What, if anything is the difference between cost, recoverable amount and fair value
Question 2
A. What, if anything is the difference between cost, recoverable amount and fair value and why is this important in relation to non-current assets?
B. How is ‘impairment of an asset’ different from ‘amortisation of an asset’?
Give an example that enhances your explanation.
C. Describe three incentives that management might have to revalue assets?
D. Who should be responsible for providing valuations on which to base revaluations and how should they be derived? What are the disclosure requirements for these valuations?
E. Spinifex Ltd acquired and installed Equipment on 1st July 2017 at a cost of $920,000. The equipment had a useful life of 10 years and an expected residual value of $20,000. Spinifex depreciates its equipment on a straight line basis over its useful life. At 30 June 2019 the equipment had a carrying amount of $740,000. The equipment was damaged in small fire which reduced its recoverable amount such that the carrying amount now exceeded it. As a result of the damage the fair value less costs of disposal of the equipment has been estimated at $445,000 at the end of the reporting period. Despite the damage the equipment can still be utilised to generate annual net cash flows of $92,000 over the next 8 years of useful life at the end of which its residual value will remain unchanged at $20,000. The firm uses a discount rate of 12% for calculations of this kind.
(a) Determine the amount of, and provide the journal entry for, any impairment in the equipment.
(b) What will happen to future depreciation charges and why?
Hint
Accounts & Finance "B. Impairment is normally related to long-term intangible assets and its market value lowered significantly. If expected cash flows from the asset are less than the asset's carrying amount, an impairment loss must be reported and the sum of an impairment loss is estimated by deducting it from the carrying value.Amortization is a regular decrease in the value of an inta...
"B. Impairment is normally related to long-term intangible assets and its market value lowered significantly. If expected cash flows from the asset are less than the asset's carrying amount, an impairment loss must be reported and the sum of an impairment loss is estimated by deducting it from the carrying value.
Amortization is a regular decrease in the value of an intangible asset or the manner in which to pay off a debt over a period of time by periodic payments and is generally related to the expenses of intangible assets like patents, copyrights, goodwill and trademarks etc. to show its decreased value as a result of over the long period.
So, amortization and impairment both relate to the value of a company's intangible assets, that are reported on the balance sheet. Intangible assets include goodwill, or value within the company's name and reputation itself along with patents, trademarks, and copyrights when given a value. And, amortization is used to reflect the intangible asset's reduction in value over its lifespan and impairment occurs when an intangible asset is deemed less valuable than is stated on the balance sheet after amortization."
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