- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 7. Analysis of Long-Term Assets
- Subject 2. Impairment of Assets
CFA Practice Question
A firm had an asset with a carrying value of $300,000. Its fair value is $180,000, and the future discounted cash flows from the use of the asset are estimated to be $200,000. Under U.S. GAAP, the firm should recognize an ______.
B. extraordinary loss of $100,000
C. impairment loss of $120,000
A. extraordinary loss of $20,000
B. extraordinary loss of $100,000
C. impairment loss of $120,000
Correct Answer: C
When the market value of an asset has significantly decreased or there is a significant decrease in future cash flows from the asset, the loss on the asset impairment should be recognized as the excess of the carrying value over the market value, if available.
User Contributed Comments 7
| User | Comment |
|---|---|
| danlan | If the fair value is available, use it; otherwise, use the discounted cash flows. |
| guna | First look at Fair value and Cash flows, if FV < CF, then impairment loss = Carrying Value - Fair value |
| hegde | when both fair value & future discounted cash flow is available and FDC < FV then is it Ok to take FDC on the basis of conservatisam? |
| rfvo | Good fundemental question |
| prajacti | think about it hegde, it is highly unlikely that fair value will be less than future discounted CF. who will pay more than future benefit? |
| quanttrader | carrying value > undiscounted cash flows. Therefore impairment charge of carrying value - fair value. |
| jzty | I think this problem is unclear. We do not know the undiscounted cash flows. We are comparing the carrying value and the undiscounted cash flows, not discounted cash flows. |