Question 9.13: Impairment of Property, Plant, and Equipment Sussex, a hypot......
Impairment of Property, Plant, and Equipment
Sussex, a hypothetical manufacturing company in the United Kingdom, has a machine it uses to produce a single product. The demand for the product has declined substantially since the introduction of a competing product. The company has assembled the following information with respect to the machine: (Table 1)
1. Under IFRS, what would the company report for the machine?
2. Under U.S. GAAP, what would the company report for the machine?
| Carrying amount | £18,000 |
| Undiscounted expected future cash flows | £19,000 |
| Present value of expected future cash flows | £16,000 |
| Fair value if sold | £17,000 |
| Costs to sell | £2,000 |
| (Table 1) | |
to 1: Under IFRS, the company would compare the carrying amount (£18,000) with the higher of its fair value less costs to sell (£15,000) and its value in use (£16,000). The carrying amount exceeds the value in use, the higher of the two amounts, by £2,000. The machine would be written down to the recoverable amount of £16,000, and a loss of £2,000 would be reported in the income statement. The carrying amount of the machine is now £16,000. A new depreciation schedule based on the carrying amount of £16,000 would be developed.
to 2: Under U.S. GAAP, the carrying amount (£18,000) is compared with the undiscounted expected future cash flows (£19,000). The carrying amount is less than the undiscounted expected future cash flows, so the carrying amount is considered recoverable. The machine would continue to be carried at £18,000, and no loss would be reported.