impairment loss

Impairment loss is occurs where the recoverable amount of an asset is less than its carrying amount. The question now is,; what then is recoverable amount? Recoverable amout is the higher of fair value less cost to sell and the value in use . Value in use is the discounted net present cash flow that the asset is expected to generate.

For example, if an entity is expecting a trade receivable worth $40m from one of its major customers, and it received news that the client is passing through some financial difficulties, which has cast doubt on its ability to receive payment. Impairment test has been carried out and the result showed that the entity can only recover 60% of the receivable. Ascertain impairment loss on the asset?

Solution.;
Carrying amount of the asset= $40

Recoverable amount(60%*$40)= $24

impairment loss = $16.

Hope this is clear.