Page 132 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Chapter 6

Example 2

At 31 December 20X5, HKM had a non-current asset which had cost $15,000
and on which accumulated depreciation was $10,000. Information collated for
an impairment review at that date identified that its fair value was $4,900 and
costs to sell were $600. The value in use of the non-current asset was $4,800.

Required:

What was the extent of impairment recognised in HKM’s financial
statements at 31 December 20X5?

Example 2: Solution

$200 impairment.

An asset should be stated at the lower of carrying amount or its recoverable
amount, where recoverable amount is the higher of either value in use or fair
value less costs to sell.

Carrying amount = $5,000 ($15,000 – $10,000).

Recoverable amount is the higher of either:

 fair value less costs to sell of $4,300 ($4,900 – $600) or

 value in use of $4,800.

Therefore the recoverable amount is $4,800.

Finally, compare the carrying amount of $5,000 with recoverable amount of
$4,800. As carrying amount exceeds recoverable amount, there is impairment
of $200.

This should be accounted for as follows:

Debit Impairment charge $200
Accumulated depreciation and impairment
Credit $200
charges

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