A company must write its fixed assets down if the carrying value of the assets is not recoverable. To determine if the carrying value of an asset or asset group is recoverable, the company compares the carrying amount of the asset or asset group with the sum of the estimated undiscounted future cash flows . if the future undiscounted cash flow is greater than the Book value the asset is not impaired and no adjustment needs to be made.
If the future undiscounted cash flow is less then the Carrying value of Asset, then the Assets is impaired. The asset need to be written down to its Fair Value. IF Fair value is not available than you can used the discounted Future cash flow to written down the value of Asset.
Eg. A company has as Asset of 20,000 with Accumulated Depreciation 11,000 and the Fair value of Asset is 7,000
a) Future undiscounted cash flow 10,000 b ) Future undiscounted cash flow 8,000
Solution : – a ) Carrying Value of Asset 9,000 ( 20,000-11,000) we will compare it with the Future undiscounted Cash flow that is 10,000 , here the future undiscounted cash flow is more then the Carrying Value of Asset , which means that the Asset is not impaired
b) Carrying value of Asset 9,000 ( 20,000-11,000) , we will compare it with the future undiscounted Cash flow that is 8,000, here the future undiscounted cash flow is less then the Carrying value of Asset , which means that the asset is impaired. Now, we will see if the Fair value of the Asset is available in this problem they have given us the Fair Value of Asset that is 7,000 , hence we have to write down the asset by 2,000/- up to it Fair Value
Impairment loss 2000
Accumulated Depreciation 2000
Note : When fair value of Asset and Discounted cash flow both are given , we have to always take Fair value of Asset to write in down.
Under US GAAP Impairment loss is not reverse.
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