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ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework

Orion Ltd holds a machine. Its carrying amount is $800,000. Fair value less costs of disposal is $650,000. Value in use is $720,000. Which statement correctly describes the measurement and the Conceptual Framework idea involved when applying IAS 36?

Recoverable amount is the higher of $650,000 and $720,000, so $720,000, giving an impairment of $80,000. Value in use is an entity-specific current value measure reflecting present value of expected cash flows. Taking the lower figure or averaging would be incorrect.

  1. ARecoverable amount is $720,000, so an impairment of $80,000 is recognised, using value in use, an entity-specific current valueCorrect
  2. BRecoverable amount is $650,000, so an impairment of $150,000 is recognised, using fair value as a market-based measure
  3. CRecoverable amount is $685,000, the average of the two, so an impairment of $115,000 arises
  4. DRecoverable amount is $720,000, so an impairment of $80,000 is recognised, using value in use, a historical cost measure

Explanation

Recoverable amount is the higher of fair value less costs of disposal ($650,000) and value in use ($720,000), so $720,000. Impairment is $800,000 - $720,000 = $80,000. Value in use is an entity-specific current value, not historical cost. Using $650,000 wrongly takes the lower figure.

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