Example of Impairment Loss

Example of Impairment Loss

	Carrying Value	Fair value	Cost of Sell	Value in use
Plant	150,000	140,000	10,000	120,000
Machinery	180,000	150,000	30,000	140,000

Calculate the impairment loss

Solution

Rule for solving example

Impairment loss arises when the carrying amount of asset exceeds the recoverable amount i.e. higher of fair value less cost of sell and value in use.   

Step 1 Find value in use

1. Determine the expected cash flows

2. Discount the cash flow using discount rate

3. All discounted values

In this example the value is use is given and need not to calculate

Assets	Value in use
Plant	120,000
Machinery	140,000

Step 2 calculate Fair value

The net fair value is calculated by deducting cost of sale of asset from its fair value.

Assets	Fair value	Cost of sell	Net Fair value
Plant	140,000	10,000	130,000
Machinery	150,000	30,000	120,000

 Step 3 find Recoverable amount

Assets	Net Fair Value	Value in use	Recoverable Amount
Plant	130,000	120,000	130,000
Machinery	120,000	140,000	140,000

Steps 4 compare the recoverable amount with carrying amount

Impairment loss is amount by which carrying amount exceeds the recoverable amount and is calculated by subtracting the recoverable amount from the carrying amount of asset.

Assets	Carrying Value	Recoverable Amount	Impairment loss
Plant	150,000	130,000	20,000
Machinery	180,000	140,000	40,000