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Impairment of assets (Assessing recoverable amount (Examples of costs of…
Impairment of assets
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Indicators of impairment
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Dividend from a subsidiary, joint venture or associate
The carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets
The dividend exceeds the total comprehensive income of the subsidiary, joint venture or associated in the period the dividend is declared
Value in use
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The standard places restrictions and rules on many of the input in order to ensure a prudent calculation is carried out. Even then a great deal of judgement if often required. The estimates of future cash flows will include
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Projections of cash outflows incurred to generate the cash inflows from the continuing use of the asset
Net cash flows, if any, to be received or paid for the disposal of the asset at the end of its useful life
Disclosures
Where impairments have occurred there are substantial disclosure requirements, particularly in relation to the inputs into the calculation of value in use and how fair value has been derived (i.e observable market prices)
Where an asset is acquired and used in a business, it is important to know that the business will get sufficient value from using the asset such that its cost will be recovered
To the extent that future profits and cash flows are not sufficient to recompense for the remaining carrying value of the asset at any particular point in time, accounting standards require impairment charges to be made
IAS 36 Impairment of Assets deals with these issues for both individual assets and also for assets, including purchased goodwill relating to acquired businesses.
The objective of IAS 36 is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount
An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset, if this is the case the asset is described at impaired and the standard requires the entity to recognise an impairment loss
IAS 36 only requires an entity to consider whether an asset is impaired if there are indicators of impairment, if this were not the case it would be very onerous to test each asset for impairment every accounting period. Where there are indicators, the entity must estimate the recoverable about