When measuring an impairment loss for a longterm operating a

When measuring an impairment loss for a long-term operating asset, must firms determine the fair market value using a discounted cash flow model? Explain.

Solution

Impairment Loss = Carrying Amount - Recoverable Amount

Carrying Amount = This is book value of asset after charging depreciation and revaluation if any.

Recoverable Amount = Higher of net selling price or Value in use

Net Selling Price = Estimated Selling price - Estimated Selling Expense

Estimate selling price is based on any of following factors:-

- Current Quotation

- Price of recent similar transaction

- Management Estimate

Value in use is value of expected cashflow arising from use of asset including terminal value. Such cashflow should be discounted using pretax discount rate calculated as per CAPM.

If value in use or net selling price can not be calculated then either value can be ignored.