Question

Topeka Corporation uses special strapping equipment in its packaging business. The equipment was purchased at the beginning of 2010 for $800,000 and had an estimated useful life of 8 years with no salvage value. Topeka uses the straight-line depreciation method.

At the end of 2010, new technology was introduced that would accelerate the obsolescence of the equipment. Topeka’s controller gathered the following information:   

Expected future cash flows	$710,000
Value in use	$675,000
Fair value	$670,000
Selling costs	$20,000

14. Assume Topeka will continue to use the equipment and that it tests the asset for impairment under IFRS. Based on this test, which of the following statements is MOST correct?

	There is no impairment.
	There is an impairment loss in the amount of $25,000

There is an impairment loss in the amount of $35,000

15. Assume Topeka will continue to use the equipment and that it tests the asset for impairment under GAAP. Based on this test, which of the following statements is MOST correct?

	There is no impairment.
	There is an impairment loss in the amount of $25,000

There is an impairment loss in the amount of $35,000

Answer 1

As per IFRS, there is impairment if the carrying value is greater than the recoverable amount. The recoverable amount is the greater of Fair value less selling costs or value in use.

As per the above definition, Carrying value = Original cost - accumulated depreciation = $800,000 - ($800,000/8) = $700,000, Fair value = $670,000, Selling costs = $20,000, Value-in-use = $675,000

Thus fair value - selling costs = $670,000 - $20,000 = $650,000, value-in-use = $675,000

Thus, impairment = $700,000 - $675,000 = $25,000

Thus, there is an impairment loss in the amount of $25,000

As per GAAP, there is a recoverability test to be performed to test for impairment.

This test suggests if the carrying value is greater than the undiscounted future cash flows than the asset is impaired.

As calculated above, Carrying value = $700,000, Undiscounted future cash flows = $710,000.

Since, carrying value is less than the undiscounted cash flow the asset is not impaired.