Question

In: Accounting

Information related to equipment owned by Brownfield Company follows: Original cost $900,000 Accumulated depreciation to date...

Information related to equipment owned by Brownfield Company follows:

Original cost $900,000

Accumulated depreciation to date $100,000

Expected future cash flows $825,000

Fair value $790,000

Value in use $785,000

Selling costs $30,000

Assuming Brownfield will continue to use the equipment, test the asset for impairment under both IFRS and U.S. GAAP and discuss the results.

Expert Solution

Impairment loss on assert under GAAP is computed as follows-

Step 1: Compare the book value and fair value of the asset if book value exceeds the fair value then asset should be impaired.

Book value of the asset = Original cost - Accumulated depreciation

= $900,000 - $100,000

= $800,000

Expected future cash flows = $825,000

Since, book value of the asset is less than the expected future cash flows, therefore asset will not get impaired.

Impairment under IFRS is computed as follows-

Under IFRS asset is impaired when the book value of the asset exceeds the higher of value in use or fair value adjusted to the cost of disposal.

Book value of the asset = $800,000

Value in use = $785,000

Fair value adjusted to the cost of disposal = Fair value - Cost of disposal

= $790,000 - $30,000

= $760,000

Impairment loss = Book value - Value in use

= $800,000 - $785,000

= $15,000

Under GAAP method the given asset is not impaired but under IFRS method generally assets get impaired earlier than the GAAP method.

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