Qns on testing for impairment in afternoon 2011 mock exam 2011, 2010, statements, afternoon, equipment

rosewhite

This is a question from the cfa afternoon mock exam for 2011. Below is the qns:

A Canadian printing company which prepares its financial statements according to IFRS has experienced a decline in the demand for its products. The following information relates to the company’s printing equipment as of 31 December 2010.

Carrying value of equipment (net book value): 500,000
Undiscounted expected future cash flows: 550,000
Present value of expected future cash flows: 450,000
Fair Value: 480,000
Costs to sell: 50,000
Value in use: 440,000

The impairment loss (in C$) is closest to:
A. 0.
B. 60,000.
C. 70,000.
Answer = B

The answer from the mock exam is B. Based on this question, there think there are some answers conflicts. Any experts who read this question, please kindly correct me if I'm wrong.

The net book value is $500,000.
The un-discounted expected future cash flows: $550,000
Since the un-discounted cash flows: $550,000 is more than net book value: $500,000, the testing of the asset is not impaired. (Net book value > un-discounted cash flows)

I just want to know if my method is correct. I have attempted a lot of questions and there are some questions test impairment by using the un-discounted cash flows. If it is impaired, the asset carrying value (-) present value of the cash flows.

Any different views? Thanks
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This is the answer explanation from the mock exam:

Under IFRS, an asset is considered to be impaired when its carrying amount exceeds its recoverable amount (the higher of fair value less cost to sell or value in use).
Fair value less costs to sell: 480,000 – 50,000 = 430,000
Value in use = 440,000
Recoverable amount (higher value) = 440,000
Impairment loss under IFRS = Carrying value – recoverable amount = 500,000 – 440,000 = 60,000

farrukhsadiq

Kiakaha, you need to write down the asset to FV if it's given or ViU if the FV is unknown.

rkapoor

I am confused about this question too -- but for a different reason.

In the Elan guides it says that an asset is impaired under IFRS when its carrying amount is more than the higher of (fair value - costs to sell) and "value in use", where value in use means the discounted value of future cash flows expected from the asset.

but in the question they give you a figure for "value in use" AND a different figure for the present value of cash flows.

Should I assume from this that if you're given "value in use", you use that, and if not, you use the present value?

-- vitalstrike, you are getting confused between IFRS and GAAP -- undiscounted cash flows are considered under GAAP only. IFRS looks at the higher of (fair value - costs to sell) and "value in use", as written above.

Mechanic

Under IFRS it's impaired if the Book Value>recoverable cost ( value in use or FV less selling cost-whichever is greater). Since ViU ($440)>FV less selling cost ($430)=>Loss=500-440=60

dcfox83

US GAAP requires Testing for impairment using un-discounted cashflows and then measuring the impairment loss using the discounted cf/fair value.. For IFRS, you use the recoverable amount to test for impairment AND measure the loss. Hope this helps!