Can anyone advise the true definition for carrying value?
I am confused by the different definition utilised in Schweser Notes (" SN"). Under Study Session 9, Page 211 (SN 2014), carrying value is defined as
Historical Cost - Acc Depreciation/Amortization
However, Page 221 of SN define carrying value as
Historical Cost - Acc Depreciation/Amortization - any impairment charges
I’m confused between both definition. Also the above expression (i_.e. Historical Cost - Acc Depreciation/Amortization - any impairment charges_) is also referred to amortized/depreciated cost, correct?
My take will be Carrying Value generally refers to:
Historical Cost - Acc Depreciation/Amortization - any impairment charges
where impairment charges will be zero if there is no impairment. Am I correct?
carrying value is whatever amount the asset is carried at (presented) in the balance sheet. If an asset is depreciated/amortised, the carrying value will be historical cost - acc. derpeciation/amortisation. If additionally, an asset suffered from impairment losses, those will further reduce carrying amount.
So, Ernest is correct. Whether impairment charges enter the definition of carrying value for a specific asset will depend on whether an asset has suffered from any impairment or not.
From what I understand, Impairment charges will always be part of definition/equation…for carrying value… Impairment charges may be taken 0 if asset is never undergone impairment… But it should be considered while arriving at Carrying value of any asset.
But I am confused as to what happens during reversal of impairment charges… Does it add back to carrying value?
Like you said, the firms can have 2 types of non-current assets namely: Tangible assets and Intangible assets. Furthermore, intangible assets can be further classified as i)identifiable or ii)non-identifiable.
Also, a long-lived assets can have infinite lives or finite lives and this will have implications on whether the assets will be subjected to depreciation/amortization:
Finite lives assets will be subjected to depreciation/amortization while;
Infinite lives assets will not be depreciated/amortizied.
_ *Though it may seems that most infinite lives assets are intangibles, some tangible assets have infinite lives too e.g. land* _
Long lived assets, be it tangible or intangible , be it inifite or finite lives can be impaired i.e. Impairment is not the exlusive property of infinite living assets. However, some mild differentation should be made between infinite and finite living assets:
Finite living assets (IFRS and U.S. GAAP) does not need to be tested for impairments annually BUT rather firms will reaccess the firm’s circumstances/market conditions during each reporting period- to determine whether impairment is necessary.
Infinite living assets need to be tested for impairments at least on an annual basis.
For Tangible Assets, we can broadly classify them (list is not exhaustive) as:
Plant,Property and Equipments (" PP&E")
2)Land
Investment Properties
IFRS define Investment Properties as ownership by firm to earn rental income or capital appreciation or both; whereas under U.S. GAAP; there is no differentiation from other long lived assets. Investment Properties are different from the properties under PP&E as they serve different purposes. Put it this way, whether the properties owned by a firm is classified as PP&E or as Investment Properties depend on what purposes the firm use it for. If the properties are used to house production (i.e. owner-occupied) then it will be classified as PP&E; whereas if the properties are used to collect rental/capital appreciation (i.e. investment properties) then it will be classified as investment properties.
The differentiation is important when determining the measurement base for the assets i.e. to value the assets [Cost Model? Revaluation Model? Fair Value Model (for investment properties)?]
