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Ida's Impairment

An IFRS case
by

Sean Crabtree

on 4 October 2012

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Transcript of Ida's Impairment

If the carrying amount of the building exceeds its recoverable amount, an impairment loss shall be measured. (4,500>4,000) [IAS 36-8]
Recoverable amount – the higher of fair market value less cost to sell OR value in use. (3,800; 4,000, respectively)
An impairment loss shall be measured as the amount that the carrying amount exceeds its recoverable amount. (4,500-4,000=500) Answer A reversal of impairment loss on a revalued asset is recognized is an increase in the revaluation surplus account. However, we can only recognized the reversal of an impairment loss as profit to the extent of that we recognized a loss on the initial impairment. [IAS 36-119&120]
PPE 1,299,894
Land 81,106
Revaluation Surplus 1,281,000
Gain on revaluation 100,000 Answer (a) According to FASB 350-20-35-13, GAAP does not allow the reversal of a goodwill impairment.
(b) According to IAS 36-122&123, a goodwill impairment loss cannot be reversed in a subsequent period. However, the remaining impairment shall be allocated pro rata to the rest of the assets.
Cash $50
PPE 2,905
Less: Acc. Depr. (581) (2,905/5yrs) 2,324
Land 145
Total Assets $2,519
Liabilities (1300)
Carrying Value $1,219 Answer 5. Assume that during 2011, the effects of the export loss on Ida’s Spanish operations are less dramatic than initially expected by management.
Management estimates that the recoverable amount of its Spanish operations CGU/reporting unit will increase to $2.6 million.
On the basis of this information and the information from question (4), calculate the reversal of loss, if any, and the carrying value as of Dec. 31, 2011, under (1) U.S. GAAP and (2) IFRS.
The remaining useful life of PPE is 5 years at the beginning of 2011. Assume that there have been no other changes in the carrying value of other assets or liabilities during 2011. Question

Loss on impairment-CGU 400,000
Goodwill 300,000
PPE 95,238
Land 4,762 Answers According to IAS 36-104 & 105, an impairment loss shall be recognized if the recoverable amount is less than the carrying amount. (1,800<2,200)
The impairment loss amount is first allocated to goodwill.
Any remaining loss amount is allocated to assets pro rate on the basis of the carrying amount of each asset. Answers 4. (b) On the basis of the information provided, under IFRS, is goodwill associated with the Spanish operations impaired as of Dec. 31, 2010? If so, determine the impairment loss and the new carrying value of the assets and CGU under IFRS.

Value in use: $1.8 million
Fair value: 2.1 million
Cost to sell: 400,000 Questions
The amount of the impairment is the carrying amount of goodwill less implied fair value:
(300,000-100,000)=200,000

Loss on Impairment-Goodwill 200,000
Goodwill 200,000 Answer 4. (a) On the basis of the information provided, under U.S. GAAP, is goodwill associated with the Spanish operations impaired as of Dec. 31, 2010? If so, determine the impairment loss. Questions Possible journal entries:
Loss on impairment 500,000
Accumulated impairment loss 500,000
Loss on impairment 500,000
Equipment 500,000
OR
Revaluation Surplus 500,000
Equipment 500,000

[IAS 36- Answer 3. If a recoverability test is needed under IFRS, what amount of impairment (If any) should Ida record on the U.S. commercial building when reporting to its parent as of Dec. 31, 2010? Questions If the carrying amount of the building exceeds its undiscounted future cash flows, an impairment loss shall be measured. (4,500>4,200)
An impairment loss shall be measured as the amount that the carrying amount exceeds its fair value. (4,500-3,900=600) [FASB 360-10-35-17]
Loss on impairment-building 600,000
Accumulated Depr.-building 600,000 Answer According to the Financial Accounting Standards Board (FASB), a long-lived asset shall be tested for recoverability whenever there is a significant decrease in its market price. (360-10-35-21)
According the International Accounting Standards (IAS), in assessing whether there is any indication that an asset may be impaired, an entity shall consider during the period if an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use. (36-12a)
For both U.S. GAAP & IFRS, Ida should test for recoverability. Answer 1. As of December 31, 2010, does Ida need to test the U.S. commercial building for recoverability under (1) U.S. GAAP and (2) IFRSs? Questions At the end of 2010, the newly elected government passed legislation significantly restricting exports of Ida’s main product.
External industry reports a stagnant growth rate and production decreases.
Due to the legislation and the stagnant growth, Ida must estimate its recoverable amounts from impairment indicators. Recent Legislation Located in the U.S.
Long-lived asset
Under IFRS, the building is a cash generating unit (CGU).
CGU- The smallest group of assets that independently generate cash flow.
A competitor recently sold a similar building for significantly less than its asking price. Building Ida, Inc. is a manufacturing company in the U.S. that is a subsidiary of a U.K. entity.
It has operations in both the U.S. and Spain.
Our concern is a commercial building (2010) and a smaller Spanish company (2008) that was acquired.
Both are subject to impairment tests for the year ended December 31, 2010.
Remaining useful life of assets is 6 years at Jan. 1, 2010. Ida uses straight-line depreciation and anticipates no residual value.
We are testing for both IFRS and U.S. GAAP. Background By: Sean Crabtree
Andrew Falcon
Justin Rodriquez
Savannah Yohannes Case 10-2
Ida’s Impairment Pro rata carrying value to the assets:
2011 Recoverable amount: 2,600
Less: 2011 Carrying Value 1,219
Remaining amount: 1,381 Answer Carrying amount 2,200
Value In use 1,800
Total Impairment 400
Amount allocated to goodwill: 300
Remaining amount: 100 Answers 2. If a recoverability test is needed under U.S. GAAP, what amount of impairment (If any) should Ida record on the U.S. commercial building when reporting to its U.S. based lender as of Dec. 31, 2010? Questions * Implied Fair Value According to FASB 350-20-35-2, impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Answer
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