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Impairment of Assets | Impact on Financial Statement - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo Friends today we are
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going to learn a tutorial on impairment
of assets this is more sort of related
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to the gaap or the accounting standard or
maybe the US GAAP and so on and so forth
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so let's get into the nitty-gritty of
the same written over here 9 years
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since that Tata Steel Limited made its
most expensive acquisition purchasing
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anglo-dutch steelmaker corus it has
taken an impairment charge of almost
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$3 billion and analyst expects
more to come so what exactly they are
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trying to say see impairment is isn't
basically an accounting principle and
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that has been used to reduce the value
of the company's assets so this the
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asset of the company are basically they
have been tested for impairment annually
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very important they are tested annually
and if impaired an impairment loss has
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been recognized in that particular
regards in the income statement and the
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balance sheet is basically adjusted
accordingly so cash flow statement is
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not not at all affected by the
impairment as there is no cash
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transaction taking place at the time of
the impairment see we note that from the
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this particular snapshot that we that we
see over here in in this particular
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snapshot Tata Steel with the most
expensive acquisition of corus group has
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taken approximately 3 billion of
impairment charge until now and
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impairment charges have negative impact
on the financial statement as well so in
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this tutorial we are going to look into
various things mainly the fixed assets
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are basically which were which which are
been tested for impairment
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there are basically two type of fixed
assets the one all right over here the
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fixed assets they are of two types the
one is called the tangible one that is
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known as your tangible assets and the
another one is called intangible assets
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intangible assets one is called tangible
and another is called intangible assets
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so before understanding how a specific
asset is impaired we need to understand
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how it has been reported on the balance
sheet so the first and foremost thing
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that we are going to look about is how
are the tangible assets they are being
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basically reported in US GAAP and in
IFRS
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see different standard used by different
countries all around the world have
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different methods of reporting see if
you talk about US GAAP then in that
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particular case the uses you use the
cost model to report the tangible assets
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and you can say you know the tangible
assets mainly the property plant and
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equipment other land as reported on the
Amortized cost historical cost that is
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minus accumulated depreciation on
amortization depletion in impairment of
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losses so here the historical cost
refers to the purchase price you need to
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add anything that is in this any sort of
the cost that are related to the same to
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make the asset on ready for use and over
the period of time the value of the
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asset reduces as we charge depreciation
as expense every year in the income
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statement which then reduces the value
of the asset in the balance sheet see if we
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talk about things in terms of IFRS then
in that scenario most assets are
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reported at the depreciated cost model
so that that is known as the cost model
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now in this particular case what exactly
happens is that a IFRS provide basically
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an alternative that the revaluation
model in which an asset can be reported
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it at its fair value till the time
inactive market is there for the asset
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an active market is necessary because
the assets fair value can be reliably
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estimated only if it has been actively
traded so the use of the revaluation
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model is not very frequent at IFRS reporting but you can say
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you know it's still good in a way let's
see how things work out in case of the
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impairment of assets in in both the
scenario that is impairment of assets in
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case of US GAAP and in case of IFRS US
GAAP
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is basically the norms that US
follows in IFRS as his international
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financial reporting standards which the
international standards up in adopted so
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under US GAAP the test for the
impairment the effects as it has done
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only when the events in circumtances
indicate that you know over here there
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is the sort of a recovery of carrying
value might not be possible through
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future use so determining the impairment
of calculating the loss potentially
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involves basically it's a two-step
process in the first step in the first
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and the foremost step what has been done
is that the asset is tested before for
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impairment by applying the a recovery
ability test and if the asset is
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impaired the second step that involves
is measuring the losses so that's the
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second step see recoverability test if
you see over here in this case if the
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carrying value that is the original cost
less the accumulated depreciation I'll
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have to write things for you if in this
scenario you're carrying value if you're
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carrying value which is your original
cost lest any occupant depreciation if
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that is greater than the assets future
cash flow stream then the asset is
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considered as impaired so as the
recoverability test is based on the
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estimates of the future undiscounted
cash flows test for impairment involve
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considerable management discretion now
the loss measurement if the impaired the
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useful value of the asset is written
down to its fair value over here okay
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and on the balance sheets wherever
a loss is recognized in the income
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statement this loss is taken to be equal
to the excess of carrying value over the
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fair value of the assets now let's see
the impairment of the fixed assets under
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IFRS scenario what exactly goes on
around here
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in case of IFRS under IFRS the form
needs to assess annually whether the
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event or the circumstances indicate an
impairment of the assets value has
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occurred for example there may be a
consideration considerable decline in
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the value of the asset or a major change
in the assets physical condition if so
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the asset value must be tested for
impairment see when carrying out your of
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an asset if the carrying value over here
if that exceeds the recoverable amount
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then in that scenario what exactly
happens is that the asset can be impaired
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over here this thing can be impaired now
what happens a recoverable amount over
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here is equal to thee if that is the
recoverable amount if that is basically
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equal to your fair value minus any
selling cost or its value induce then
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in that scenario whichever is greater
then the process of computation the
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value use involves basically following
formulas or value in use will be equal
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to the estimation of the future cash
flow okay
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would be generated by the asset and the
calculation of the present value of the
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future cash flow by applying the
appropriate discounted that is basically
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your WACC once you apply that you get
your amount and whichever is higher will
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be the case so reasonable assumptions
must be taken in order to predict the
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future cash flows the item that should
be awarded while projecting the future
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cash flows include like exaggerated
revenue growths
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significant anticipated cost reductions
and unreasonable useful life for plant
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assets so Avoiding this items will result
in more meaningful results similarly any
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extraordinary growth of the recent times
should be assumed to be to last only for
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near about future near-term future and
should not be projected to continue in
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the long term so if impaired you can say that in the
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assets value must be written down to on
the balance sheet but to the recoverable
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amount so an impairment loss equals to
the excess of the carrying value of the
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recoverable amount is recognized in the
income statement it is only under the
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IFRS case what happens that the company
is allowed to reverse over here reverse
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its losses value of the impaired asset
recovers in its future so however the
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loss reversal is limited to the original
impaired the impairment loss hence the
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carrying value of the asset after
reversal cannot exceed the carrying
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value before impairment loss that was recognized in US GAAP this
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thing loss recoveries are not at all
permitted unlike what happens in IFRS
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where the company can recover its losses
but cannot exceed the original carrying
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value of the stated about now how are
intangible assets are recorded under US
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GAAP and IFRS I'll just write intangible
for US GAAP and IFRS see intagible
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assets are of two types one is called
you know the identifiable another is
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called unidentifiable so identifiable
are those type of assets which have
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finite life and therefore these assets
are amortized over a period of time and
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the expenses are recording the income
statement if I give some example of the
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identifiable assets that includes
trademark copyright etc so there is
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another called unidentifiable and those
are have an indefinite life and cannot
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be amortized at all so this are tested
for the impairment just like what we did
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for tangible assets right so over here
is the same thing has to be done under
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US GAAP the goodwill can be tested once
in a while so I'll just write for you
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goodwill and it can be tested once in a
while once in a while now in case of
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other things you know goodwill can be
must be tested for impairment in IFRS
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case it should be annually okay so reporting of the unidentifiable
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intangible assets is done similar to the
tangible assets that is on the US GAAP
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and under IFRS situation now let's
understand the impairment of the
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intangible assets under US GAAP and IFRS
see goodwill which has basically been
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created in a purchase acquisition can be
tested for impairment so goodwill
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created internally should be expensed as
incurred impairment of goodwill is
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basically similar to the tangible assets
under US GAAP and IFRS both so you know
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I'll show you that you know toshiba corp
had to record close enough to 2.3
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billion and goodwill impairment
charge on the value of the vesting and
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house Cranberry based nuclear form let
me show you that this article specifies
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the same you know Japanese parent
company has demoted the value of
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cranberry based nuclear form form 10
years after buying the business of $5.4
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billion around and it will record a 2.3 billion impairment
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charge on the goodwill value of westing
house so let's understand some examples
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on impairment see let's say or on basically on April 1
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2005 there was a company called
Belfor Inc they bought a building for
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around close enough to a 2 billion
they bought around for 2 billion and
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sorry not 2 billion it for 2 million
and the estimated life of the building
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at the time of the purchase was close
enough to 20 years the Depreciated
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method was used as like a know the
straight-line SLM method was been used
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on March 31 2009 the company came up
came to know that about about a flyover
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construction which would be adjacent to
the building which would reduce the
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access to the building decreasing its
value so for 1 million the company
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estimated to sell the building but would
be and would have to incur some cost of
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close enough to 50,000 another option
which was which the company had to
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consider that to use which would help
the company generate a present value of
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around $1.2 million okay so now if
the carrying value over here exceeds the
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recoverable amount we will have to
impair the building by the difference
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between the carrying value and the
recoverable amount now if you see the
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carrying amount the building was
originally bought for how much the
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building was originally we have bought
for 2 million with its estimated life
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of 20 years which is used for around
5 years which is used for 5 years
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so far so this gives us an accumulated
balance as is equal to 2 divided by 20
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into 5 which gives us 0.5 million
so to calculate the carrying amount of
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the building we need to calculate we
need to we need its formula which is
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carrying value is equal to the amount at
which the asset was purchased - any
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accumulated depreciation therefore you
know the 2 million was the amount right
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and less 0.5 that will be 1.5 now the recoverable amount over here is
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higher of the fair value - cost to sell
or the value in use as we discussed
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about so therefore in case of 1 million
minus 0.05 that gives us 0.95
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so the value in use is basically equal
to the present value of the future cash
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flows which in the question was given to
us that you know that was 1.2 million so
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as discussed in this particular case the
recoverable amount should be 0.95
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and 1.2 million so they caring
about is 1.5 million which is
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recoverable amount and is 1.2 million so
the company will have to book an
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impairment loss of 0.3 million
okay so 0.3 million is the amount of the
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lost day need to book but there are this
list of the companies with the highest
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level of impairment charges like Devon
Energy with having a huge market cap it
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has a high level of for asset impairment
of close enough to $20.820
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zero million that's really big
Bank Bradesco hsbc holding
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merck 3948 you can see Halliburton since so on and so forth now
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let's understand the impact of the
impairment on the financial statement
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see you know if the impairment or the
loss is recognized in the income
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statement in the same section where we
report our operating income and expenses
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with this loss the profitability for the
year is affected negatively so I'll show
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you an income statement of Schlumberger
limited it reported a significant
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impairment charge of close enough to
$3172 million in
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its income statement resulting in net
loss of 1687 million
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3172 is the impairment charge that they have record see at the
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balance sheet level if impaired the
asset is recently written down to the
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amount equal to the impairment loss
which is recognized in the income
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statement in the cash flow statement
there is no impact on the cash flow
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statement as there is no transaction
that has taken place so I'll show you a
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snapshot of how the cash flow worked we
note that you know the cash flow from
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the operations is prepared using the
indirect method and wearing you start
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with a net income and by call the
non-cash items included in the income
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statement let me show you that so we
here the impairment charges there which
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has been added back right so finally
after all this we can make a final
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conclusion that you know now at the very
first an impairment is basically an
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accounting principle that has been used
to permanently reduce the asset so under
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IFRS an asset estate tested for you can
say for impairment annually unlike the
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under US GAAP where there are two stages
from which the company decides whether
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they have to impair the answer so know
so generally fixed assets are tested for
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impairment and fixed assets include both
your tangible as well as your intangible
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assets it includes both of the thing and
you can say that the there are there are
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two types I mean intangible assets
identifiable and unidentifiable
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intangible assets identifiable assets
are about as
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the life of the assets and
unidentifiable assets are tested for
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impairment if you see for IFRS as the
fixed assets are reported depreciated
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cost at his cost model IFRS is also
provides an reval revaluation model and
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in that particular case in which the
assets is reported at the fair value if
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the carrying value is greater than the
recoverable amount then the asset is
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said to be impaired and the impairment
loss that is the difference between the
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carrying value and the recoverable
amount is recognized in the income
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statement but if you see in case of the
US GAAP the fixed assets are reported at
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the depreciated cost and the asset is
tested for impairment in two stages
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which we have learned for there is a
recovery ability test which helps to
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determine if the asset is impaired or
not and second there is a loss
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impairment that is if the asset is
impaired then what amount of loss do we
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have to report on the income statement
so an impairment loss can be recovered
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only under IFRS and not a US GAAP Thank You Everyone
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