CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

A firm had an asset with a carrying value of $600,000. The estimated future undiscounted cash flows from the use of the asset have decreased to $300,000. Under U.S. GAAP, the firm should ______

I. write down the asset.
II. recognize an impairment loss.
III. determine the fair value of the asset, if possible.
A. I, II and III
B. II and III
C. I and II
Explanation: When the undiscounted estimated cash flows expected from use of the asset are decreased significantly, there exists one of the conditions for recognizing an impairment of value.

User Contributed Comments 5

User Comment
jpducros What's the difference between writing down the asset and recognising an impairment loss?
teje writing down the asset means that they will credit a contra account (which serves to reduce the corresponding asset) or they will credit the asset account itself (also resulting in a reduction in asset value) for every credit there has to be a corresponding debit, the impairment loss is the debit that occur on the income statement, which reduces net income, retained earnings, and shareholders' equity.
altyn2003 thank you
Mariana80 why do you need the fair value if you already know what the undiscounted cash flows are?
dream007 @ mariana80: US GAAP says we write down the difference between the carrying value and fair value (or DISCOUNTED cash flow if we are unable to ascertain fair value).

Write down under US GAAP is a two stage process. First determine if the carrying value is more than the UNDISCOUNTED cashflow. if yes, there is impairment.
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