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CFA Level 1 Question of the Week - Financial Reporting and Analysis

Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 141 Associate
edited April 2017 in Level 1 Questions
An accountant is analyzing the statements of a Belgian firm. The information regarding its ice cream plant is given below: 

Book value of the plant:$400,000
Accumulated depreciation:$25,000
Fair value:$370,000
Selling cost:$15,000
Value in use:$360,000
Expected future cash flow:$350,000

If the Belgian firm reports under IFRS, the amount of the impairment loss is closest to:

CFA Level 1 Question of the Week - Financial Reporting and Analysis 6 votes

A. $15,000
50% 3 votes
B. $25,000
50% 3 votes
C. $40,000
0% 0 votes

Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 141 Associate
    The correct answer is A.

    Under IFRS, an asset is impaired if its carrying value exceeds the recoverable value of the asset and the recoverable value of the asset is greater than the Value in use or Fair value minus Selling cost.

    In our example, the carrying value of the asset is $400,000 (Book value) - $25,000 (Acc. Dep.) = $375,000.

    Since the Carrying value ($375,000) is above the Recoverable value ($360,000), which is greater than the Value in use ($360,000) or Fair value minus Selling cost ($370,000 - $15,000 = $355,000), the impairment loss of $15,000 (Carrying value ($375,000) - Value in use ($360,000) ) is recognized in the Income statement and the asset is written down to $360,000.
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