Final answer:
Impairment of value for assets with finite lives involves regular reviews and comparisons of the asset's carrying amount to its recoverable amount. For assets with indefinite lives, such as goodwill, impairment tests should occur annually or when circumstances suggest potential impairment. Complex banking transactions, especially international ones, can affect asset valuation and require present discounted value calculations.
Step-by-step explanation:
The question addresses the impairment of value of assets in the context of a bank's balance sheet. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. For assets with finite lives, impairment may be identified through regular reviews and triggered by events or changes in circumstances that indicate the asset's carrying amount may not be recoverable. The impairability is tested by comparing the carrying amount of the asset to its recoverable amount, which is the higher of the asset's fair value less costs to sell and its value in use.
Conversely, assets with indefinite lives or goodwill should be tested for impairment at least annually or more frequently if events or changes in circumstances indicate that it is likely that the impairment may have occurred. This process typically involves estimating the fair value of the asset or the cash-generating unit to which the asset belongs, and comparing it to its carrying amount.
Understanding the impairment of assets is vital, especially when banks engage in complex financial activities such as issuing loans to foreign entities or creating intricate financial deals. The risk of not recovering loans, which are a bank's primary assets, can significantly influence their value on the balance sheet. Additionally, the concept of present discounted value is key in determining the value of future cash flows from these assets, helping to accurately reflect their value in today’s terms.