according to Schweser page 47 We use undiscounted cash flows to detect impairment under GAAP And we impair down to fair value, or the disccounted cash flows if fair value is not know… What if fair value is bigger than the undiscounted cash flows. So your test sais it is impaired, but in reality you cant impair to fair value cause you would be valuing up… What do you do? Leave as is, or impair to discounted cash flows.
dude, you on the right forum level?
yup, are you?
Dont think this will be an issue Gulf, I would imagine if there was a question on the exam, they would give you the undiscounted cash flows, and a discount rate, so once you realise there is an impairment from comparing the BV to undiscounted cashflows, you simply subtract the BV from the discounted cash flows.
^probably right… but in the real world what would they do…
eh? if an asset has a market to determine fair value, just use fair value and ignore cash flows. if there is no market/mechanism to know fair value, approximate it via cash flows to determine impairment. it doesn’t make sense to write-down based on cash flows if the fair value is higher, since, if liquidated, you could just sell the asset for (near and net to) fair value. it’s not really impaired at that point.
^^^ Sounds right
well they make it clear you should use UNDISCOUNTED cashflows to test for impairment under GAAP… so say your undiscounted cash flows sum up to 100 and your bv is 90, the test said it is impaired. now the next step is to measure the impairment. the say impair down to fair value or discounted cash flows if no fair value estimate is available… in the absance of fair value it will always workout cause discounted cash flows are always less than undiscounted cash flows. and thus less than book value since we have already tested that in step one… when a fair value exists, what if it is greater than undiscounted cash flows? and they tell you to use fair value when it is available…
Well as the other guy said, if a FV is available then why use discounted cash flows, the only answer to this would be to look up GAAP standards directly and see what they say there
you already wrote the answer, use UNDISCOUNTED to compare to BV; write down to FAIR VALUE. No less, when fv is available. If you cannot determine a fair value, then go down to DISCOUNTED cash flows. not sure why this is hard, unless i’m really missing something. i agree with ped. if you really think it’s worthwhile, look it up; i’m sure it’s not worth your time.
its just that i am anoyed by he fact that you can compare to undiscounted cash flows and get a “yes it is impaired” but you go and try to do the impairment and there wont be an impairment if fair value is higher han BV… anyway thanks to ALL… i am just gona forget it for now, not worth it
gulf, Just ask yourself a basic question - why would fair value be anything different than discounted CFs??? Not higher or lower - it should exactly be the same (unless you use wrong CFs/disc rate).