📖 长期资产综合练习

Financial Statement Analysis

I. Lesson Focus

II. The Problem

A manufacturing company holds several long-lived assets at the end of 2023: a production line used for eight years (historical cost CNY 12 million), an office building (historical cost CNY 45 million), and an old machine with a carrying amount of only CNY 150,000 that is scheduled for retirement. Due to deteriorating market conditions, the production line shows clear impairment indicators, property values in the office building’s area have declined, and the old machine will be sold for scrap. How should the company perform impairment testing? How is the impairment loss measured and recognized? What are the journal entries for retirement and sale? How do these transactions affect current-period net income, total assets, operating cash flow, and key ratios such as ROA and asset turnover? This lesson provides systematic practice to build a robust framework for impairment and disposal of long-lived assets under both IFRS and US GAAP.

III. Impairment Framework and Testing Process for Long-Lived Assets

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. Under IFRS, recoverable amount is the higher of: - Fair value less costs of disposal (FVLCD) - Value in use (VIU) — the present value of expected future cash flows

Testing sequence: 1. Identify impairment indicators (external: market price decline, adverse legal changes; internal: idle assets, performance significantly below budget). 2. If indicators exist, test the individual asset or cash-generating unit (CGU). 3. Calculate recoverable amount. If lower than carrying amount, recognize:
Impairment Loss = Carrying Amount − Recoverable Amount 4. Allocate the loss first to reduce any goodwill to zero, then pro-rata to other assets. No asset may be written down below the higher of its FVLCD or zero. 5. The impairment loss is recognized in profit or loss. Under IFRS, impairment losses (except on goodwill) may be reversed in subsequent periods if recoverable amount increases. US GAAP prohibits reversal of impairment losses on long-lived assets once recognized.

Key IFRS vs US GAAP differences: - IFRS uses a one-step approach with recoverable amount and permits reversal (except goodwill). - US GAAP uses a two-step test (qualitative screen then quantitative) and does not allow reversal.

IV. Accounting for Disposal and Retirement

When an asset is sold, retired, or otherwise disposed of: - Depreciation ceases at the date of disposal. - Calculate gain or loss: Gain/Loss on Disposal = Net Proceeds − Carrying Amount - The gain or loss is reported in the income statement, typically within “other income/expense.” - Cash received is classified as an investing cash inflow.

Special cases: - Non-current asset held for sale: Once criteria are met, measure at the lower of carrying amount and FVLCD, cease depreciation, and present separately. - Asset retired with no proceeds: Write off the remaining carrying amount as a loss.

V. Financial Statement and Ratio Impacts

• Balance sheet: Impairment and disposal losses reduce total assets and equity.
• Income statement: Both impairment losses and disposal losses directly reduce net income.
• Cash flow statement: Impairment is a non-cash charge; add it back in the reconciliation of net income to operating cash flow. Actual cash from sale appears in investing activities.
• Ratio effects:
• ROA usually declines (numerator falls more than denominator).
• Asset turnover (Revenue / Average Total Assets) typically rises (smaller denominator).
• Leverage ratios (e.g., Debt/Assets) increase because total assets decrease.

Worked Cases

Case 1: Production Line Impairment Test (IFRS)

A production line has a historical cost of CNY 12 million and accumulated depreciation of CNY 4.8 million, resulting in a carrying amount of CNY 7.2 million. At year-end, impairment indicators exist: - FVLCD = CNY 5.5 million - Value in use (discounted future cash flows) = CNY 6.1 million

Solution:
Recoverable amount = max(5.5 m, 6.1 m) = CNY 6.1 million
Impairment loss = 7.2 m − 6.1 m = CNY 1.1 million

Journal entry:
Dr Impairment loss (P&L) 1.1 m
Cr Accumulated impairment (or asset) 1.1 m

Statement impact: Net income decreases by CNY 1.1 million; total assets decrease by the same amount. In the cash-flow statement the CNY 1.1 million non-cash impairment is added back to operating cash flow.

Case 2: Partial Reversal of Prior Impairment on Office Building (IFRS)

An office building has a current carrying amount of CNY 27 million after a CNY 3 million impairment recognized in the prior year. This year the recoverable amount rises to CNY 31 million. The carrying amount that would have existed had no impairment been recognized is CNY 26 million.

Solution:
Reversal is permitted but limited to the amount that restores the asset to the carrying amount that would have existed had the impairment never occurred.
Maximum reversal = CNY 3 million (original impairment).
After reversal the new carrying amount is CNY 30 million and a CNY 3 million impairment reversal gain is recognized in profit or loss.

Case 3: Retirement and Sale of Equipment

Equipment with original cost CNY 1.8 million and accumulated depreciation CNY 1.65 million has a carrying amount of CNY 150,000. The company retires and sells it, receiving CNY 80,000 cash and incurring CNY 20,000 in dismantling costs.

Solution:
Net proceeds = 80,000 − 20,000 = CNY 60,000
Loss on disposal = 150,000 − 60,000 = CNY 90,000

Journal entries (simplified):
Dr Cash 80,000
Dr Accumulated depreciation 1,650,000
Dr Loss on disposal 90,000
Cr Equipment 1,800,000
Cr Cash (dismantling) 20,000

Statement impact: Net income decreases by CNY 90,000. Net investing cash inflow is CNY 60,000. Any previously recognized impairment reserve would be incorporated into the carrying amount before calculating the loss.

Traps

Key Formulas

• Impairment Loss = Carrying Amount − Recoverable Amount
  Recoverable Amount = max(FVLCD, VIU)
• Gain/Loss on Disposal = Net Proceeds − Carrying Amount
• ROA = Net Income / Average Total Assets (typically falls after impairment)
• Asset Turnover = Revenue / Average Total Assets (typically rises after impairment)
• Reversal of Impairment (IFRS only) ≤ amount that restores asset to depreciated historical cost had no impairment occurred
• Post-impairment carrying amount becomes the new basis for future depreciation

Practice Questions

Q1. Under IFRS, when an asset’s recoverable amount is CNY 6.2 million and its carrying amount is CNY 7.5 million, the impairment loss to be recognized is:
A. CNY 0　B. CNY 1.3 million　C. CNY 6.2 million　D. CNY 7.5 million

Q2. Under US GAAP, an impairment loss recognized on a long-lived asset:
A. May be reversed in future periods　B. May be reversed only upon sale　C. May never be reversed　D. May be reversed by 50% the following year

Q3. A CGU includes goodwill of CNY 2 million and other assets totaling CNY 18 million. The recoverable amount of the CGU is CNY 16.5 million. The impairment loss allocated to the other assets is:
A. CNY 1.5 million　B. CNY 3.5 million　C. CNY 2 million　D. CNY 0

Q4. After an asset is classified as held for sale, the correct treatment is to:
A. Continue depreciating under the original policy　B. Stop depreciation and measure at the lower of carrying amount and FVLCD　C. Immediately impair the entire amount　D. Reclassify to current assets but continue depreciation

Q5. Equipment with a carrying amount of CNY 1.8 million is sold for CNY 2.2 million cash; transportation costs are CNY 150,000. The gain on disposal is:
A. CNY 250,000　B. CNY 400,000　C. CNY 550,000　D. CNY 2.2 million

Q6. The effect of an impairment loss on the statement of cash flows is:
A. Investing cash outflow　B. Added back in the operating section (indirect method)　C. No effect on cash flows　D. Financing adjustment

Q7. Which of the following is typically NOT an external indicator of impairment?
A. Significant decline in market price　B. Internal restructuring causing the asset to be idle　C. Significant increase in market interest rates lowering VIU　D. Adverse technological change in the industry

Q8. An asset had a CNY 1 million impairment recognized last year. This year its recoverable amount has increased by CNY 1.2 million (IFRS). If the carrying amount that would have existed had no impairment occurred is 85% of original cost, the maximum impairment reversal that can be recognized this year is:
A. CNY 1 million　B. CNY 1.2 million　C. CNY 200,000　D. CNY 0

Answers

Takeaways

• Recoverable amount is the higher of FVLCD and discounted value in use.
• IFRS permits reversal of impairment losses (except goodwill); US GAAP does not.
• Both impairment and disposal losses reduce net income, but only actual cash movements affect cash flows.
• In a CGU, impair goodwill first, then allocate the remainder pro-rata.
• Assets held for sale stop depreciating and are carried at the lower of carrying amount and FVLCD.
• After impairment, the revised carrying amount becomes the new depreciable base, affecting future expense recognition.