CAF-1 · Chapter 5

IAS 36 Impairment of Assets MCQs with Answers

15 multiple-choice questions on IAS 36 Impairment of Assets for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Under IAS 36, an asset is impaired when its carrying amount exceeds its 'recoverable amount'. How is the recoverable amount defined?

   • A) The higher of its fair value less costs of disposal and its value in use.
   • B) The lower of its fair value less costs of disposal and its value in use.
   • C) The present value of future cash flows expected to be derived from an asset.
   • D) The amount obtainable from the sale of an asset in an arm's length transaction.
   Show answer & explanation

   Answer: A) The higher of its fair value less costs of disposal and its value in use.

   IAS 36 defines the recoverable amount of an asset (or a cash-generating unit) strictly as the higher of its fair value less costs of disposal and its value in use.

2. Question 2

   When calculating the 'value in use' of an asset for impairment testing, which discount rate should be applied to future cash flows?

   • A) The entity's average historical borrowing cost.
   • B) The risk-free rate adjusted for general inflation.
   • C) A pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.
   • D) A post-tax rate equivalent to the entity's weighted average cost of capital.
   Show answer & explanation

   Answer: C) A pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.

   IAS 36 requires that the discount rate used to calculate value in use be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which future cash flow estimates have not been adjusted.

3. Question 3

   An entity previously recognized an impairment loss on an asset carried under the cost model. If the reasons for the impairment subsequently reverse, what is the upper limit for the new carrying amount?

   • A) Its newly determined fair value without any limits.
   • B) The carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized in prior years.
   • C) Its original historical cost before any depreciation or impairment.
   • D) Reversals of impairment losses are strictly prohibited under IAS 36.
   Show answer & explanation

   Answer: B) The carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized in prior years.

   IAS 36 limits the reversal of an impairment loss. The increased carrying amount of an asset attributable to a reversal cannot exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized in prior years.

4. Question 4

   Under IAS 36, when is an asset considered to be impaired?

   • A) When its fair value exceeds its carrying amount.
   • B) When its carrying amount exceeds its recoverable amount.
   • C) When its value in use is less than its historical cost.
   • D) When physical damage occurs, regardless of value.
   Show answer & explanation

   Answer: B) When its carrying amount exceeds its recoverable amount.

   An asset is impaired if its carrying amount exceeds the amount to be recovered through use or sale (recoverable amount).

5. Question 5

   Which of the following is defined as the 'value in use' of an asset?

   • A) The estimated future selling price of the asset.
   • B) The current market value in an active market.
   • C) The present value of the future cash flows expected to be derived from the asset.
   • D) The replacement cost of the asset.
   Show answer & explanation

   Answer: C) The present value of the future cash flows expected to be derived from the asset.

   Value in use is the present value of the future cash flows expected to be derived from an asset, including its eventual disposal.

6. Question 6

   Which of the following assets is OUTSIDE the scope of IAS 36 Impairment of Assets?

   • A) Property, plant, and equipment.
   • B) Intangible assets.
   • C) Purchased goodwill.
   • D) Inventories.
   Show answer & explanation

   Answer: D) Inventories.

   Inventories are measured at the lower of cost and net realizable value under IAS 2, and are thus excluded from IAS 36.

7. Question 7

   Which of the following represents an INTERNAL indication that an asset may be impaired?

   • A) Significant adverse changes in the technological environment.
   • B) A significant increase in market interest rates.
   • C) Evidence of obsolescence or physical damage to the asset.
   • D) A decline in the overall market capitalization of the entity.
   Show answer & explanation

   Answer: C) Evidence of obsolescence or physical damage to the asset.

   Evidence of obsolescence or physical damage is an internal source of information indicating potential impairment.

8. Question 8

   Which of the following represents an EXTERNAL indication of potential impairment?

   • A) The asset becoming idle or part of a restructuring.
   • B) The asset's market value declining significantly more than expected.
   • C) Internal reports showing worse economic performance than expected.
   • D) Physical damage from an accident.
   Show answer & explanation

   Answer: B) The asset's market value declining significantly more than expected.

   A significant, unexpected decline in an asset's market value is classified as an external source of information indicating impairment.

9. Question 9

   If an asset is carried at a revalued amount under IAS 16, how is an impairment loss treated?

   • A) Always charged entirely to profit or loss.
   • B) Treated as a revaluation decrease recognized in other comprehensive income up to the available revaluation surplus.
   • C) Ignored because revalued assets cannot be impaired.
   • D) Deducted from the asset's historical cost.
   Show answer & explanation

   Answer: B) Treated as a revaluation decrease recognized in other comprehensive income up to the available revaluation surplus.

   An impairment loss on a revalued asset is recognized in other comprehensive income to the extent it does not exceed the revaluation surplus for that asset.

10. Question 10

    After an impairment loss is recognized, what must happen to the depreciation charge for the asset?

    • A) It remains the same as before.
    • B) It is suspended until the asset's value recovers.
    • C) It is adjusted in future periods to allocate the revised carrying amount over the remaining useful life.
    • D) The asset must be fully depreciated in the year of impairment.
    Show answer & explanation

    Answer: C) It is adjusted in future periods to allocate the revised carrying amount over the remaining useful life.

    The depreciation charge must be adjusted in future periods to allocate the asset's revised carrying amount on a systematic basis over its remaining useful life.

11. Question 11

    When reversing an impairment loss for an asset (other than goodwill), what is the upper limit for the new carrying amount?

    • A) The fair value of the asset.
    • B) The original historical cost of the asset.
    • C) The carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized.
    • D) There is no upper limit.
    Show answer & explanation

    Answer: C) The carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized.

    A reversal cannot lead to a carrying amount higher than what it would have been, net of depreciation, if no impairment had occurred.

12. Question 12

    Which of the following assets MUST be tested for impairment annually, irrespective of whether there is any indication of impairment?

    • A) All property, plant, and equipment.
    • B) Purchased goodwill.
    • C) Inventory.
    • D) Assets with a finite useful life of less than 5 years.
    Show answer & explanation

    Answer: B) Purchased goodwill.

    Certain assets, such as purchased goodwill, are required to be tested for impairment annually regardless of indicators.

13. Question 13

    When calculating the value in use, which of the following should NOT be included in the estimated future cash flows?

    • A) Cash inflows from the continuing use of the asset.
    • B) Cash outflows necessarily incurred to generate the cash inflows.
    • C) Cash flows from financing activities and income tax receipts/payments.
    • D) Net cash flows from the ultimate disposal of the asset.
    Show answer & explanation

    Answer: C) Cash flows from financing activities and income tax receipts/payments.

    Estimates of future cash flows for value in use calculations strictly exclude cash inflows or outflows from financing activities and income tax.

14. Question 14

    If an asset's fair value less costs of disposal is found to be greater than its carrying amount, what is the next required step under IAS 36?

    • A) Immediately calculate the value in use.
    • B) Revalue the asset upwards to its fair value.
    • C) Conclude the asset is not impaired and do not estimate value in use.
    • D) Recognize an impairment loss based on the difference.
    Show answer & explanation

    Answer: C) Conclude the asset is not impaired and do not estimate value in use.

    If fair value less costs of disposal exceeds the carrying amount, the asset is not impaired, and it is not necessary to estimate the value in use.

15. Question 15

    What type of discount rate should be used when calculating the value in use of an asset?

    • A) A post-tax rate that reflects the entity's overall cost of capital.
    • B) A pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset.
    • C) The prevailing inflation rate.
    • D) The exact interest rate of the entity's main bank loan.
    Show answer & explanation

    Answer: B) A pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset.

    The discount rate must be a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset.