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Impairment Loss: Discontinued Operation. FAR CPA Exam

In this video we discuss impairment loss for discontinued operation. Start your free trial: ✅https://farhatlectures.com/ Understanding Impairment Loss on Discontinued Operations In accounting, impairment losses can significantly impact the financial reporting of discontinued operations. When a business decides to discontinue part of its operations, any impairment loss associated with the disposal or discontinuation must be recorded to reflect the current fair value of the assets and the financial impact of the decision. 1. Discontinued Operations Definition: Discontinued operations refer to components of an entity (such as a subsidiary, department, or segment) that have been disposed of or are classified as held for sale. These operations are separated from continuing operations on the financial statements to provide a clearer picture of ongoing business activities. Reporting Requirements: Under US GAAP and IFRS, discontinued operations are reported separately in the income statement below income from continuing operations, highlighting their results and allowing users to assess the impact on the entity's financial position more clearly. 2. Impairment Loss Definition: An impairment loss occurs when the carrying amount of an asset (or asset group) exceeds its recoverable amount. For discontinued operations, the recoverable amount is the higher of the asset's fair market value less costs to sell and its value in use. Trigger for Impairment Testing: When operations are classified as discontinued, a review for impairment is necessary because the decision to discontinue often changes the way assets are used and can affect their future cash flow projections. 3. Accounting for Impairment Loss in Discontinued Operations Measurement of Impairment: The impairment loss for discontinued operations is measured as the difference between the carrying amount and the fair market value less costs to sell. If the operation is to be disposed of, the fair market value less costs to sell typically becomes the relevant measure. Journal Entry: If an impairment loss is recognized, it should be recorded as follows: Debit: Impairment Loss (reported within the results of discontinued operations) Credit: Asset or Accumulated Depreciation (reducing the carrying value of the related asset) 4. Example of Impairment Loss on Discontinued Operations Suppose a company decides to discontinue and sell a division. The carrying amount of the division's assets is $1,000,000. After an impairment review, the fair market value less costs to sell is determined to be $800,000. The company would record an impairment loss as follows: Debit: Impairment Loss on Discontinued Operations: $200,000 Credit: Accumulated Depreciation or directly reduce the Asset value: $200,000 5. Impact on Financial Statements Income Statement: The impairment loss is shown as part of the results from discontinued operations. This separate presentation helps stakeholders understand the effects of discontinuing operations on the overall financial health of the company. Balance Sheet: The asset values are reduced to reflect the impairment, decreasing total assets and potentially impacting equity and asset turnover ratios. 6. Disclosure Requirements Financial Statement Notes: Entities must disclose the nature of the discontinued operation, the financial effects of discontinuing it (including impairment losses), and the method of disposal. Segments and Geographical Areas: If applicable, the impact on reportable segments or geographical areas must also be disclosed. Conclusion Impairment losses on discontinued operations are crucial for accurately presenting the financial impact of ceasing certain business segments or units. Proper recognition and measurement of these losses ensure that the financial statements reflect the true economic consequences of such strategic decisions, aiding stakeholders in making informed evaluations of the entity's financial health and future prospects. #cpaexaminindia #cpaexam #cpaexamprep