impairment GAAP discounted, impaired, bigger, cause

malbec

according to Schweser page 47

We use undiscounted cash flows to detect impairment under GAAP

And we impair down to fair value, or the disccounted cash flows if fair value is not know...

What if fair value is bigger than the undiscounted cash flows. So your test sais it is impaired, but in reality you cant impair to fair value cause you would be valuing up...

What do you do? Leave as is, or impair to discounted cash flows.

kickthatcfa

dude, you on the right forum level?

yodacaia

yup, are you?

b_sea93

Dont think this will be an issue Gulf, I would imagine if there was a question on the exam, they would give you the undiscounted cash flows, and a discount rate, so once you realise there is an impairment from comparing the BV to undiscounted cashflows, you simply subtract the BV from the discounted cash flows.

troymo

^probably right...

but in the real world what would they do...



Edited 1 time(s). Last edit at Wednesday, May 4, 2011 at 01:05PM by gulfcfa.

comp_sci_kid

eh?

if an asset has a market to determine fair value, just use fair value and ignore cash flows.

if there is no market/mechanism to know fair value, approximate it via cash flows to determine impairment.

it doesn't make sense to write-down based on cash flows if the fair value is higher, since, if liquidated, you could just sell the asset for (near and net to) fair value. it's not really impaired at that point.

eoin

^^^ Sounds right

economicz

well they make it clear you should use UNDISCOUNTED cashflows to test for impairment under GAAP.....

so say your undiscounted cash flows sum up to 100 and your bv is 90, the test said it is impaired.

now the next step is to measure the impairment.

the say impair down to fair value or discounted cash flows if no fair value estimate is available...

in the absance of fair value it will always workout cause discounted cash flows are always less than undiscounted cash flows. and thus less than book value since we have already tested that in step one...

when a fair value exists, what if it is greater than undiscounted cash flows? and they tell you to use fair value when it is available....



Edited 1 time(s). Last edit at Wednesday, May 4, 2011 at 01:32PM by gulfcfa.

jacksparrow

Well as the other guy said, if a FV is available then why use discounted cash flows, the only answer to this would be to look up GAAP standards directly and see what they say there

cv4cfa

you already wrote the answer, use UNDISCOUNTED to compare to BV; write down to FAIR VALUE. No less, when fv is available.

If you cannot determine a fair value, then go down to DISCOUNTED cash flows.

not sure why this is hard, unless i'm really missing something.

i agree with ped. if you really think it's worthwhile, look it up; i'm sure it's not worth your time.