Scrap fully amortised or early; exchange at fair value; the two-step test with no reversal

Nothing is received

Not every asset is sold. Northlake Nordic Centre Inc. scraps a fully amortised snowmobile — cost 14,000, accumulated amortization 14,000, carrying amount zero. Nothing changes in total, but an entry is still needed, or the books carry a 14,000 asset and a 14,000 contra for a machine at the dump:

Accumulated Amortization – Equipment    14,000
    Equipment                                     14,000

No gain, no loss, no cash. Then a rental kiosk (cost 9,000, accumulated 6,500) is crushed by a falling tree, uninsured. The four steps run with proceeds of zero: the 2,500 carrying amount becomes a Loss on Disposal — Dr Accumulated Amortization 6,500, Dr Loss on Disposal 2,500 / Cr Equipment 9,000. The loss is the carrying amount, never the 9,000 cost.

A trade-in: purchase plus disposal

Bramble Lane Outfitters Ltd. trades its old delivery truck (Vehicles: cost 38,000, accumulated 30,000 — carrying amount 8,000) plus 43,000 cash for a new one. The dealer’s sticker says 52,000 with a 9,000 “trade-in allowance”. Ignore the sticker. A dealer’s allowance is a negotiating number; the old truck’s fair value — what it would fetch on its own — is 5,000. A trade-in with substantial cash is, in substance, two transactions: a disposal of the old truck at its fair value, and a purchase of the new one for what was given up:

$$\text{Cost of the new truck}=\text{Cash paid}+\text{Fair value of the old}=43,000+5,000=48,000$$

$$\text{Loss on the old truck}=\text{Fair value}-\text{Carrying amount}=5,000-8,000=(3,000)$$

Vehicles (new)                            48,000
Accumulated Amortization – Vehicles       30,000
Loss on Disposal                           3,000
    Vehicles (old)                                38,000
    Cash                                          43,000

Recording the new truck at 52,000 and a 1,000 “gain” (allowance 9,000 − carrying 8,000) overstates the asset by 4,000 and turns a loss into a gain. ASPE s.3831 governs the pure swap with little or no cash — measured at the fair value of what was given up or received, whichever is more reliable — and gives the same answer; if a swap has no commercial substance, the carrying amount is used instead. A 191 case keeps to the simple rule: new asset = cash paid + fair value of the old.

Impairment: the two-step test

Amortization spreads cost on the assumption the asset will earn it back. When something happens that says it will not — three warm winters, a competitor, a technology shift — ASPE s.3063 requires a test. Note the trigger: the test is run only when an indicator exists, not every year.

Northlake’s snowmaking system: cost 210,000, accumulated 90,000, carrying amount 120,000. After three warm winters management estimates it will generate 100,000 of future cash flows, undiscounted, over its remaining life, and that it could be sold today for 82,000.

Step 1 — recoverability. Compare the carrying amount with the undiscounted future cash flows: 120,000 > 100,000. The asset will not earn back its carrying amount; it is not recoverable, so go to step 2. (The 20,000 excess is a signal, not the loss.)

Step 2 — measure. The loss is carrying amount less fair value: 120,000 − 82,000 = 38,000.

Impairment Loss                           38,000
    Accumulated Amortization – Equipment          38,000

The written-down 82,000 is the new cost base, amortised over the remaining life from here. And if fair value recovers to 95,000 next year — nothing. ASPE never reverses an impairment of PP&E (IFRS does; inventory write-downs do, L8.7; PP&E under ASPE does not).

The contrast case shows why step 1 matters. Same system, but the undiscounted cash flows are 130,000 and the fair value 110,000. Step 1: 120,000 < 130,000 — recoverable, stop. No impairment, even though the fair value is 10,000 below the carrying amount. A student who skips to step 2 writes down an asset the standard says is fine.