Non-Financial Assets, Impairment and Disposal

Introduction and context

Non-financial assets are resources controlled by an entity that are expected to generate future economic benefits without being primarily financial claims on another party. They include inventories, property, plant and equipment (PPE), intangible assets, investment property, biological assets and assets classified as held for sale. Their accounting is important because recognition, measurement, depreciation, impairment and disposal can materially affect profit, equity, solvency ratios, taxation and management decisions.

International Financial Reporting Standards (IFRS) do not provide one universal measurement model for all non-financial assets. Instead, measurement depends on the asset’s purpose, expected pattern of consumption, market characteristics and the existence of reliable valuation evidence. The central professional task is therefore classification: an asset must first be identified and classified correctly before an appropriate measurement model can be selected.

This chapter integrates IAS 2 Inventories, IAS 16 Property, Plant and Equipment, IAS 23 Borrowing Costs, IAS 36 Impairment of Assets, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, IAS 38 Intangible Assets, IAS 40 Investment Property, IAS 41 Agriculture, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Learning objectives

By the end of this chapter, the reader should be able to:

1. Distinguish major categories of non-financial assets and apply the relevant IFRS classification criteria.
2. Measure inventories, PPE, intangible assets, investment property and biological assets using appropriate cost and valuation models.
3. Capitalise eligible borrowing costs and distinguish capital expenditure from repairs and operating expenditure.
4. Identify, measure and reverse impairment losses while observing the rules for goodwill and cash-generating units.
5. Account for government grants and asset retirement obligations.
6. Apply the recognition, measurement and presentation requirements for assets held for sale.
7. Evaluate how accounting choices affect performance indicators, stewardship and financial statement credibility.

1. A classification-based framework

The following questions provide a practical decision framework:

An asset is generally recognised only when it is probable that future economic benefits will flow to the entity and its cost or fair value can be measured reliably. These criteria are supplemented by specific standards. For example, internally generated goodwill is not recognised, whereas purchased goodwill is recognised in a business combination under IFRS 3 and subsequently tested for impairment under IAS 36.

2. Inventories: IAS 2

Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials and supplies to be consumed in production or service delivery. Examples include merchandise, raw materials, work in progress and finished goods.

Initial measurement

Inventory is measured initially at cost. Cost includes:

• purchase price, import duties and non-refundable taxes;
• transport and handling costs; and
• conversion costs, including systematic allocation of fixed and variable production overheads.

Trade discounts, rebates and similar items reduce cost. Abnormal waste, storage costs not necessary for production, administrative overheads unrelated to production and selling costs are expensed as incurred.

For normal production, fixed production overhead is allocated using normal capacity, not merely the output achieved in an unusually low-production period. Variable overhead is allocated based on actual use of production facilities.

Cost formulas

Specific identification is appropriate for items that are not ordinarily interchangeable or for goods produced for specific projects. For interchangeable items, IAS 2 permits first-in, first-out (FIFO) or weighted-average cost. Last-in, first-out is not permitted under IFRS.

The periodic weighted-average cost per unit is:

The formula assumes that all units in the relevant pool are interchangeable. A moving-average system recalculates the average after each purchase and may produce a different result from a periodic average.

Net realisable value

Inventories are measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale.

NRV is entity-specific and differs from fair value. A write-down is recognised as an expense. If NRV subsequently increases, a previous write-down may be reversed, but only to the amount of the original write-down.

Worked example: inventory valuation

A retailer has 1,000 units purchased at $18 and 600 units purchased at $22. At year-end, 900 units remain. The selling price is $20 per unit and selling costs are $1 per unit. There are no completion costs.

Under periodic weighted average:

Total cost = (1,000 × $18) + (600 × $22) = $31,200.

Units available = 1,600.

Weighted-average cost = $31,200 ÷ 1,600 = $19.50 per unit.

Closing inventory cost = 900 × $19.50 = $17,550.

NRV = 900 × ($20 − $1) = $17,100.

Therefore, closing inventory is reported at $17,100 and the write-down is $450. The write-down reflects expected economic recovery, not a permanent change in the purchase price of the goods.

3. Property, plant and equipment: IAS 16

PPE comprises tangible items held for production or supply, rental to others, or administrative purposes and expected to be used during more than one period. Recognition requires probable future economic benefits and reliable measurement of cost.

Elements of cost

The cost of PPE includes:

• purchase price, net of discounts;
• directly attributable costs of bringing the asset to the location and condition necessary for operation;
• initial estimates of dismantling, removal and site-restoration obligations; and
• borrowing costs where IAS 23 criteria are met.

Examples of directly attributable costs include site preparation, delivery, installation, testing and professional fees. Start-up losses, staff training, general administration and abnormal inefficiencies are normally expensed.

Subsequent expenditure is capitalised only when it meets the recognition criteria. Routine repairs and maintenance are expensed. Significant inspections and replacement components may be capitalised when their recognition criteria are satisfied; the carrying amount of the replaced component is derecognised.

Depreciation

Depreciation allocates the depreciable amount systematically over useful life. The depreciable amount is:

For straight-line depreciation:

The method must reflect the pattern in which economic benefits are consumed. Straight-line depreciation is appropriate where consumption is approximately even. Units-of-production may be appropriate where use drives consumption. Revenue-based depreciation is generally inappropriate because revenue reflects prices and other factors, not solely consumption of the asset.

Depreciation begins when the asset is available for use and ceases at the earlier of derecognition or classification as held for sale. Useful life, residual value and method are reviewed at least at each financial year-end and changes are accounted for prospectively as changes in estimates.

Cost and revaluation models

Under the cost model, an asset is carried at cost less accumulated depreciation and accumulated impairment losses. Under the revaluation model, an entire class of PPE is carried at fair value at the revaluation date less subsequent depreciation and impairment. Revaluations must be sufficiently regular to ensure that carrying amount does not differ materially from fair value.

An upward revaluation is generally recognised in other comprehensive income and accumulated in revaluation surplus, except to the extent that it reverses a previous decrease recognised in profit or loss. A downward revaluation is generally recognised in profit or loss, except to the extent of an existing surplus for that asset.

Components and derecognition

Material components with different useful lives are depreciated separately. When PPE is sold or otherwise disposed of, it is derecognised. The gain or loss is:

The gain is not revenue from ordinary activities unless the sale is part of the entity’s ordinary business.

4. Borrowing costs: IAS 23

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of that asset’s cost. A qualifying asset requires a substantial period of time to get ready for its intended use or sale. Examples include major manufacturing facilities, certain investment properties under construction and large inventories requiring a substantial production period.

Capitalisation begins only when all three conditions exist:

1. expenditures for the asset are being incurred;
2. borrowing costs are being incurred; and
3. activities necessary to prepare the asset for intended use or sale are in progress.

Capitalisation is suspended during extended periods in which active development is interrupted, except where the interruption is a necessary part of the process. It ceases when substantially all activities necessary to prepare the asset are complete.

For a specific borrowing, the capitalised amount is generally the actual borrowing cost incurred less income from temporary investment of those borrowings. For general borrowings, a capitalisation rate is applied to qualifying expenditures:

The capitalisation rate is the weighted average of borrowing costs applicable to the entity’s general borrowings outstanding during the period, excluding borrowings specifically obtained for qualifying assets. Capitalisation cannot exceed borrowing costs incurred during the period.

5. Intangible assets: IAS 38

An intangible asset is an identifiable non-monetary asset without physical substance. Identifiability exists when the asset is separable or arises from contractual or other legal rights. Control means the entity can obtain future economic benefits and restrict others’ access to those benefits.

Examples include patents, licences, copyrights, computer software and development costs meeting specified criteria. Research expenditure is expensed as incurred. Development expenditure is capitalised only when the entity can demonstrate technical feasibility, intention and ability to complete and use or sell the asset, probable future benefits, availability of resources, and reliable measurement of costs.

Internally generated brands, mastheads, publishing titles, customer lists and goodwill are not recognised because their costs cannot be distinguished reliably from the cost of developing the business as a whole.

An intangible asset with a finite useful life is amortised systematically from the date it is available for use. The residual value is assumed to be zero unless a third party is committed to purchase the asset or an active market is expected to exist at the end of its useful life. An indefinite-life intangible is not amortised but is tested annually for impairment and whenever indicators exist. “Indefinite” does not mean infinite; it means there is no foreseeable limit to the period over which net cash inflows are expected.

6. Investment property: IAS 40

Investment property is land or a building, or part of a building, held to earn rentals, for capital appreciation, or both. Owner-occupied property is PPE under IAS 16, while property held for sale in the ordinary course of business is inventory under IAS 2.

After recognition, an entity chooses either the fair value model or the cost model and applies that policy consistently to investment property. Under the fair value model, changes in fair value are recognised in profit or loss and depreciation is not charged. Under the cost model, the property is accounted for under IAS 16’s cost model, subject to required disclosures about fair value.

Transfers occur when there is a change in use supported by evidence, such as commencement of owner-occupation or development with a view to sale. Mere changes in management intention do not, by themselves, establish a transfer.

7. Biological assets and agricultural produce: IAS 41

Biological assets are living animals or plants. Agricultural produce is the harvested product of an entity’s biological assets. Biological transformation includes growth, degeneration, production and procreation.

Biological assets are generally measured at fair value less costs to sell, both initially and at each reporting date, unless fair value cannot be measured reliably on initial recognition. Gains and losses from changes in fair value less costs to sell are recognised in profit or loss. Agricultural produce is measured at fair value less costs to sell at the point of harvest; that amount becomes its cost under IAS 2 after harvest.

Bearer plants used solely to grow produce are accounted for under IAS 16, while the produce growing on bearer plants remains within IAS 41. This distinction is significant because bearer plants are consumed through use, whereas the produce is subject to biological transformation.

8. Government grants and asset retirement obligations

Government grants: IAS 20

A government grant is recognised only when there is reasonable assurance that the entity will comply with the conditions and that the grant will be received. Grants related to assets may be presented either as deferred income recognised systematically in profit or loss over the useful life of the asset, or by deducting the grant from the asset’s carrying amount. The chosen policy must be applied consistently.

Income-related grants are presented either separately or under a general heading such as “other income,” or deducted from the related expense. Repayment of a grant is accounted for as a change in accounting estimate, with the required adjustment to deferred income, asset carrying amount or cumulative depreciation.

Asset retirement obligations: IAS 37 and IAS 16

An obligation to dismantle an asset or restore a site is recognised as a provision when there is a present legal or constructive obligation from a past event, a probable outflow of resources and a reliable estimate. The initial present value of the obligation is included in the cost of the related PPE when it arises from constructing or using that asset.

Where settlement is expected in the future, discounting is required when the effect is material. The provision is subsequently revised for changes in expected cash flows and discount rates. The unwinding of the discount is generally recognised as a finance cost. Changes related to PPE are accounted for under the applicable asset standard and may affect the asset’s carrying amount, subject to impairment considerations.

9. Impairment of assets: IAS 36

An asset is impaired when its carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use.

Value in use is the present value of future cash flows expected from continuing use and ultimate disposal. Cash-flow estimates must be based on reasonable and supportable assumptions, consistent with approved budgets, and should not include benefits from future restructurings or enhancements to which the entity is not yet committed.

An impairment loss is:

The loss is recognised in profit or loss unless the asset is carried at a revalued amount, in which case it is treated as a revaluation decrease to the extent of any related surplus.

Indicators and testing

At each reporting date, an entity assesses whether impairment indicators exist. External indicators include declining market value, adverse technological or economic changes and increases in market interest rates. Internal indicators include obsolescence, physical damage and worse-than-expected performance.

Annual testing is required for goodwill, indefinite-life intangible assets and intangible assets not yet available for use, even if no indicator exists. Goodwill is allocated to the cash-generating units (CGUs) or groups of CGUs expected to benefit from the business combination. A CGU is the smallest identifiable group generating cash inflows largely independent of other assets.

An impairment loss for a CGU is allocated first to goodwill and then pro rata to other assets, subject to the rule that no asset is reduced below the highest of its fair value less costs of disposal, value in use and zero.

Impairment losses may be reversed when estimates change, but not beyond the carrying amount that would have existed after normal depreciation had no impairment been recognised. Impairment of goodwill is never reversed.

Worked example: value in use

A CGU has a carrying amount of $10.0 million. Forecast cash inflows and outflows produce net cash flows of $2.4 million in each of the next three years, followed by a disposal cash flow of $1.0 million at the end of year three. The discount rate is 10%.

Value in use is:

This equals approximately $2.182 million + $1.983 million + $2.554 million = $6.719 million. If fair value less costs of disposal is $7.2 million, recoverable amount is $7.2 million because it is higher than value in use. The impairment loss is therefore $10.0 million − $7.2 million = $2.8 million.

The calculation assumes cash flows occur at each year-end, the discount rate is appropriate for the risks not already reflected in the cash flows, and the cash flows are stated consistently before or after tax with the discount rate. In practice, valuation uncertainty should be disclosed where material.

10. Assets held for sale and disposal groups: IFRS 5

A non-current asset or disposal group is classified as held for sale when its carrying amount will be recovered principally through sale rather than continuing use. The asset must be available for immediate sale in its present condition, a sale must be highly probable, management must be committed to a plan, an active programme to locate a buyer must have begun, the asset must be marketed at a reasonable price and completion should normally be expected within one year.

Once classified as held for sale, the asset is measured at the lower of carrying amount and fair value less costs to sell. Depreciation and amortisation cease. Impairment losses and subsequent reversals are recognised in profit or loss, subject to IFRS 5 limits. Comparative information is generally not reclassified merely because an asset is classified as held for sale in the current period.

A disposal group includes assets and directly associated liabilities intended to be disposed of together. Discontinued operations are components that have been disposed of or classified as held for sale and represent a separate major line of business or geographical area, form part of a coordinated plan, or are a subsidiary acquired exclusively for resale. Their results are presented separately to improve users’ assessment of continuing operations.

11. Applied case: Meridian Manufacturing Ltd

Background

Meridian Manufacturing Ltd is constructing a specialised production facility. It has also acquired software, received a government grant, identified a site-restoration obligation and decided to sell an obsolete warehouse. At year-end, management proposes to capitalise all expenditure and defer any losses until the assets are sold.

Problem

The proposed treatment risks overstating assets and profit. The finance team must classify and measure each item under IFRS.

Analysis and approach

1. Factory construction: Direct construction expenditure and eligible borrowing costs are capitalised under IAS 16 and IAS 23. General administration, abnormal waste and training are expensed.
2. Borrowing costs: Capitalisation starts when expenditure, borrowing costs and qualifying construction activities occur. It stops when the facility is substantially ready for use.
3. Site restoration: The present value of the restoration provision is recognised under IAS 37 and included in the factory’s initial cost under IAS 16. The provision is subsequently updated, with discount unwinding recognised as finance cost.
4. Software: Purchased software is recognised as an intangible asset when controlled and expected to generate benefits. It is amortised over its finite useful life from the date it is available for use.
5. Government grant: The grant is recognised only when reasonable assurance exists. Meridian selects a consistent policy: deferred income recognised over the factory’s useful life.
6. Warehouse: Management’s intention alone is insufficient. If the warehouse is available for immediate sale, actively marketed at a reasonable price and sale is highly probable, it is classified under IFRS 5, depreciation stops, and measurement becomes the lower of carrying amount and fair value less costs to sell.
7. Impairment: The factory and software are assessed for indicators. If the facility is not yet available for use, relevant intangible assets are tested annually where IAS 36 requires it. Forecasts must not include unsupported future benefits.

Outcome

Meridian’s revised accounting produces a more faithful allocation of expenditure across assets and periods. Capitalisation is limited to costs that create or prepare assets, restoration obligations are recognised rather than ignored, the grant is matched systematically with the related asset benefit, and the warehouse is reclassified only when IFRS 5’s stringent criteria are met. The resulting statements may show lower current profit than management originally expected, but they provide more reliable information for lenders, shareholders and regulators.

Learning points

The case demonstrates that classification, timing and evidence are as important as arithmetic. Capitalising an expenditure does not eliminate its eventual effect on profit: it changes timing through depreciation or amortisation. Similarly, delaying impairment or ignoring disposal criteria can materially misstate both assets and performance.

12. Professional judgement, governance and technology

These standards require judgement in estimating useful lives, residual values, fair values, cash flows, discount rates, normal production capacity and the probability of sale. Governance should therefore include documented assumptions, independent review of valuations, sensitivity analysis and clear approval controls.

Valuation specialists may be needed for investment property, biological assets, complex impairment models and restoration obligations. Audit committees should challenge optimistic forecasts, especially where management compensation depends on earnings or asset values. Disclosures should explain accounting policies, estimation uncertainty, impairment sensitivity, revaluation movements, commitments and restrictions on title.

Technology can improve asset registers, component tracking, maintenance records and impairment monitoring. Artificial intelligence may assist in detecting obsolete inventory, forecasting asset utilisation or identifying unusual capital expenditure. However, AI-generated forecasts do not replace management’s responsibility for reasonable assumptions, data quality, explainability, human review and compliance with IFRS. Automated systems should preserve audit trails and prevent unauthorised changes to useful lives, residual values or classification decisions.

13. Contemporary issues and limitations

Fair-value models can improve relevance but may reduce comparability when active markets do not exist. Value-in-use calculations are sensitive to small changes in growth, margins and discount rates. Climate-related risks may create impairment indicators, shorten useful lives, reduce residual values or increase restoration obligations even when no immediate legal requirement exists. Technological disruption can make inventory and intangible assets obsolete quickly.

A further challenge is the tension between faithful representation and verifiability. Historical cost is often objective but may become less relevant in periods of inflation or rapid technological change. Fair value may be more current but depends on models and assumptions. The appropriate response is not to select the method that produces the most favourable result, but to apply the relevant standard consistently, document judgement and provide transparent disclosures.

Best-practice checklist

• Confirm classification before selecting a measurement model.
• Maintain a componentised fixed-asset register.
• Separate capital expenditure from repairs, training and administration.
• Review useful lives, residual values and depreciation methods annually.
• Document borrowing-cost start, suspension and cessation dates.
• Test goodwill and other required assets for impairment at the correct frequency.
• Use realistic, supportable cash-flow forecasts and perform sensitivity analysis.
• Reconcile physical inventory to the ledger and assess NRV item by item where appropriate.
• Monitor legal, contractual and constructive obligations for restoration provisions.
• Apply IFRS 5 only when all held-for-sale criteria are satisfied.
• Obtain independent valuation evidence where measurement uncertainty is high.
• Preserve approval and audit trails for estimates and classification decisions.

Chapter Summary

Non-financial asset accounting is built on a classification-first approach. Inventories are measured at the lower of cost and NRV, using permitted cost formulas such as FIFO or weighted average. PPE is initially measured at cost and subsequently measured using either the cost or revaluation model, with significant components depreciated separately. Eligible borrowing costs are capitalised only while qualifying asset activities are in progress.

Intangible assets require identifiability, control and probable future benefits; research and many internally generated items are expensed. Investment property is held for rentals or capital appreciation and may be measured under the fair value or cost model. Biological assets generally use fair value less costs to sell, while bearer plants fall under IAS 16. Government grants are recognised when reasonable assurance exists, and asset retirement obligations are recognised as provisions and included in related asset cost when appropriate.

IAS 36 compares carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use. Goodwill and certain intangible assets require annual impairment testing, and goodwill impairment cannot be reversed. IFRS 5 requires strict criteria before classification as held for sale; depreciation then ceases and measurement is at the lower of carrying amount and fair value less costs to sell. Across all areas, reliable estimates, governance, disclosure and professional scepticism are essential to credible IFRS reporting.

Key Terms

Asset retirement obligation: A present obligation to dismantle, remove or restore an asset or site.

Bearer plant: A living plant used in the production or supply of agricultural produce, expected to bear produce for more than one period.

Carrying amount: The amount at which an asset is recognised after accumulated depreciation, amortisation and impairment.

Cash-generating unit: The smallest identifiable group of assets generating largely independent cash inflows.

Component accounting: Separately depreciating significant parts of an asset with different useful lives.

Depreciable amount: Cost or revalued amount less residual value.

Fair value less costs of disposal: The price obtainable from selling an asset in an orderly transaction, less direct disposal costs.

Government grant: A transfer of resources by government in return for past or future compliance with specified conditions.

Impairment loss: The excess of an asset’s carrying amount over its recoverable amount.

Intangible asset: An identifiable non-monetary asset without physical substance.

Investment property: Property held to earn rentals, for capital appreciation, or both.

Net realisable value: Estimated selling price less completion and selling costs.

Qualifying asset: An asset requiring a substantial period to become ready for intended use or sale.

Recoverable amount: The higher of value in use and fair value less costs of disposal.

Residual value: Estimated amount obtainable from disposal of an asset after deducting disposal costs at the end of useful life.

Revaluation model: A PPE measurement model based on fair value at the revaluation date, less subsequent depreciation and impairment.

Value in use: Present value of future cash flows expected from continuing use and ultimate disposal.

Useful life: The period or production capacity over which an asset is expected to be available for use.

Review Questions

Short Answer Questions

1. What are the two components of recoverable amount under IAS 36?
2. Why are abnormal production losses excluded from inventory cost?
3. When does depreciation of PPE begin?
4. What conditions must exist before borrowing-cost capitalisation begins?
5. Why is goodwill impairment not reversed under IAS 36?

Long Answer Questions

1. Compare the cost and revaluation models for PPE, including their effects on profit, equity and disclosure.
2. Explain the recognition and subsequent measurement requirements for internally generated intangible assets.
3. Discuss the distinction between investment property, owner-occupied property and inventory held for sale.
4. Explain how IAS 2 determines inventory cost and NRV, including the treatment of subsequent reversals.
5. Describe the accounting for government grants and asset retirement obligations and explain the related judgement issues.

Analytical / Application Questions

1. A company reports a CGU carrying amount of $15 million, value in use of $12 million and fair value less costs of disposal of $13.5 million. Calculate the impairment loss and explain how it should be allocated if the CGU includes $2 million of goodwill.
2. A warehouse has a carrying amount of $8 million, fair value less costs to sell of $7.4 million and is actively marketed under an approved plan expected to complete within eight months. Analyse whether IFRS 5 applies and state the measurement consequences.
3. Critically evaluate whether fair value measurement or historical cost provides more decision-useful information for a specialised biological asset with no active market. Address reliability, estimation uncertainty and disclosure.

Multiple Choice Questions with Answers

Question 1

Under IAS 2, inventories are generally measured at:

A. The higher of cost and net realisable value

B. The lower of cost and net realisable value

C. Fair value through other comprehensive income

D. Replacement cost only

Correct Answer: B. The lower of cost and net realisable value

Question 2

Which cost is normally excluded from the cost of inventories?

A. Import duties

B. Direct conversion labour

C. Abnormal production waste

D. Transport to the production facility

Correct Answer: C. Abnormal production waste

Question 3

A qualifying asset under IAS 23 is an asset that:

A. Is always intangible

B. Requires a substantial period to become ready for use or sale

C. Has an indefinite useful life

D. Is held exclusively for trading

Correct Answer: B. Requires a substantial period to become ready for use or sale

Question 4

Under IAS 36, recoverable amount is the:

A. Lower of value in use and carrying amount

B. Higher of fair value less costs of disposal and value in use

C. Higher of cost and fair value

D. Present value of liabilities only

Correct Answer: B. Higher of fair value less costs of disposal and value in use

Question 5

Which statement about goodwill impairment is correct?

A. It is tested only when goodwill is sold

B. It is amortised over five years in all cases

C. An impairment loss is never reversed

D. It is measured at NRV

Correct Answer: C. An impairment loss is never reversed

Question 6

Under IFRS 5, depreciation of a non-current asset ceases when it is:

A. Fully paid for

B. Classified as held for sale

C. Revalued upward

D. Insured

Correct Answer: B. Classified as held for sale

Question 7

A biological asset under IAS 41 is generally measured at:

A. Historical cost less depreciation in all cases

B. Fair value less costs to sell

C. Replacement cost plus margin

D. NRV less accumulated impairment only

Correct Answer: B. Fair value less costs to sell

Question 8

Which expenditure is most likely to be capitalised as part of PPE cost?

A. General staff training

B. Abnormal start-up losses

C. Installation and testing necessary to prepare the asset for use

D. Routine administrative salaries

Correct Answer: C. Installation and testing necessary to prepare the asset for use

Question 9

A government grant related to an asset may be accounted for by:

A. Recognising it only when the asset is sold

B. Deducting it from the asset’s carrying amount or presenting it as deferred income

C. Recognising it directly in retained earnings in all cases

D. Treating it as a financial liability permanently

Correct Answer: B. Deducting it from the asset’s carrying amount or presenting it as deferred income

Question 10

A $10 million asset has a recoverable amount of $7.2 million. The impairment loss is:

A. $2.8 million

B. $7.2 million

C. $17.2 million

D. $0.72 million

Correct Answer: A. $2.8 million