Identify four specific issues that the Directors should consider when reviewing the impairment calculations that will...

Identify four specific issues that the Directors should consider when reviewing the impairment calculations that will shortly be prepared by management. For each issue identified, explain how it is specifically relevant.

Expert Solution

Impairment loss is the value by which Carrying Amount(CA) of the Cash Generating Unit(CGU) exceeds the Recoverable Amount(RA).
Recoverable Amount is the higher of Value in Use(VIN) or Net Selling Price(NSP)
Value in use(VIN) is the present value of Cash Flows expected from continuing use and expected disposal proceeds.
Net Selling Price(NSP) = Fair Value-Cost to sell

The four specific issues that the Directors should consider are:

1) Whether the impairment indicators are properly identified by the management.

There are Internal as well as External Indiactors. The Directors should make sure that the Asset is tested for imapirment only if there are indicators,examples are :

Internal Indicators	External Indicators
Damage to asset due to fire, flood etc	Change in Government regulation
Desicion to discontinue operation	Change in technology

2) Assessing or re-assessing cash flows.

Whether proper assessment of Future cash flows with respect to the CGU is done to determine the Value in Use.

Cash flows in the impairment calculation should be reasonable and supportable.

3) Determination of the discount rates.

The discount rates to determine the present value of future cash flows are ascertained properly.

4) Allocation of Goodwill to appropriate CGUs

If there are Goodwill and corporate assets in an entity, check whether such Goodwill and Corporate assets can be allocated to CGUs under consideration.

ekkarill92 answered 1 year ago

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