It would be unusual for a company to have an asset impairment in Year 1, but...

It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC determined

that their intangible asset might be impaired on December 31, 2016. Record the impairment adjustment, if any.

The expected future undiscounted net cash flows for this intangible asset totals $48,000, and the fair value of the asset is $45,000.

This is all the teacher provided for the problem.

Expert Solution

In the given problem, book value of the asset is missing which we can assume here $50,000 slightly higher than future cash flows.

The impairment loss is recognised when the carrying value (i.e. book value) is higher than the 'value in use' from the asset. It is the difference of carrying amount and value in use from the asset. The value is use from the asset is measured as higher of undiscounted future cash flow from the asset and the fair value (i.e. market value) of the asset. It is assumed that the future cash flows from the use of asset shall be risk free hence the future cash flows are not discounted.

Now, first we shall calculate the impairment loss:

Particulars	Amount ($)
Undiscounted estimated future net cash flows	48,000
Fair value	45,000
Value in use from the asset (higher of above two)	48,000
Carrying amount (book value) of the asset (assumed equal to the fair value)	50,000
Impairment loss (Since Carrying amount is higher than value in use)	2,000

Now in second step, we shall record the impairment:

Particulars	Debit	Credit
Loss on impairment	$ 2,000
Intanguble asset		$ 2,000

ekkarill92 answered 1 year ago

would manager prefer recognizing asset impairment loss? Why?

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