REVALUATION AND IMPAIRMENT

Measurement of Recoverable Amount

 It is the higher of an asset’s or cash generating unit’s fair value less costs to sell and value in
use.

Fair Value less Costs to Sell

 The best evidence of an asset’s fair value less costs to sell is a price in a binding agreement
in an arm’s length transaction, adjusted for incremental costs that would directly be
attributable to the disposal of the asset.
 If there is no binding sale agreement but an asset is traded in an active market, fair value
less costs to sell is the asset’s market price less costs of disposal. The aggregate market
price is usually the current bid price. When current bid prices are unavailable, the price of
the recent transaction may provide a reasonable basis.
 If there is no binding sale agreement or active market for an asset, fair value less costs to
sell is based on the best information available to reflect the amount that an entity could
obtain, at the balance sheet date, for the disposal of the asset in arm’s length transaction
between knowledgeable willing parties, after deducting the costs of disposal.

Value in Use - The following elements shall be reflected in the calculation of an asset’s value in use:
a. an estimate of the future cash flows the entity expects to derive from the asset;
b. expectations about possible variations in the amount or timing of those future cash flows;
c. the time value of money, represented by the current market risk-free rate of interest;
d. the price for bearing the uncertainty inherent in the asset; and
e. other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset.
Estimating the value in use of an asset involves the following steps:
1. estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal
2. applying the appropriate discount rate to these future cash flows.

Recognizing and Measuring an Impairment Loss. If, and only, if the recoverable amount of an asset is
less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable
amount. That reduction is an impairment loss.
After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any),
on a systematic basis over its remaining useful life.

Timing of Impairment Assets. The annual impairment test for a cash-generating unit to which goodwill
has been allocated may be performed at any time during an annual period, provided the test is
performed at the same time every year.

Impairment Loss for a Cash-Generating Unit

 An impairment loss shall be recognized for a cash generating unit (the smallest group of cash
generating units to which goodwill or a corporate asset has been allocated) if, and only if, the
recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of
units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit
(group of units) in the following order:
 a. first, to reduce the carrying amount of goodwill allocated to the cash generating unit (group of
units); and
b. then, the other assets of the unit (group of units) pro rata on the basis of the carrying amount of
each asset in the unit (group of units).
 In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below
the highest of:
a. its fair value less costs to sell (if determinable);
b. its value in use (if determinable); and
c. zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to other assets of the unit (group of units).

Reversal of an Impairment Loss. An entity shall assess at each reporting date whether there is an
indication that an impairment loss recognized in prior periods for an asset other than goodwill may no
longer exist or may have decreased. If any such indication exists, the entity shall estimate the
recoverable amount of that asset.
An impairment loss recognized in prior periods for an asset other than goodwill should be reversed if,
and only if, there has been a changed in the estimates used to determine the asset’s recoverable
amount since the last impairment loss was recognized.

Reversing an Impairment Loss for an Individual Asset. The increased carrying amount of an asset other
than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that
would have been determined (net of amortization or depreciation) had no impairment loss has been
recognized for the asset in prior years.
After a reversal of an impairment loss is recognized, the depreciation or (amortization) charge for the
asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual
value (if any), on a systematic basis over its remaining useful life.

Recovering an Impairment Loss for a Cash-Generating Unit. A reversal of an impairment loss for a cash-
generating unit shall be allocated to the assets of the unit, except for goodwill, pro rata with the carrying
amounts of those assets. These increases in carrying amounts shall be treated as reversals of
impairment losses for individual assets

Reversing an Impairment Loss for Goodwill. An impairment loss recognized for goodwill shall not be
reversed in a subsequent period. Any increase in the recoverable amount of goodwill in the periods
following the recognition of an impairment loss for that goodwill is likely to be an increase in internally
generated goodwill rather than a reversal of the impairment loss recognized for the acquired goodwill.

Disclosure. An entity shall disclose the following for each class of assets:
a. the amount of impairment losses recognized in profit or loss during the period and the line
item(s) of the income statement in which those impairment losses are included.
b. The mount of reversals of impairment losses recognized in profit or loss during the period and
the line item(s) of the income statement in which those impairment losses are reversed.
An entity that reports segment information shall disclose the following for each reportable segment
based on an entity’s primary reporting format:
a. the amount of impairment losses recognized in profit or loss and directly in equity during the
period.
 b. the amount of reversals of impairment losses recognized in profit or loss and directly in equity
during the period.
THEORIES
1. Which of the following impairment losses should never be reversed?
a. Loss on property, plant and equipment c. Loss on inventory
b. Loss on a business segment d. Loss on goodwill
2. When allocating an impairment loss, such a loss should reduce the carrying amount of which
asset first?
a. Property, plant and equipment c. Goodwill
b. Intangible assets d. Current assets
3. A cash-generating unit (CGU) is
a. the smallest business segment
b. any grouping of assets that generates cash flows
c. any group of assets that is reported separately to management
d. the smallest group of assets that generates independent cash flows from continuing use
4. An impairment of asset is generally recorded by debiting impairment loss and crediting:
a. Accumulated Impairment c. Revaluation Surplus
b. Accumulated Depreciation d. Retained Earnings
5. The value in use (VIU) of an asset is equal to the
a. Discounted future pre-tax net cash flows from the use of the asset
b. Discounted future after-tax net cash flows from the use of the asset
c. Discounted future pre-tax net cash flows from the use and eventual disposal of the asset
d. Discounted future after-tax net cash flows from the use and eventual disposal of the
asset
6. The “cost to sell” shall not include
a. Legal costs b. Transaction taxes c. Removal costs d. Financing charges
7. The best evidence of an asset’s fair value less cost to sell is
a. The fair value in an active market c. The sales price in a binding sales agreement
b. The carrying value of the asset d. The best estimate of knowledgeable parties
8. A property’s recoverable amount is equal to its
I. Fair value less cost to sell II. Value in Use (VIU)
a. I only b. II only c. I or II, whichever is higher d. I or II, whichever is lower
9. Which of the following is not an indication of possible asset impairment?
a. Significant decrease or decline in the market value of an asset
b. Evidence of obsolescence or physical damage of an asset
c. Evidence that the economic performance of an asset will be worse than expected
d. The use of accelerated method of depreciation of the asset
10. Due to decline in market value, the recoverable amount of an asset is less than its carrying
value. The asset is said to be
a. Impaired b. Depreciated c. Appraised d. Amortized
11. If a revalued property is sold or otherwise disposed, the related revaluation surplus is directly
transferred to
a. Revaluation gain c. Additional paid-in capital
b. Retained earnings d. Accumulated depreciation
12. A revaluation increase shall be recognized as income
a. Always
b. When the asset is revalued for the first time
c. When the asset is revalued frequently
 d. When it reverses a revaluation decrease of the same asset previously recognized as
expense
13. The carrying amount of a property is decreased as a result of revaluation. Assuming no
revaluation was made before, the decrease should be debited to
a. Accumulated depreciation
b. Revaluation or impairment loss
c. Revaluation surplus, shown as component of the equity reserve
d. Retained earnings, shown under equity section of the balance sheet
14. The carrying amount of a property increased as a result of revaluation. Assuming no revaluation
was made before, the increase should be credited to
a. accumulated depreciation
b. revaluation gain, shown as component of income
c. revaluation surplus, shown as component of the equity reserve
d. retained earnings, shown under equity section of the balance sheet
15. It is the replacement cost minus the accumulated depreciation per revaluation
a. appreciation c. net book value
b. appraised value d. depreciated replacement cost
16. It is the excess of the sound value over the net book value
a. revaluation surplus c. observed depreciation
b. revaluation increase d. impairment in value
17. It is the excess of replacement cost over the historical cost
a. net book value b. sound value c. appreciation d. net appreciation
18. It is the revalued amount of the property, plant and equipment where fair value is not available
a. replacement cost (appraised value)
b. depreciated replacement cost (sound value)
c. appreciation (appraisal increase)
d. revaluation surplus (revaluation increment)
19. Statement I: PPE is carried, under the revaluation model, at Revalued amount, being the fair
value at the date of revaluation less any subsequent accumulated depreciation and impairment
loss.
Statement II: PPE revaluation is made with sufficient regularity such that the carrying amount
does not differ materially from fair value on the balance sheet date.
Statement III: When an item of PPE is revalued, the entire class of PPE to which the asset
belongs should be revalued.
a. true, true, true c. true, false, false
b. true, false, true d. false, false, false
20. Which statement is correct about the carrying amount of a depreciable item of PPE after an
impairment loss has been recognized?
I. The reduced carrying amount of the asset may be increased in subsequent years if the
impairment loss has been recovered.
II. The reduced carrying amount of the asset represents the amount that should be depreciated
over the asset’s remaining useful life.
a. I only b. II only c. Both I and II d. Neither I nor II
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