CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to valuation impairments under U.S. GAAP?

I. An asset is deemed impaired if its book value exceeds its expected discounted cash flows.
II. The amount of the write-down is equal to the difference between the asset's book value and the present value of its expected cash flows even if the fair market value is available.
III. The amount of the write-down must appear on the income statement as part of continuing operations.
IV. Once the impairment has been eliminated, the asset's book value may be written back up again to better reflect economic reality.
A. I and II
B. III only
C. III and IV
Explanation: I is incorrect because the rule stipulates that the book value of the asset must exceed its undiscounted cash flows.

II is incorrect because the amount of the write-down is equal to the difference between the asset's book value and its fair market value (if it is available).

IV is incorrect because once an asset is written down, it may not be written back up again, even if circumstances turn favorable.

User Contributed Comments 5

User Comment
mishis for III If fair mkt value is not available, you may use PV of future CFs
dlukas PV of future CFs is a proxy for FMV, therefore, II is also correct.
dlukas Also, see p. 403 in the CFA curriculum (FSA book): In the case of assets held for sale, FMV = PV of future CF, discounted at a credit-adjusted risk-free rate.

I guess II is incorrect if the fair value is there.
Hishy Step 1: If BV < Undiscounted future CFs, then there is impairment.

Step 2: Calculate actual impairment value.
FMV - BV = Impairment
If FMV not available, use PV of future CFs.
jayj001 Hishy, the notes have it different.

BV > Undiscounted future CFs => impairment

IL = BV - [FMV or PV future CFs]
You need to log in first to add your comment.