Macon Company Macon Company owns an apartment building that originally cost $40 million and by the end of the current period has accumulated depreciation of $10 million, with net carrying value of $30 million.Macon Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the building for $16 million.Unanticipated placement of a new shopping center has caused Macon Company to reassess the future rentals.Macon Company expects the building to provide rentals for only 15 more years before Macon will sell it.Macon Company uses a discount rate of 8% per year in discounting expected rentals from the building.
Macon now expects to receive annual rentals of $2.7 million per year for 15 years and to sell the building for $10.0 million after 15 years; these payments, in total, have a present value of $26.2 million when discounted at 8% per year.The building's fair value is $25 million today.Costs to sell are estimated at $1,000,000.
Using the Macon Company data, the application of IFRS indicates:
A)no impairment loss has occurred.
B)an impairment loss has occurred in the amount of $3.8 million.
C)an impairment loss has occurred in the amount of $6 million.
D)an impairment gain has occurred in the amount of $6 million.
E)an impairment gain has occurred in the amount of $3.8 million.

Question

Quizplus · Accepted Answer

Under IFRS, an impairment loss should be recognized if the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. In this case, the apartment building's carrying amount is $30 million, which exceeds its recoverable amount of $26.2 million. Therefore, an impairment loss of $3.8 million ($30 million - $26.2 million) should be recognized.

Note that the fact that the building's fair value is $25 million is not relevant for impairment testing under IFRS, as the recoverable amount is based on the higher of fair value less costs to sell and value in use.

Macon Company Macon Company Owns an Apartment Building That Originally