Hi,
I’ve come across a question concerning the impairment of PP&E. Under IFRS an asset is impaired when carrying amount>recovorable amount, where recovorable amout = max(fair value-selling costs; value in use), where value in use = PV of future cash flows.
In the Mock March Exam there was a question where the PV of expected future cash flows was given as 450,000 but there was also a value given for value in use (440,000).
Two questions:
1.) How can value in use (440,000) be different from the pv of expected future cash flows (450,000) if by definition the value in use is the pv of future cash flows?
2.) Which of those two should one use when determining the recovorable amount?
I agree, this question was weird… I chose the Value in Use during the mock, as it is the text book definition given by the books, but according to me, value in use = PV of future discounted cash flows generated by the asset.
Exactly! That’s how I see it. Anyone else has an idea why value in use und PV of future cash flows can differ?
I’m not entirely sure why they would differ (haven’t really thought about it either), but I think they presented both to see if you understand impairment under IFRS, rather than GAAP.
If I recall (and I hope so, since the test is Saturday), under GAAP, you check if the carrying amount is greater than the sum of the undiscounted expected future cash flows. If it is, you have asset impairment. You should then write the asset down to the the PV of the expected future cash flows. With IFRS, you compare the carrying value to max [value in use, fair value-costs to sell]. If the carrying amount is higher than the other number, write down the asset to the max [value in use, fair value-costs to sell].
Good question. I am confusing as well.