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

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

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    • Matt_AnalystPrep
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      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
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      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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