Question

Principles Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment.

(a) Suppose conditions improve in its markets. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.

(b) Briefly describe how accounting for impairment differs from accounting for revaluation.

(c) Define cash generating units and briefly discuss conceptual arguments for accounting of impaired intangible assets.

Answer 1

Assets are said to be impaired when their net carrying value, (acquisition cost - accumulated depreciation), is greater than the future undiscounted cash flow that these assets can provide and be disposed for.

Under U.S. GAAP impaired assets must be recognized once there is evidence of a lack of recoverability of the net carrying amount. Once impairment has been recognized it cannot be restored.

A capital asset is depreciated based on the carrying cost of the asset. Therefore, if a capital asset is impaired, the periodic amount of depreciation is adjusted. Retroactive changes are not required for fixing the amount of depreciation to record. Only depreciation charges going forward are recalculated based on the impaired asset’s new carrying cost

Impairment and revaluation are terms closely related to one another, with subtle differences. Revaluation and impairment both require the company to evaluate the assets for their fair value, and then take appropriate action in updating the accounting books. The major difference between the two is that a revaluation can be made upwards (to increase the value of the asset to market value) or downwards (to ecrease the value). An impairment, on the other hand, only refers to one of the two; a fall in the market value which is then written down.

The CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets

Current U.S. GAAP requires that goodwill of a reporting unit be tested for

impairment at least annually or more frequently if certain conditions exist. An

entity can choose to either perform a qualitative assessment to determine

whether it is more likely than not that a reporting unit’s fair value is less than its

carrying amount, or proceed directly to step one of the impairment test, which is

to compare the carrying amount of the reporting unit with its fair value. If its

carrying amount exceeds its fair value, the entity must determine the extent of

goodwill impairment, if any. In calculating the amount of the impairment, an entity

must compare the implied fair value of the reporting unit’s goodwill with its

carrying amount. That necessitates performing a hypothetical application of the

acquisition method to determine the implied fair value of goodwill after measuring

the reporting unit’s identifiable assets and liabilities

Note-

Best effort have been made to answer the question correctly, in case of any discrepencies kindly comment and i will try to resolve it as soon as possible.

Please provide positive feedback.