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Dear Tutor iam mixed up in the answer in the bpp question in the exam kit.
The question is Select whether each of the following statements is an indicator of impairment or is not an indicator.a. Advances in the technological enviroment in which an asset is employed has an adverse impact on its future use.
b. An increase in interest rates which increases the discount rate of an entity uses.
c. The carrying amount of an entitys net assets is lower thatn the entitys number of shares in issue multiplied by its share price.
d. The estimated net realisable value of inventory has been reduced due to fire damage although this value is greater than its carrying amounnt.
The asnwer says a, b and c are indicators and d is not.
The bpp workbook however states that an indicator of impairment is :
Carrying amount of net assets of the entity excceds market capitalisation
Which one is true ? Thank you
Hi,
The answer given is correct and you are confusing what is said in the workbook with this scenario as it is not relevant in this instance.
For part d then there is no indicator of impairment if the NRV of the inventory is still above its carrying amount. It is effectively saying that we used to have a NRV of $20 per unit and this is not $16 per unit but the carrying amount of the inventory is $12, so no indicator of impairment.
The scenario that you are trying to link back to is in relation to a company that is listed on an exchange and its market capitalisation (based on the current share price) is below the value of the net assets in the financial statements. The low share price therefore gives an indicator of a potential impairment.
Thanks
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