Because of significant changes in the marketplace, the demand for a company's product has fallen and is not expected to recover to previous levels. The following information is related to the patent under which the product is produced:
Under IFRS (International Financial Reporting Standards), first determine the recoverable amount, which is the higher of
1. value in use (the present value of the expected future cash flows) = $32,000 or
2. fair value minus costs to sell = $34,000 - 4,000 = $30,000
The recoverable amount ($32,000) is lower than the carrying value ($36,000). Therefore, the asset is impaired and should be written down to that amount.
Under US GAAP, to assess impairment, the carrying value ($36,000) is compared with the undiscounted expected future cash flows ($38,000). In this case, the carrying value is lower so the patent is not impaired.