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Hi sir,
Could you please help me with the question from BPP study book?
A head office building with a carrying amount of $140m is estimated to have a recoverable amount of $90m due to falling property values in the area. An impairment loss of $50m is recognised. After three years, property prices in the area have risen, and the recoverable amount of the building increases to $120m. The carrying amount of the building had the impairment not occurred would have been $110m.
Required Calculate the reversal of the impairment loss.
Answer: The reversal of the impairment loss is recognised to the extent that it increases the carrying amount of the building to what it would have been had the impairment not taken place, ie a reversal of impairment loss of $20m is recognised and the building written back to $110m.
My question is: When we calculate the reversal of impairment loss, we calculate the difference between the historical carrying amount and the impaired carrying amount, and we also recognize it as gain on reversal. Why does this question reverse the difference between 110 and 90 (20)? After all, 90 is not a carrying amount. It is said that there is a revaluation after 3 years, ie there has been no depreciation in 3 years?
Thanks in advance!
Hi,
I can see your point in that when the asset was impaired to $90m three years ago then it would have been depreciated but there is no information given to help work out what the depreciation would be, so we have to just use the $90m in our calculations.
Thanks
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hi
dear tutor the question obviously states that if the impairment had not taken place the CV wouldve been 110m
now for that to happen you mustve had a building with the useful life of 14 years because:140m/14=10m depreciation per annum and since there were 3 years that are gone from the useful life the remaining life of the asset is 11 years so the new depreciation of the building wouldve been 90m/11years=8.2m per year then 8.2m*3=24.6m then the new CV is 90m-24.6=65.4m and then when the value of the property increases we NOW can remove the whole 50m in ACCUMULATED IMPAIRMENT why? because the value of the increase is more than the 50m that was once recognized
now my question is that whats the accounting treatment for that? do we debit the accumulated impairment and credit impairment expense? like , do we treat it as a negative expense ?or what?
and my second question is that am i right in my logic regarding the reversal of accumulated impairment account?
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hi
sorry i think im wrong in reducing the 3 years from the useful life of the building so we would have 90m/14years=6.43m then 6.43*3years=19.29 then 90m-19.29m=70.71 then 120m-70.71m=49.29 so we would reverse the accumulated impairment account for 49.29
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