Example of Impairment loss entry

Example of Impairment loss entry

There are two kind of accounting treatment may arise i.e. asset are held under historical cost convention and assets are held under revaluation.

1. Historical Cost

Under Historical cost convention the impairment is debited being loss for the business and Fixed  asset is credited. For example plant has a carrying value of 200,000 and it can only be sold in the market for 170,000, then Fixed asset would be reduced by $ 30,000 ($200,000-$170,000).

Date	Particulars	Dr.	Cr.
	Income Statement  (Impairment Loss)	30,000
	Non Current Asset		30,000

2. Revaluation Model

Under the revaluation model the impairment is adjusted initially against the revaluation surplus (if any available) and any excess amount is charged to the impairment. For example if the revaluation surplus is available is $20,000 and asset is being carried at revalued amount of 180,000 and asset can be sold in opening in market is $ 100,000.

The impairment loss is difference between the carrying amount and revocable amount. In this example the impairment loss is 80,000 (180,000- 100,000)

Date	Particulars	Dr.	Cr.
	Revaluation Surplus	20,000
	Income Statement	60,000
	Fixed Assets		80,000

Example of value in use

Example of value in use

Value in use is the present value of future cash flows which expected to be generated from the use of asset. The following example explains the value in use

Future Cash flows	20,000
Expected period of cash flows	3 years
Discount Rate	6%

Calculate the value in use?

Solution

1. Determine the cash flows

2. Apply the discount rate for discounting

3. Add all discounted values

Year	Cash flows	Discount factor	NPV
1	20,000	1/1.06=.95	19,000
2	20,000	1/1.13=.89	17,800
3	20,000	1/1.2 = .84	16,800
Value in use			53,600