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Chapter 4

Example 1

Impairment

A company owns a machine that is damaged as a result of a fork-lift truck
reversing into it. The machine has a carrying amount of $42,000 at the date
of the accident. The damaged machine could be sold for $15,000, but if the
company continues to use the asset it will generate cash flows with a present
value of $19,000.

How will this be reflected within the financial statements?

Solution

First calculate the recoverable amount. This is the higher of the fair value
less costs to sell (taken here as potential sale proceeds of $15,000) and the
value in use (the present value of cash flows of $19,000). The recoverable
amount is therefore $19,000, which is less than the carrying amount of
$42,000 and the value of the machine is thus impaired.

The impairment is calculated by deducting the recoverable amount of $19,000
from the carrying amount of $42,000 to give an impairment of $23,000.

The value of the machine is reduced to $19,000 and the impairment is
charged as an expense in the statement of profit or loss.

Illustrations and further practice

Now try TYU questions 1 and 2 from Chapter 4 of the Study Text.

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