Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › What's the difference between asset revaluation and asset impairment
- This topic has 7 replies, 2 voices, and was last updated 8 years ago by MikeLittle.
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- February 24, 2016 at 5:55 pm #301877AnonymousInactive
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Hi Mr Little,
May I ask what’s the difference between asset revaluation and asset impairment? Particularly the application aspects.
I understand asset can be revaluated down from the carrying amount and a revaluation loss is created;
Though there will be a loss too when asset is impaired.
So what’s the differences in regards to their application?
When do I use asset revaluation and when do I use asset impairment, when the new asset value is bring down all the same?
Thanks.February 25, 2016 at 7:38 am #301957Revaluation will be when the valuation model is adopted
Impairment applies when we’re using the cost model
February 25, 2016 at 9:52 am #301978AnonymousInactive- Topics: 43
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Hi Mr Little,
What about the first time the asset is revalued/reassessed? And the carrying value is brought down. Does this mean both revaluation and impairment can be applied?
Thanks.
February 27, 2016 at 9:43 pm #302367No, it’s being impaired down to proper valuation and valuation procedures will be applied after that
March 1, 2016 at 4:35 am #302727AnonymousInactive- Topics: 43
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Thank you sir.
May I ask you an Exam question for the diet of Jun 2015? It’s the question number 4.
The following is the briefing:
A plant of carring amount of $248,000 at 1 Apr 2014.
The depreciation rate is 12.5% on a reducing balance.
The estimated net cash flows for the next three years discounting to the present is $214,600.
On 1 Apr 2015, offer to buy the plant is $200,000.The solution is:
Carrying amount at 1 Apr 2015: $248,000 – $248,000 * 12.5% = $217,000
The estimated net cash flows discounted to the present value (recoverable amount): $214,6000We choose the lower of the amount: $214,600
Then we choose the higher of the recoverable amount $214,600 which is the value in use and the fair value less any costs of disposal $200,000, reaching the value of $214,600 as the asset value in the state of financial position at 1 Apr 2015.
It seems to me that the first choice is the application of revaluation model, and the second choice is the application of impairment, but why this precedent? Why not the reverse application?
And another thing, I feel the question and the presented solution is confusing. The three years net cash flow is discounted to present, which I assume is at 1 Apr 2014, but then the Examiner takes this figure to compare against the carrying amount one year’s later at the 1 Apr 2015, and then he choose the lower amount that is the discounted net cash flow $214,600. Isn’t that wrong?
Thank you.
March 1, 2016 at 10:10 am #302773I’m confused!
It looks to me like you’ve selected $214,600 too early! “We choose the lower of the amount: $214,600” seems to me to be in the answer too early
Take the $248,000, depreciate for one year to March 2015 and arrive at carrying value of $217,000
Recoverable amount at March 2015 is higher of $200,000 resale value and $214,600 present value
Select $214,600 as the higher of these two
Compare $214,600 with carrying value of $217,000 and impair carrying value by $2,400
(Why did you assume that the “net cash flow discounted to present” was as at 1 April, 2014? The depreciation rate is given for you to calculate depreciation for the year ended 31 March, 2015. The offer to buy the plant is at 1 April, 2015. So why do you think the present value of value in use is as at 2014?)
March 1, 2016 at 1:59 pm #302825AnonymousInactive- Topics: 43
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Hi Sir,
Now I understand. The order of the selection of $214,600 is provided in the solution from ACCA’s site:
Is the lower of its carrying amount ($217,000) and recoverable amount ($214,600) at 31 March 2015.
Recoverable amount is the higher of value in use ($214,600) and fair value less (any) costs of disposal ($200,000)).
Carrying amount = $217,000 (248,000 – (248,000 x 12·5%))
Value in use is based on present values = $214,600Thus I was confused.
As for 3 year net cash flows discounting to current as of 01 Apr 2014, I read that from the question. Below is the net cash flow table:
Year to 31 March 2015 120,000–>109,200
Year to 31 March 2016 80,000 –>66,400
Year to 31 March 2017 52,000 –>39,000If the year to 31 Mar 2015 net cash flow is discounted to $109,200, then the present time must have been 1 Apr 2014, thus my confusion why the examiner uses a value of 1 Apr 2014 to compare with the one carried on 1 Apr 2015 ($217,000).
Thanks.
March 1, 2016 at 4:41 pm #302860Wow! Yes, that really HAS confused me!
A comparison between present value at 2014 and carrying value at 2015 is SA very strange idea!
I can’t help you, sorry
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