Question

At the end of 2020, Bridgeport Corporation owns a licence with a remaining life of 10 years and a carrying amount of $ 528,000. Bridgeport expects undiscounted future cash flows from this licence to total $ 532,500. The licence's fair value is $ 423,000 and Bridgeport prepares financial statements in accordance with IFRS. disposal costs are estimated to be nil. The licence's discounted cash flows (that is, value in use) are estimated to be $ 477,700. Determine if the licence is impaired at the end of 2020. The licence_____at the end of 2020.

Answer 1

The licence owned by Bridgeport Corporation is impaired because its carrying amount ($528,000) is higher than both its fair value less costs to sell ($423,000) and its value in use ($477,700).

Step-by-step explanation:

The licence is considered impaired at the end of 2020 because its carrying amount ($528,000) exceeds the recoverable amount. In accordance with IFRS, an asset's recoverable amount is the higher of its fair value less costs to sell ($423,000 in this case) and its value in use. Since both the fair value less costs to sell ($423,000) and the discounted cash flows reflecting the value in use ($477,700) are lower than the carrying amount, it is evident that the asset is impaired.

To determine if an impairment exists, compare the carrying amount of the asset with the recoverable amount, which is the greater of the two values (Fair value less costs to sell or value in use). Here, both values are less than the carrying amount, thus an impairment loss needs to be recognized. The impairment loss would be calculated as the difference between the carrying amount and the highest of the fair value less costs to sell or the value in use, which in this case is $477,700.