Exercise 12-15 At the end of 2017, Flounder Corporation owns a licence with a re
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Question
Exercise 12-15
At the end of 2017, Flounder Corporation owns a licence with a remaining life of 9 years and with a carrying amount of $505,000. Flounder expects undiscounted future cash flows from this licence to total $509,300. The licence’s fair value is $399,500 and disposal costs are estimated to be nil. The licence’s discounted cash flows (that is, value in use) are estimated to be $445,900. Flounder prepares financial statements in accordance with IFRS. Assume that the licence was granted in perpetuity and has an indefinite life.
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Account Titles and Explanation
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Exercise 12-15
At the end of 2017, Flounder Corporation owns a licence with a remaining life of 9 years and with a carrying amount of $505,000. Flounder expects undiscounted future cash flows from this licence to total $509,300. The licence’s fair value is $399,500 and disposal costs are estimated to be nil. The licence’s discounted cash flows (that is, value in use) are estimated to be $445,900. Flounder prepares financial statements in accordance with IFRS. Assume that the licence was granted in perpetuity and has an indefinite life.
Explanation / Answer
IFRS uses a one-step impairment test. The carrying amount of an asset is compared with the recoverable amount.
The recoverable amount is the higher of
(1) the asset’s fair value less costs of disposal or
(2) the asset’s value in use.Value in use represents entity-specific future pretax cash flows
discounted to present value.
Carrying value of license at end of 2018= 5,05,000-(5,05,000/9)= 4,48,889
Since the recoverable amount is less than carrying amount, therefore, the license needs to be impaired by 20,789 (4,48,889-4,28,100)
Year 2017 Carrying Amount Recoverable Amount is higher of: Fair Value 3,99,500 Value in use 4,45,900Related Questions
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