Example of value in use and impairment loss

Example of value in use and impairment loss

Expected Future Cash flows	20,000
Period of cash flows	2 years
Rate (for Discounting)	10%
Cost of asset purchased 2 year back	60,000
Depreciation Rate	10% straight line

Calculate the value in use?

Solution

Rule for solving example

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

Step 1 Calculate value in use

1. Determine the expected cash flows

2. Discount the cash flow using discount rate

3. All discounted values

Year	Cash flows	Discount factor	NPV
1	20,000	1/1.1= .91	18,200
2	20,000	1/1.21=.83	16,600
Value in use			34,800

Step 2 calculate carrying value

Cost	60,000
Less: Depreciation 2 years	(12,000)
Carrying value	48,000

 Step 3 Compare carrying value and value in use

Carrying value	Value in use	Difference
48,000	34,800	13,200

Carrying value is exceeding the value in use by 13,200 that is impairment loss.