Can somebody explain why this statement is wrong? "The asset is deemed to be 'impaired, because the present value of expected future cash flows is less than the carrying value.
Because you need to include something in there about fair value (net sale value). “The asset is deemed to be 'impaired, because the max of (present value of expected future cash flows, fair value) is less than the carrying value” Edit: Note this is because the asset may not help you get future cash flows, but it is valuable to someone else.
The definition of the term impairment includes the term “estimated” future cash flows, not “expected” future cash flow. You might expect more than the asset will give you, and given market condition, technological developments, you could estimate less than carrying value when calculating “estimated” PV of future cash flows.
it might also be because an object is deemed impaired if the pv of cf + salvage value < Carrying value. one of the ways you can measure the impairment is by taking pv of cf against the Carrying value
stephjaelee Wrote: ------------------------------------------------------- > it might also be because > > an object is deemed impaired if the pv of cf + > salvage value < Carrying value. > But this is just not so. Replace the “if” by “may be” and we are okay. > one of the ways you can measure the impairment is > by taking pv of cf against the Carrying value
map1 Wrote: ------------------------------------------------------- > The definition of the term impairment includes the > term “estimated” future cash flows, not “expected” > future cash flow. You might expect more than the > asset will give you, and given market condition, > technological developments, you could estimate > less than carrying value when calculating > “estimated” PV of future cash flows. Nah. “Expected” means “estimated in an unbiased way”. There is no chance you could make a decision on impairment by saying “I think the pv of future cash flows will be $1M, just because I think so and I don’t care if that’s biased”. “Expected” is a better word here than “estimated”, but agree that the standards say “estimated”.
Correct. It is not simply by saying “i think”, but “based” on market conditions (i.e. what the asset is worth to others on the market), technological changes (improvements in newer equipment), unfavorable economic conditions, one can reasonably determine that a part of the carrying cost would not be recovered from the “expected” levels of operations. That’s why “estimated” versus “expected” makes the difference here.
Hmm… Maybe. I find my brain going into reading FSA shutdown mode. I still think the answer is the fair value part is missing.
This is quotes from FSA… “Impairment must be recognized when the carrying value of the assets exceeds the UNDISCOUNTED expected future cash flows from their use and disposal.” I would think that it’s because your statement says to take the PV of the cash flows. The PV of the cash flows is only taken after you determine that the asset is impaired, and when you are determining the amount of the impairment. Correct?
jmuc85 is correct.
Hmm, I am probably erroneously thinking of IFRS not GAAP. You get to discount in IFRS.