impairment of property, plant, and equipment

CFA Level I FRA
#1

Hi,

I am really confused about a question from the CFAI topic test regarding the above-mentionned topic.

But before, let me explain what I understood from impairments:

IFRS: we impair PPE if carrying value>fair value-sell cost or carrying value>PV of expected future cash flow (whichever is greater).

I found t he example 9 in the curriculum, chapter 30, more than useful and I thought that would be my reference for such exercices! They state that the value in use= PV of expected future cash flow.

Now…

I found that exercice:

A Canadian printing company that prepares its financial statements according to IFRS has experienced a decline in the demand for its products. The following information (in Canadian dollars) relates to the company’s printing equipment as of the current fiscal year end:

Carrying value of equipment (net book value) 500,000

Undiscounted expected future cash flows 550,000

Present value of expected future cash flows 450,000

Fair value 480,000

Costs to sell 50,000

Value in use 440,000

So ok, Undiscounted expected future cash flow is out, that’s for US-GAAP.

But now… I thought, according to the example 9 in the curriculum, that value in use=PV of expected future CF… which isn’t the case here…

So what is value to use? and why this “discrepancy” between the example 9 and this exercice?

Thanks! (ps: correct answer is 60’000

#2

couldnt understand how they got 60,000 as the impairment loss as well.

Will go through the question in the corriculum myself…

#3

they got this way the 60’000: Fair value less costs to sell: 480,000 – 50,000 = 430,000 Value in use = 440,000 Recoverable amount (higher value of the above two amounts) = 440,000 Impairment loss under IFRS = Carrying value (net book value) – recoverable amount Impairment loss = 500,000 – 440,000 = C$60,000

however, it’s still unclear why the value in use is another value than PV of discounted CF when in the curriculum, there’s an exemple where it’s the same…

#4

Exactly, that is my question, why not use the PV…

#5

I thought value in use was the PV of expected cash flows. Why are they given seperately here? And that too with different values? What sorcery is this?

#6

Welcome to the club gigaloo ahah. No idea why. Some help would be needed

#7

do you guys managed to understand what the discrepancy was? I don’t…

#8

Still waiting for others to share their view on it

#9

so am I. Would be very very very appreciated

#10

Anyone ?

#11

As I can found hereby are redundant items with different numbers:

Present value of expected future cash flows 450,000

Fair value 480,000

Costs to sell 50,000

Value in use 440,000

If Company use IFRS, than item should be impaired if BV> (FV-Cost of sale) or Value in use, whichever is in greater amount.

IAS 36 defines Value in use as “the present value of the future cash flows expected to be derived from an asset or cash-generating unit”.

Since Value in use is in amount of 440K which is greater than FV-cost of sale, the asset would bi impaired in amount of 60K.

I don’t know why they put item PV of expected FCF with different data because it would be same considered as the Value in Use.

#12

Exactly, I guess that was a mistake though.

#13

let’s say it’s a mistake, period! :slight_smile: thank you for your help guys

#14

Lol… Think so too…