CFA Practice Question

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CFA Practice Question

Under U.S. GAAP, impairment losses are recognized for long-lived tangible assets held for use when the asset's ______

I. carrying amount is not recoverable.
II. carrying value exceeds its undiscounted future cash flows.
III. fair value exceeds its carrying value.
IV. carrying value exceeds its fair value.
Correct Answer: I and II

User Contributed Comments 11

User Comment
mattg I assume that if future cash flows can surpass carrying amount, fair value is irrelevant? If not I also think IV would be true
rocyang don't get I. Anyone know why?
Jurrens I think "fair value" is ignored, because it does not necessarily imply it could sold for that value, where as with market value, you can actual sell the asset for that amount. So while something may be "worth" something, it doesn't mean anyone will actually pay that amount.

That's what I derived from the wording.
joywind Just remember that the basic principle is that impairment cost incurs (requires to be recognized) when the carrying value is not recoverable. Then under U.S. GAAP, Recoverability Test (Book Value > Undiscounted future Cash Flows) is used to decide if loss should be recognized; while under IFRS, one step approach will be used, which is not relevant in this question.
NIKKIZ There is a reason why 4 is not true: the point of an impairment charge is not to mark the asset to its market value (which can change all the time depending on the business cycle) but to take a charge when its reasonably certain that the asset will not produce the cashflows that were originally envisaged.
johntan1979 IV is for calculating the impairment loss, not to determine impairment.
quanttrader conditions:

1. recoverability test - carrying amt is not recoverable

2. impairment exists if carrying value < future undiscounted CF

if impairment is recognized, then value of impairment/write off is carrying value - fair mkt price (otherwise, use undiscounted future cash flow)
Seancfa1 Thank-you Johntan1979 and Quanttrader
Tom0409 So what happens if the asset is considered impaired due to carrying value exceeding undiscounted cash flows, but the fair value is above the carrying value? therefore there is no impaired amount?
khalifa92 1. occurrence
2. recognition
mcbreatz I believe quanttrader has his symbol backwards. If carrying value is > than undiscounted future CF than an impairment exists. Basically carrying value should never exceed undiscounted CF because undiscounted CF is a conservative estimate of value.
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