12 – Impairment of Assets

Problems with Solutions

Problems 12-1, 12-2, 12-3 (pages 2-8)

From the textbook:

Brief Exercises: 11.14, 11.15, 11.16, 11.17,12.16, 12,17, 12.18, 12.20, 12.21

Exercises: 11.19, 11-20a, 11.21, 11.22, 12.13, 12.14, 12.15, 12.16, 12.17, 12.18

Problems 12.8, 12.9

The items in bold are the ones I recommend you do first.

What the textbook calls the ‘rational entity impairment model’ refers to the IFRS impairment test.
The ‘cost recovery model’ refers to the ASPE impairment test.
 2

Problem 12-1

Henry Corp. has identified circumstances that warrant impairment testing on its goodwill and on
a depreciable asset.

Information on each of these is provided below:

Impairment of depreciable asset

Equipment $60,000
Accumulated depreciation (15,000)
Carrying value $45,000

Undiscounted future cash flows from use of asset 43,000

Value in use: DCF 37,500
Fair value 42,000
Costs of disposal 2,000

Carrying amount of CGU:

Cash $200,000
Receivables 300,000
Inventories 700,000
PPE, net 800,000
Goodwill 900,000
Liabilities (500,000)
$2,400,000

Fair value of the CGU $1,900,000

Direct costs to sell/dispose of the CGU 50,000
Value in use of the CGU 2,100,000

Required:
Prepare any impairment loss journal entries required under each of IFRS and ASPE. Can such
impairment losses subsequently be reversed?
 3

Problem 12-2
An entity has two assets and two cash generating units. The carrying values at December 31,
20x3 are as follows:

Asset 1 $5,600,000
Remaining useful life = 18 years; Residual value = $1,000,000

Asset 2 $4,800,000
Remaining useful life = 14 years; Residual value = $750,000

CGU 1
Land $ 2,400,000
Building 5,900,000
Equipment 3,400,000
Goodwill 3,600,000
$15,300,000

Remaining useful life of building = 30 years; Residual value = $500,000

CGU 2
Land $1,500,000
Building 4,300,000
Equipment 2,800,000
Goodwill 2,500,000
$11,100,000

Remaining useful life of building = 25 years; Residual value = $500,000

The fair values of Asset 1 and Asset 2 are $6,500,000 and $4,500,000 respectively. The entity
would incur selling costs of 7% of the asset’s selling price if these were to be sold in an orderly
disposal.

The projected future cash flows of all assets and CGU’s is projected to be the following:

Year 1 Year 2 Year 3 Year 4

Asset 1 $400,000 $450,000 $525,000 $550,000
Asset 2 500,000 500,000 500,000 500,000
CGU 1 1,100,000 1,100,000 1,100,000 1,100,000
CGU 2 550,000 600,000 630,000 650,000

Assume that the cash flows beyond Year 4 will be the same amount as the Year 4 cash flow (i.e.
zero growth).
 4

Required –

a. Calculate the total impairment loss for the year ended December 31, 20x3, if any.
Determine the resulting carrying values of the assets and CGU’s after the impairment loss
has been applied. Assume a discount rate of 8%.
b. Three years past and the recoverable amount of Asset 2 is $4,200,000. What amount of
the impairment loss taken on Asset 2 can be reversed in Year 3, if any?

Problem 12-3

The Davis Corporation believes that the assets of one of their CGU’s may be impaired. The
carrying value and the net realizable value of the CGU’s assets is as follows:

Carrying Fair
Value Value
Land $ 200,000 $ 300,000
Building 1,200,000 1,050,000
Furniture and Fixtures 150,000 n/a
Equipment 300,000 250,000
Goodwill 1,100,000 n/a
$2,950,000

If the building and land were put on the market for sale, the costs to sell would be equal to 7% of
the fair value. If the equipment was put on the market for sale, the costs to sell would equal 10%
of the fair value.

The remaining useful life of the assets of the CGU (except land) is 6 years. The annual cash
flows generated by the CGU are $200,000 per year. The fair value of the land in 6 years is
expected to be equal to the equal to $300,000. The relevant discount rate is 5%.

Required –

Calculate the impairment loss, if any, under the following two assumptions:

(a) Davis is a public company. Include an allocation of the impairment loss to the assets of
the CGU.
(b) Davis is a private company subject to ASPE.
 5

SOLUTIONS

Problem 12-1

Depreciable Asset-

IFRS -
Carrying value $45,000
Recoverable amount = greater of:
Value in use: $37,500
NRV: $42,000 – 2,000 = $40,000 40,000
Impairment loss $ 5,000

ASPE – Undiscounted cash flows < Carrying Value => need to

measure for impairment
Carrying value $45,000
Fair value 42,000
Impairment loss $ 3,000

CGU -

IFRS -
Carrying value $2,400,000
Recoverable amount = greater of:
Value in use: $2,100,000
NRV: $1,900,000 – 50,000 = $1,850,000 2,100,000
Impairment loss - Apply against goodwill $300,000

ASPE –

Carrying value $2,400,000

Fair value 1,900,000
Impairment loss - Apply against goodwill $ 500,000

Under IFRS, the impairment loss can be reversed unless It applied to goodwill.

Under ASPE, an impairment loss cannot be reversed.

 6

Problem 12-2

Part (a)

Asset 1 Net realizable value = $6,500,000 x 0.93 = $6,045,000

No write down is necessary

Asset 2 Net realizable value = $4,500,000 x 0.93 = $4,185,000

Value in use:

N = 4, I = 8, PMT = $500,000 $1,656,063

PV of terminal value:
N = 10, I = 8, PMT = 500,000, FV = 750,000
PV = $3,702,436
N = 4, I = 8, FV = 3,702,436 2,721,401
$4,377,464

Recoverable amount = $4,377,464

Impairment loss = $4,800,000 – 4,377,464 = $422,536

CGU1 Value in use:

N = 4, I = 8, PMT = $1,100,000 $3,643,340

PV of terminal value:
N = 26, I = 8, PMT = 1,100,000, FV = 500,000
PV = $11,958,577
N = 4, I = 8, FV = 11,958,577 8,789,911
$12,433,251

Impairment loss = $15,300,000 – 12,433,251 = $2,866,749

Applied to Goodwill:

CGU 1
Land $ 2,400,000
Building 5,900,000
Equipment 3,400,000
Goodwill ($3,600,000 – 2,866,749) 733,251
$12,433,251
 7

CGU2 Value in use:

N = 1, I = 8, FV = $550,000 $509,259
N = 2, I = 8, FV = $600,000 514,403
N = 3, I = 8, FV = $630,000 500,114
N = 4, I = 8, FV = $650,000 477,769
PV of terminal value:
N = 21, I = 8, PMT = 650,000, FV = 500,000
PV = $6,610,250
N = 4, I = 8, FV = 6,610,250 4,858,731
$6,860,277

Impairment loss = $11,100,000 – 6,860,277 = $4,239,723

Applied first to Goodwill
Balance of $1,739,723 applied on a pro-rata basis to the other tangible
assets.

Part (b)
Carrying Value of Asset 2 at the end of the 3rd year:
$4,377,464 – (4,377,464 – 750,000)/14 x 3) $3,600,150
Carrying Value of Asset 2 at the end of the 3rd year if no impairment
had taken place:
$4,800,000 – (4,800,000 – 750,000)/14 x 3) 3,932,143
Reversal of impairment loss $ 331,993
 8

Problem 12-3

(a) Net realizable values of….

Land: $300,000 x 0.93 = $279,000
Building: $1,050,000 x .93 = $976,500
Equipment: $250,000 x .9 = $225,000
Tota; NRV = $1,480,500

Value in use:
N = 6, I = 5, PMT = 200,000, FV = 300,000
PV = $1,239,003

Recoverable amount = $1,480,500

Impairment loss = $2,950,000 – 1,480,500 = $1,469,500

Allocation -
Goodwill = 1,100,000; remaining = 369,500
Proportionately to Building F&F, Equipment:
Building: $369,500 x 1,200,000 / 1,650,000 = $268,727; Max = $223,500
Remaining: $369,500 – 223,500 = 146,000
To equipment: $146,000 x 300,000/ 450,000 = 97,333; Max = 75,000
Remaining = $146,000 – 75,000 = 71,000
To F&F: $71,000

(b) Goodwill present, measure for impairment -

Fair value = $1,600,000

Impairment loss = $2,950,000 – 1,600,000 = $1,350,000
 9

BRIEF EXERCISE 11.14

(a)

Under IFRS, the recoverable amount is the higher of (1) the asset’s value in use and (2) its fair
value less costs to sell. In this case, even though the asset was scrapped on January 1, 2021, its
value in use as of November 30, 2020 was $800,000. The recoverable amount of $800,000 is
lower than the carrying amount of $1,000,000; therefore the asset is impaired as of the date of
the financial statements.

Note: The scrapping of the asset should be disclosed as a subsequent event if material.

(b)

Under ASPE, the recoverable amount is the undiscounted net future cash flows from use and
eventual disposal. The recoverable amount of $1,100,000 is higher than the carrying amount of
$1,000,000; therefore the asset is not impaired as of the date of the financial statements.

Note: The scrapping of the asset should be disclosed as a post–balance sheet subsequent event if
material.

BRIEF EXERCISE 11.15

(a) At December 31, 2020:

The recoverable amount is $425,000 (the higher of the asset’s (1) value in use of $425,000 and
(2) fair value less costs to sell of $400,000).

Impairment loss:
Carrying amount $500,000
Less: Recoverable amount 425,000
Impairment loss $ 75,000

Loss on Impairment ($500,000 – $425,000) 75,000

Accumulated Impairment Losses - Land 75,000

(b) At December 31, 2021:

Accumulated Impairment Losses - Land 75,000
Recovery of Loss from Impairment ($500,000 – $425,000) 75,000

Reversal of the impairment loss is limited to the amount required to increase the asset’s carrying
amount to what it would have been if the impairment loss had not been recorded. In this case the
original cost of the land is $500,000 and accumulated impairment losses recorded to date is
$75,000. Since the current recoverable amount of $550,000 (higher of value in use of $550,000
and fair value less costs to sell of $480,000) is higher than the original cost of the land, recovery
of impairment losses is limited to $75,000.
 10

BRIEF EXERCISE 11.16

(a) Under ASPE, because the buildings and equipment are specialized and cannot generate
cash flows on their own, they are combined into an asset group with the land. The
carrying amount of the asset group is $60,000. The cost recovery model applies a
recoverability test to determine if there is impairment. The asset group’s carrying amount
of $60,000 is compared to undiscounted net future cash flows of $70,000. Since the asset
group’s carrying amount can be recovered (i.e. the asset group’s undiscounted net future
cash flows are greater than the asset group’s carrying amount), there is no impairment,
and no impairment loss is recorded.

(b) Under the IFRS rational entity model, the cash generating unit’s (CGU’s) carrying
amount of $60,000 is compared to recoverable amount of $45,000 (the higher of the
CGU’s value in use of $45,000 and fair value less costs to sell of $35,000).

Carrying amount of CGU……… $60,000

Less: Recoverable amount…... 45,000
Loss on impairment………………… $15,000

The impairment loss is then allocated to the individual assets in the CGU, but no
individual asset can be reduced to below the highest of (1) its value in use, (2) its fair
value less costs to sell, or (3) zero. In this case, the land is not impaired (recoverable
amount is greater than carrying amount), thus the $15,000 loss is allocated to the
buildings and equipment.

Carrying Loss
Allocation: Amount Proportion Allocation
Buildings $30,000 30/40 $ 11,250
Equipment 10,000 10/40 3,750
$40,000 $15,000

The journal entry to record the impairment is:

Loss on Impairment 15,000

Accumulated Impairment Losses – Buildings 11,250
Accumulated Impairment Losses - Equipment 3,750
 11

BRIEF EXERCISE 11.17

The cost recovery impairment model used under ASPE compares the asset carrying amount with
its undiscounted future net cash flows to determine if the asset is impaired. This recoverability
test does not take into account the time value of money and delays recording of an impairment
loss. As a result, the financial statements may not be as relevant or faithfully representative.
When using this method, recoveries of impairment losses cannot be recorded, which is not
neutral.

The rational entity impairment model used under IFRS better reflects the economic conditions
underlying the asset’s usefulness to the entity, by considering the asset’s value in use as well as
its fair value less costs to sell, and by capturing both the declines and recoveries in value of the
asset.

Overall, the rational entity model used under IFRS provides better information for users: it
provides better representational faithfulness as it is more neutral; it is more relevant; provides
more timely information; and it better reflects the time value of money and the fair value of
impaired assets.
 12

EXERCISE 11.19

a. December 31, 2020

Loss on Impairment 270,000

Accumulated Impairment Losses—Equipment 270,000

The recoverability test indicates that impairment has occurred since the carrying amount
($500,000) exceeds the undiscounted future net cash flows ($300,000). The impairment
loss is then calculated as follows:

Cost $900,000
Accumulated depreciation 400,000
Carrying amount 500,000
Fair value 230,000
Loss on impairment $270,000

b. It may be reported in the other expenses and losses section or it may be highlighted as an
unusual item in a separate section, as part of income from continuing operations.

c. No entry necessary. Under the Cost Recovery Impairment Model, recovery of any
impairment loss is not permitted for assets held for use or to be disposed of other than by
sale.

d. No entry necessary. The recoverability test indicates that impairment has not occurred
since the carrying amount ($500,000) is less than the undiscounted future net cash flows
($510,000).

e. The recoverability test indicates that impairment has occurred since the carrying amount
($500,000) exceeds the undiscounted future net cash flows of $450,000 ($45,000 X 10
years).

Since fair value is not available (no active market for the equipment), present value of the
future net cash flows is used to calculate the impairment loss:

Cost $900,000
Accumulated depreciation 400,000
Carrying amount 500,000
Fair value (N = 10, I = 10, PMT = 45,000) 276,506
Loss on impairment $223,494

December 31, 2020

Loss on Impairment 223,494

Accumulated Impairment Losses—Equipment 223,494
 13

f. The Cost Recovery Impairment Model uses undiscounted future net cash flows in its
recoverability test because the recoverability test assesses recoverability of cost. The
asset’s original cost is compared to undiscounted future net cash flows generated from
use of the asset in future periods.

EXERCISE 11.20

a. When the recoverable amount of an individual asset cannot be determined, the asset is
identified with a cash-generating unit (CGU), and the CGU’s cash flows are tested for
impairment. An individual asset is identified with a CGU only when it does not generate
cash inflows that are largely independent of cash flows from other assets or groups of
assets, or when its fair value less selling costs is not considered representative of its value
in use. The allocation of assets to CGU’s often involves professional judgement.

The recoverable amount of a CGU, like the recoverable amount of an individual asset, is
the higher of its value in use and fair value less costs of disposal (or fair value less costs
to sell). Because the recoverable amount is compared with the CGU's carrying amount to
determine if there is an impairment loss, it is reasonable to include the same assets in
both measures.

Therefore the carrying amount of a CGU includes the carrying amount of only those
assets that are used to generate the relevant stream of cash flows. These assets can be
assets that are directly involved in the CGU, or assets that can be allocated to the CGU on
a reasonable and consistent basis. Where liabilities are needed to calculate the
recoverable amount, they are also deducted in determining the carrying amount of the
CGU.

The road system's fair value less costs of disposal is almost negligible; certainly far less
than its value in use. Because its recoverable amount cannot be determined
independently, the road system is assigned to the smallest identifiable group of assets that
generates independent cash inflows.

(b) Machinery:

The asset’s recoverable amount is $4,500,000 (the higher of its value in use (i.e.
discounted future net cash flows) ($4,500,000) and its fair value less costs to sell
($3,800,000).

The impairment test indicates that impairment has not occurred since the carrying amount
does not exceed the recoverable amount.

Therefore, there is no impairment loss to record on the machinery.

 14

Mine in the Development Phase:

The asset’s recoverable amount is $9,350,000 (the higher of its value in use (i.e.
discounted future net cash flows) ($9,000,000) and its fair value less costs to sell
($9,350,000)).

The impairment test indicates that impairment has occurred since the carrying amount
exceeds the recoverable amount. The impairment loss is calculated as follows:

Carrying amount 9,500,000

Recoverable amount 9,350,000
Loss on Impairment $150,000

June 30, 2020

Loss on Impairment 150,000

Accumulated Impairment Losses—Mine 150,000
 15

EXERCISE 11.21

a. Under IFRS, the recoverable amount of the cash-generating unit (CGU) is the higher of
(1) value in use and (2) fair value less costs to sell. The recoverable amount of the CGU
is $108,000, which is lower than the carrying amount of the CGU ($120,000), therefore
the CGU is impaired. The impairment loss is $12,000 ($120,000 - $108,000).

The impairment loss is allocated to the individual assets in the unit, but no individual
asset is reduced to below the highest of (1) its value in use, (2) its fair value less costs to
sell, or (3) zero.

Allocation of impairment loss to assets in cash-generating unit (CGU):

Carrying Amount
(before Carrying Amount
impairment) Loss Allocation (after impairment)
Proportion
Land $25,000 25/120 $2,500 $22,500
Building 50,000 50/120 5,000 45,000
Equipment 30,000 30/120 3,000 27,000
Vehicles 15,000 15/120 1,500 13,500
$120,000 $12,000 $108,000

The journal entry to recognize the impairment loss is:

Loss on Impairment 12,000
Land 2,500
Accumulated Impairment Losses - Buildings 5,000
Accumulated Impairment Losses - Equipment 3,000
Accumulated Impairment Losses - Vehicles 1,500

b. Since the recoverable amount of the building is determined to be $46,000, the building
cannot be reduced to below $46,000 (note that from part a., a true proportionate
allocation would result in building carrying amount of less than $46,000).

Allocation of impairment loss to assets in cash-generating unit (CGU):

Carrying Carrying
Amount (before Amount (after
impairment) Loss impairment)
Proportion Allocation
1 2
Land $25,000 25/70 $2,857 $22,143
Buildings 50,000 4,000 46,000
Equipment 30,000 30/70 3,429 26,571
Vehicles 15,000 15/70 1,714 13,286
$120,000 $12,000 $108,000
1
Allocation base = $25,000 + $30,000 + $15,000 = $70,000
 16

2
Loss on impairment to allocate = $12,000 total – $4,000 allocated to buildings = $8,000; $8,000
loss on impairment to allocate X 25/70 = $2,857 allocated to land

The journal entry to recognize the impairment loss is:

Loss on Impairment 12,000
Land 2,857
Accumulated Impairment Losses - Buildings 4,000
Accumulated Impairment Losses - Equipment 3,429
Accumulated Impairment Losses - Vehicles 1,714

c. Under ASPE, the asset group is impaired if its undiscounted future net cash flows are less
than its carrying amount. The undiscounted future net cash flows are $144,000, which is
higher than the asset group’s carrying amount of $120,000. Therefore the asset group is
not impaired and no entry is necessary.
 17

EXERCISE 11.22

a. Cost Recovery Impairment Model

(1) December 31, 2020

Loss on Impairment 1,800,000

Accumulated Impairment Losses—Equipment 1,800,000

The recoverability test indicates that impairment has occurred since the carrying amount
exceeds the undiscounted future net cash flows. The loss on impairment is calculated as
follows:

Cost $10,000,000
Accumulated depreciation 2,000,000
Carrying amount 8,000,000
Fair value 6,200,000
Loss on impairment $1,800,000

(2) December 31, 2021

Depreciation Expense 1,550,000

Accumulated Depreciation—Equipment 1,550,000

New carrying amount $6,200,000

Useful life 4 years
Depreciation per year $1,550,000

(3) No entry permitted. Under the Cost Recovery Impairment Model, recovery of any
impairment loss is not permitted for assets held for use or to be disposed of other than by
sale.

b. Rational Entity Impairment Model

(1) The asset’s recoverable amount is $6,350,000 (the higher of its value in use (i.e.
discounted future net cash flows) ($6,350,000) and its fair value less costs to sell
($6,150,000).

The impairment test indicates that impairment has occurred since the carrying amount
exceeds the recoverable amount. The impairment loss is calculated as follows:

Cost $10,000,000
Accumulated depreciation 2,000,000
Carrying amount 8,000,000
Recoverable amount 6,350,000
Loss on impairment $1,650,000
 18

December 31, 2020

Loss on Impairment 1,650,000

Accumulated Impairment Losses—Equipment 1,650,000

(2) December 31, 2021

Depreciation Expense 1,587,500

Accumulated Depreciation—Equipment 1,587,500

New carrying amount $6,350,000

Useful life 4 years
Depreciation per year $1,587,500

(3) Under IAS 36, an impairment loss may be reversed, however the specific asset cannot be
increased in value to more than what its carrying amount would have been, net of
depreciation, if the original impairment loss had never been recognized.

December 31, 2020 pre-impairment loss carrying amount $8,000,000

2021 depreciation based on pre-impairment carrying amount
($8,000,000 ÷ 4 years) 2,000,000
December 31, 2021 pre-impairment carrying amount $6,000,000

The December 31, 2021 carrying amount would have been $6,000,000 if the impairment
had not occurred; this is the maximum carrying amount which can be reflected for the
equipment in the December 31, 2021 SFP.

Actual December 31, 2020 carrying amount $6,350,000

Actual 2021 depreciation (from impairment) 1,587,500
Actual December 31, 2021 carrying amount 4,762,500
December 31, 2021 pre-impairment carrying amount 6,000,000
Recovery of previously recognized impairment $1,237,500

Thus, the net effect on the 2021 net income (loss) is a net decrease of $350,000 [= a. – b.].
The asset cannot be restored to its December 31, 2020 carrying amount of $6,350,000 as
this exceeds the carrying amount that would have existed at December 31, 2021 had the
impairment in 2020 never been recognized.

December 31, 2021

Accumulated Impairment Losses— Equipment 1,237,500

Recovery of Loss from Impairment 1,237,500
 19

c. The Cost Recovery Impairment Model compares the asset carrying amount with its
undiscounted future net cash flows to determine if the asset is impaired. This
recoverability test does not take into account the time value of money and delays
recording of an impairment loss until impairment conditions are very bad. As a result, the
financial statements may not be as relevant or faithfully representative. The Cost
Recovery Impairment Model also does not allow for later recovery of any impairment
losses, which is not neutral.

The Rational Entity Impairment Model better reflects the economic conditions underlying
the asset’s usefulness to the entity by considering the asset’s value in use (a discounted
value) as well as its fair value less costs to sell, and by capturing both the declines and
recoveries in value of the asset. Therefore, the Rational Entity Impairment Model is
preferred.
 20

BRIEF EXERCISE 12.16

Under ASPE, the cost recovery impairment model for limited-life intangible assets would apply
in this case. The undiscounted future cash flows are first compared to the carrying amount. If
undiscounted future cash flows < carrying amount, the asset is impaired, and the loss on
impairment is calculated as the difference between the asset’s carrying amount and fair value.

Undiscounted future cash flows ($125,000) > Carrying amount ($83,750), therefore the asset is
not considered to be impaired.

BRIEF EXERCISE 12.17

Under IFRS, the rational entity impairment model would apply. If carrying amount >
recoverable amount (where recoverable amount is the higher of value in use and fair value less
costs to sell), the loss on impairment is calculated as the difference between carrying amount
and recoverable amount.

In this case, the recoverable amount is $95,200 (because value in use is higher than the fair value
less costs to sell), and there is no loss on impairment as the carrying amount of $83,750 does not
exceed the recoverable amount of $95,200.

BRIEF EXERCISE 12.18

(a) Under ASPE, for indefinite-life intangible assets, the impairment test is a comparison of
carrying amount with the asset’s fair value, where impairment loss is equal to the difference
when fair value is lower. Carrying amount ($83,750) > fair value ($45,000), therefore the
trademark is impaired and impairment loss is calculated as $38,750 ($83,750 - $45,000).

(b) Under IFRS, the rational entity impairment model applies. There is no loss on impairment
as the carrying amount of $83,750 does not exceed the recoverable amount of $95,200
(where recoverable amount is the higher of value in use and fair value less costs to sell).
 21

BRIEF EXERCISE 12.20

Under IFRS, the recoverable amount of the CGU is compared with its carrying amount to
determine if there is any impairment.

Based on the information provided, the recoverable amount of the CGU is the greater of:
- Fair value less costs to sell = $3,575,000
- Value in use = $3,680,000

Recoverable amount of CGU $3,680,000

Carrying amount of CGU 3,740,000
Loss on impairment $ 60,000

The goodwill is impaired because carrying amount of the CGU > recoverable amount of the
CGU. The goodwill loss on impairment is $60,000 ($3,740,000 - $3,680,000).

BRIEF EXERCISE 12.21

Under ASPE, goodwill is assigned to a reporting unit at the acquisition date. Goodwill is tested
for impairment when events or changes in circumstances indicate impairment may exist.

There is a loss on impairment if the carrying amount of the reporting unit (including goodwill)
exceeds the fair value of the reporting unit.

Carrying amount of unit $3,581,000

Fair value of unit 3,474,000
Loss on impairment $107,000
 22

EXERCISE 12.13

(a) Under IFRS, the recoverable amount is the higher of value in use and fair value less costs
to sell (both of which are discounted amounts). In this case, the licence is impaired at the
end of 2020 since:

Recoverable amount of $475,000 < Carrying amount of $530,000.

The loss on impairment of $55,000 would be recorded.

The journal entry under IFRS would be:

Loss on Impairment ......................................................... 55,000
Accumulated Impairment Losses—Licences .......... 55,000

(b) If the estimates used to determine the asset’s value in use and fair value less costs to sell
have changed, then a reversal of the impairment is recognized. The reversal amount,
however, is limited. The specific asset cannot be increased in value to more than what its
carrying amount would have been, net of amortization, if the original loss on impairment
had never been recognized. The carrying amount would have been $530,000 - $53,000 =
$477,000.

In this case, there would be a reversal since the

Recoverable amount of $450,000 > Carrying amount of $427,5001
1
Carrying amount at end of 2021 = $475,000 – $47,500 [amortization $475,000/10] =
$427,500

Therefore, carrying amount can be increased to $450,000.

Reversal = $450,000 – $427,500 = $22,500.

Accumulated Impairment Losses–Licences 22,500

Recovery of Loss from Impairment ......................... 22,500

(c) If the licence’s fair value is $500,000 at the end of 2021, the recoverable amount at the end
of 2021 would be $500,000 (since recoverable amount is the higher of value in use and fair
value less costs to sell). However, the licence cannot be increased in value to more than
what its carrying amount would have been, net of amortization, if the original loss on
impairment had never been recognized (i.e., $530,000 – $53,000 amortization = $477,000).

Therefore, carrying amount can be increased to $477,000.

Reversal = $477,000 – $427,500 = $49,500.

Accumulated Impairment Losses–Licences ...... 49,500

Recovery of Loss from Impairment ............................ 49,500
 23

EXERCISE 12.14

(a) Under ASPE, for a limited-life asset, the undiscounted future cash flows are compared to
the carrying amount. In this case, there is no loss on impairment under ASPE since:
Recoverable amount (undiscounted future cash flows) of $535,000 > Carrying amount of
$530,000

(b) Recoverable amount (undiscounted future cash flows) of $500,000 > Carrying amount of
$477,000 ($530,000 – $53,000 amortization) at the end of 2021, therefore there is no loss
on impairment under ASPE.

(c) The answer to part b. would not change if the licence’s fair value is $500,000 because
under ASPE, the impairment test compares carrying amount of the asset to undiscounted
future cash flows. The impairment test is not affected by the fair value of the licence.

EXERCISE 12.15

a. Under IFRS, indefinite-life intangible assets are tested for impairment annually (even if
there is no indication of impairment), using the rational entity impairment model (the
same test as for limited-life intangible assets). In this case, the licence is impaired at the
end of 2020 since:

Recoverable amount of $475,000 < Carrying amount of $530,000.

The loss on impairment of $55,000 would be recorded.

The journal entry under IFRS would be:

Loss on Impairment ......................................................... 55,000
Accumulated Impairment Losses—Licences .......... 55,000

b. If the estimates used to determine the asset’s value in use and fair value less costs to sell
have changed, then a reversal of the impairment is recognized if the recoverable amount
exceeds the carrying amount. The reversal amount, however, is limited. The specific asset
cannot be increased in value to more than what its carrying amount would have been, if
the original loss on impairment had never been recognized.

However, in this case, there is no reversal since the recoverable amount ($450,000) does
not exceed the carrying amount ($475,000).
Since this asset has an indefinite life, in 2021 there is further impairment since:
Recoverable amount of $450,000 < Carrying amount of $475,000.

A loss on impairment of $25,000 would be recorded. The journal entry under IFRS would
be:

Loss on Impairment ......................................................... 25,000

Accumulated Impairment Losses—Licences .......... 25,000
 24

c. If the licence’s fair value is $500,000 at the end of 2021, the recoverable amount at the end
of 2021 would be $500,000 (since recoverable amount is the higher of value in use and fair
value less costs to sell). The licence cannot be increased in value to more than what its
carrying amount would have been, if the original loss on impairment had never been
recognized (i.e., $530,000).

Therefore, carrying amount can be increased to $500,000.

Reversal = $500,000 – $475,000 = $25,000.

Accumulated Impairment Losses–Licences 25,000

Recovery of Loss from Impairment ............................ 25,000

EXERCISE 12.16

a. Under ASPE, indefinite-life intangible assets are tested for impairment when circumstances
indicate that the asset may be impaired. However, the test differs from the test for limited-
life assets. A fair value test is used, and a loss on impairment is recorded when the carrying
amount exceeds the fair value of the intangible asset. In this case, the licence is impaired at
the end of 2020 since:

Fair value of $425,000 < Carrying amount of $530,000.

The loss on impairment of $105,000 would be recorded.

The journal entry under ASPE would be:

Loss on Impairment ......................................................... 105,000

Accumulated Impairment Losses—Licences .......... 105,000

(a) Under ASPE, the recoverable amount refers to undiscounted future cash flows, which does
not affect the impairment test for indefinite-life intangible assets.

c. Under ASPE, reversal of losses on impairment is not permitted.

 25

EXERCISE 12.17

a. December 31, 2020

Loss on Impairment1 550,000

Accumulated Impairment Losses-Copyrights 550,000

Since the carrying amount of the copyright exceeds the undiscounted future cash flows,
there is impairment. The loss on impairment is calculated as follows:
1
Carrying amount $2,150,000
Fair value 1,600,000
Loss on impairment $550,000

b. Amortization Expense2 160,000

Accumulated Amortization - Copyrights 160,000
2
New carrying amount $1,600,000
Useful life ÷ 10 years
Amortization per year $ 160,000

c. No entry is necessary. Reversal of losses on impairment is not permitted under ASPE.

d. The copyright would be tested for impairment after the adjusting entry for amortization is
recorded. The regular amortization calculation should be done first, prior to testing for
impairment. The amortization expense would be shown as part of operating expenses (or
as part of a product cost) whereas the loss on impairment would be shown as part of other
expenses and losses. Amortization expense is a recurring annual expense whereas loss on
impairment is only recorded when the asset is impaired.
 26

EXERCISE 12.18

a. Under IFRS, the recoverable amount is the higher of value in use and fair value less costs
to sell (both of which are discounted amounts). In this case, the copyright is impaired at
the end of 2020 since:
b.
Recoverable amount of $1,850,000 < Carrying amount of $2,150,000.
The loss on impairment of $300,000 would be recorded.

The journal entry under IFRS would be:

Loss on Impairment ......................................................... 300,000

Accumulated Impairment Losses—Copyrights ...... 300,000

b. Amortization for 2021 will be based on the new carrying amount of $1,850,000, divided
over the remaining useful life of 10 years:

Amortization Expense 185,000

Accumulated Amortization – Copyrights 185,000

c. Reversal of impairment under IFRS:

If the estimates used to determine the asset’s value in use and fair value less costs to sell
have changed, then a reversal of the impairment is recognized if the recoverable amount
exceeds the carrying amount. The reversal amount, however, is limited. The specific asset
cannot be increased in value to more than what its carrying amount would have been, net
of accumulated amortization, if the original loss on impairment had never been
recognized.

In this situation, there will be a reversal since:

Recoverable amount of $2,200,000 > Carrying amount $1,665,000 ($1,850,000 –

amortization of $185,000 for 2021).

The reversal will be limited so that the asset’s carrying amount is not more than what its
carrying amount would have been, net of accumulated amortization, if the original loss on
impairment had never been recognized (i.e., $2,150,000 – amortization of $215,000 for
2021 = $1,935,000).

The reversal will be limited to $270,000 ($1,935,000 - $1,665,000), to adjust the carrying
amount to $1,935,000 (not $2,200,000).
 27

The journal entry would be:

Accumulated Impairment Losses-Copyrights...... 270,000

Recovery of Loss from Impairment 270,000

PROBLEM 12.8

a. Meridan Golf and Sports

INTANGIBLES and GOODWILL SECTION OF
STATEMENT OF FINANCIAL POSITION
December 31, 2020
Trade name $ 15,000
Copyright (net of accumulated amortization of $313) (Schedule 1)
24,687
39,687
Goodwill (Schedule 2) 50,000

Schedule 1 Calculation of Copyright

Cost of copyright at date of purchase $25,000
Amortization of Copyright for 2020
[($25,000 ÷ 40) X 1/2 year] (313)
Book value of copyright at December 31 $24,687

Schedule 2 Goodwill Measurement

Fair value of consideration transferred $650,000
Fair value of identifiable assets $700,000
Fair value of identifiable liabilities (100,000)
Fair value of net identifiable assets 600,000
Value assigned to goodwill $50,000

Amortization expense for 2020 is $313 (see Schedule 1). There is no amortization for the
goodwill or the trade name, which are considered to have indefinite lives.
 28

b.
Amortization Expense 625
Accumulated Amortization - Copyright
($25,000 ÷ 40) 625

There is a full year of amortization on the copyright. There is no amortization for the goodwill or
the trade name, which are considered to have indefinite lives.

Meridan Golf and Sports

INTANGIBLES and GOODWILL SECTION OF
STATEMENT OF FINANCIAL POSITION
December 31, 2021
Trade name $ 15,000
Copyright (net of accumulated amortization of $938)
(Schedule 1) 24,062
39,062

Goodwill 50,000

Schedule 1 Calculation of Copyright

Cost of Copyright at date of purchase $25,000
Amortization of Copyright for 2020, 2021
[($25,000 ÷ 40) x 1.5 years] (938)
Book value of copyright at December 31 $24,062

c.
Loss on Impairment 20,000
Accumulated Impairment Losses – Goodwill 13,000
Accumulated Impairment Losses– Trade Name 7,000
Calculations follow in Schedule 2
 29

Schedule 2
Indefinite-life intangibles and goodwill:

Recoverable Amount
Carrying (higher of VIU or FV-
amount SC) Impairment
Trade Name $15,000 $8,000 $7,000
Reporting Unit: 450,000
Trade Name Impairment 7,000
443,000 430,000 13,000

Limited-life intangibles:

Carrying Undiscounted cash Impairment

amount flows
Copyright $23,4381 $30,000 0

1
[$25,000 - ($25,000 ÷ 40 years x 2.5 years)]
 30

PROBLEM 12.9

Recoverable Amount
Carrying (higher of VIU or FV-
amount SC) Impairment
Trade Name $15,000 $ 7,500 $7,500
Copyright 23,438 27,000 0
Cash generating unit
to which Goodwill 450,000
was allocated (7,500)
442,500 440,000 2,500

The impairment test for the identifiable assets would be performed first, and then the carrying
amount of the CGU would be compared to its recoverable amount. The result, if the carrying
amount > the recoverable amount, would be the loss on impairment – first assigned to goodwill
with any remainder then allocated among the other assets on a relative book value basis.

Loss on Impairment 10,000

Accumulated Impairment Losses-Goodwill 2,500
Accumulated Impairment Losses-Trade Names 7,500