- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 5. Impairment of Assets
CFA Practice Question
A firm had an asset with a carrying value of $600,000. The estimated future discounted cash flows from the use of the asset have decreased to $300,000. If the fair value of the asset is $350,000, an impairment loss should be recognized in the amount of (under U.S. GAAP) ______.
A. $50,000
B. $250,000
C. $300,000
Explanation: The loss on impairment should be recognized as the excess of the fair value of the asset over the carrying value of the asset, if the fair value is available. If the fair value is not available, the discounted future cash flows can be used.
User Contributed Comments 8
| User | Comment |
|---|---|
| derekt | Impairement should only be recognized if the sum of the UNDISCOUNTED future cash flows < then the book value of the asset... therefore I assumed a trick question and chose A |
| danlan | Undisconted future cash flow is not available, so we do not know if the asset is impaired or not. |
| CocaColas | What am I missing? the FMV does not exceed the carrying value here |
| danlan | Cocaloas: that's why there is an impariment loss, and the amount is carring value-FMV=600000-350000=250000 |
| todolist | Fair value used for loss calculation, only use DCF when fair value unavaialbe |
| dlukas | The point where you recognize impairment in an asset (assuming it is not held for sale) is when the carrying value exceeds the UNDISCOUNTED future CF from the asset. HOWEVER, the amount of the write down is the carrying value minus the the PV of DISCOUNTED future CFs. |
| MUTE | dlukas: you are partially correct. When the fair market value is available we should use it; if not then use the discounted value of cash flows. The question is right. |
| jorellana9 | MUTE i'm not sure if you read anything dlukas said. Dlukas, thanks for your comment |