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Part of the solution reads,
“The directors wish to reverse the impairment loss calculated as at 31/05/2004,on the grounds that,using the same cash flows,the value in use of the non current assets is now above carrying value. However, while IAS 36 requires an assessment at each reporting date of whether an impairment has decreased, this does not apply to the unwinding of the discount (or goodwill). Since the same cash flows have been used, the increase in value in use is due to the unwinding of the discount, and so cannot be reversed. ”
Could someone clarify as to what the solution means?
Thanks.
Hi Ivan
the impairment of goodwill cannot be reversed because ( impairment loss is calculated by CV- value in use). Value in use is determined by the discount rates. and cannot be used in goodwill calculation also it states that the same projections have been used which shows that it definitely cannot be reversed.
Dear Kerri,
Please your answer is not clear to me because of the following;
1. The question did not state that the impairment is related to goodwill
2. “Value in use is determined by the discount rates. and cannot be used in goodwill calculation”. Please what does this mean, and why is it so?
3. “the same projections have been used which shows that it definitely cannot be reversed.” Please what about the same projections being used shows that the impairment loss cannot be reversed?
“Value in use” itself should already be the present value of future benefits, so the “value in use” at each reporting deadline can only be used to compare with the carrying value at the same time.
Example:
A CGU will generate $10 2 years later and $140 3 year later. Assuming10% discount rate, and no further income. The current carrying value is $120.At this year end, the value in use should be $8.26 + $105.18 = $113.44. So you record an impairment loss of $5.56. The new CV will be $113.44.
At next year, assuming no change in cash inflow, the value in use should be $9.09+$115.70 = $124.79. Now the value in use is greater than your current value ($113.44). However it is simply caused by “unwinding of the discount”. As such, reversal of impairment is not permitted in accordance with IAS36 (“no reversal for unwinding of discount”).
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