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

Question

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:

 	A. $15,000
 	B. $25,000
 	C. $40,000

Matt_AnalystPrep · Answer

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.