Question

As at 1 January 2020, the carrying amount of a machine owned by Lega Harta Bhd was RM30,000. The machine was bought on 3 January 2016 at a cost of RM50,000. The useful life is 10 years and the company uses cost model to subsequently value the machine. During the year 2020, due to the outbreak of a new virus in Vietnam there was a sharp decline in the demand of Lega Harta Bhd's products. Therefore, as at 31 December 2020, the company decided to perform an impairment test on the machine. It was found out that the value in use was RM22,000 and the fair value less cost to sell was RM20,000

Answer 1

Based on the given information, the carrying amount of the machine as of 1 January 2020 is RM30,000. The machine was purchased on 3 January 2016 at a cost of RM50,000, and the useful life is 10 years.

However, due to the outbreak of a new virus in Vietnam in 2020, there was a sharp decline in the demand for Lega Harta Bhd's products. As a result, the company decided to perform an impairment test on the machine as of 31 December 2020.

The impairment test revealed that the value in use of the machine was RM22,000, which is the present value of its expected future cash flows. The fair value less cost to sell, which is the amount the machine could be sold for in an orderly transaction, was RM20,000.

Considering the impairment test results, if the carrying amount of the machine is higher than the higher of its value in use (RM22,000) and fair value less cost to sell (RM20,000), an impairment loss needs to be recognized in the financial statements. In this case, the carrying amount of the machine is higher than both the value in use and fair value less cost to sell, so an impairment loss would need to be recognized.

The impairment loss would be calculated as the difference between the carrying amount of the machine (RM30,000) and the higher of its value in use (RM22,000) and fair value less cost to sell (RM20,000). Therefore, the impairment loss would be RM10,000 (RM30,000 - RM20,000).

After recognizing the impairment loss, the carrying amount of the machine would be adjusted to its recoverable amount, which is the higher of its value in use and fair value less cost to sell. In this case, the carrying amount would be adjusted to RM20,000, as it is the higher of the two.

It is important to note that impairment losses are recognized as an expense in the income statement and reduce the carrying amount of the asset on the balance sheet.