment losses are either recognized through the cost model or the revaluation model, depending on whether the debited amount was changed through the new, adjusted fair market valuation described above. Even when impairment results in a small tax benefit for the company, the realization of impairment is bad for the company as a whole. It usually represents the need for an increased investment.
4. Specific criteria for classification as held for sale.
In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale
The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned).
An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale classification under IFRS 5 classifies all of the assets and liabilities of that subsidiary as held for sale, even if the entity will retain a non-controlling interest in its former subsidiary after the sale.
5.Measurement :
Immediately before you classify an asset as held for sale, you should measure it under applicable IFRS. For example, you would measure an item of property, plant and equipment under IAS 16.
Subsequently, after you classified an asset as held for sale, you should measure it at lower of its carrying amount and fair value less costs to sell (except for measurement exceptions listed above).
Impairment
With regard to any impairment, immediately before classification as held for sale, the impairment is recognized in line with the applicable IFRSs, for example, under IAS 36 for property, plant and equipment.
In this case, you would recognize any impairment loss in profit or loss, but sometimes also in other comprehensive income – that’s when you apply revaluation model for your property, plant and equipment and you have a revaluation surplus to decrease.
After you classify an asset as held for sale, you would recognize any impairment loss in profit or loss only.