Question

The management of Clayton LTD. determined that the cost of one of its factories may be impaired. Below are data related to the assets of the factory ($ in millions):

Book value $400
Undiscounted sum of future estimated cash flows 420
Present value of future cash flows 320
Fair value less costs to sell (determined by appraisal) 330
Under IFRS, what amount of impairment loss, if any, should Clayton recognize?
a) $90 million.
b) $80 million.
c) $70 million.
d) No impairment loss is required.

Answer 1

According to IFRS, Clayton LTD should recognize an impairment loss of $70 million.

Step-by-step explanation:

According to IFRS, if the fair value less costs to sell (determined by appraisal) is less than the book value of the factory, an impairment loss should be recognized. In this case, the fair value less costs to sell is $330 million, which is less than the book value of $400 million.

The impairment loss is determined by comparing the fair value less costs to sell with the carrying amount of the asset. The carrying amount is the higher of the book value or the fair value less costs to sell. In this case, the carrying amount is $400 million.

The impairment loss is calculated as the carrying amount minus the fair value less costs to sell. Therefore, the impairment loss is $400 million - $330 million = $70 million.