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Impairment of long-lived assets to be held and used or to be disposed of by sale: Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, ASC 360-10 is the primary source of guidance on impairment of long-lived assets to be held and used or to be disposed of by sale. For guidance on impairment of goodwill and other intangible assets, see ASC 350.

Under IFRSs, IAS 36, Impairment of Assets, is the primary source of guidance on impairment of assets to be held and used. IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations, is the primary source of guidance on assets to be disposed of by sale. Unlike ASC 360-10, IAS 36 incorporates impairment guidance on other assets, including, but not limited to, goodwill, other intangibles, equity method investments, joint ventures, and investment properties carried at cost.

Note that although this comparison refers to asset groups, the same guidance would apply to disposal groups.

The table below summarizes these differences and is followed by a detailed explanation of each difference.1

SubjectU.S. GAAPIFRSs

Impairment method for long-lived assets

Impairment is recorded when an asset's carrying amount is not recoverable. An asset is not recoverable if the carrying amount exceeds the expected future cash flows to be derived from the asset on an undiscounted basis.

Impairment is recorded when an asset's carrying amount exceeds the higher of the asset's value in use (discounted present value of the asset's expected future cash flows) and fair value less costs to sell.

Measurement of an impairment loss

The carrying amount of the long-lived asset or asset group is compared with the fair value of the asset. The impairment loss is measured as the amount by which the asset's carrying amount exceeds its fair value.

The carrying amount of the asset is compared with its recoverable amount. The impairment loss is measured as the amount by which the asset's carrying amount exceeds its recoverable amount.

Definition of fair value

In accordance with ASC 820-10, fair value should be calculated as the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

Fair value is defined as the greater of:

  • Fair value less costs to sell — The "amount obtainable from the sale of an asset or cash-generating unit in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal."
  • Value in use — The "present value of the future cash flows expected to be derived from an asset or cash-generating unit."

Recording the impairment

Impairment charges are recorded directly against the carrying amount of the asset, which creates a new cost basis for the asset that is amortized over its remaining useful life.

Impairment charges reduce the carrying amount of the asset. Entities may either record the impairment directly against the carrying amount of the asset to establish a new cost basis or record the impairment within a contra-account to the asset. Under either method, the new asset value is amortized over its remaining useful life.

Reversal of impairment charge

Prohibited.

Impairment charges are reversed if there are subsequent changes in the recoverable amount, use of the asset, or economic conditions.

If a change has occurred, the asset impairment may be reversed; however, the asset should not be revalued to an amount greater than the carrying amount would have been if no impairment loss had been recognized (i.e., the otherwise net carrying amount after regular depreciation expense is deducted).

Impairment Method for Long-Lived Assets and Measurement of an Impairment Loss

Under both U.S. GAAP and IFRSs, if the circumstances associated with the long-lived asset have changed or a significant event has occurred that may affect the recoverability of the carrying amount of the long-lived asset, an impairment indicator exists and the entity should test the long-lived asset for impairment. Before testing for impairment, the entity should group the long-lived assets with other assets at the lowest level of identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. The lowest level of identifiable cash flows is termed an "asset group" under U.S. GAAP and a "cash-generating unit" under IFRSs. This is a difference in terminology, not method.

Under U.S. GAAP, testing a long-lived asset (asset group) for impairment is a two-step process:

  • Step 1 — The entity tests the long-lived asset or asset group for recoverability by comparing the carrying amount of the long-lived asset or asset group with the sum of the undiscounted future cash flows and the eventual disposal of the asset. If the carrying amount of the long-lived asset or asset group is determined to be greater than the sum of the undiscounted future cash flows, the entity would need to perform step 2.
  • Step 2 — If the long-lived asset or asset group fails the recoverability test in step 1, the entity must record an impairment expense for the difference between the carrying amount and the fair value of the long-lived asset or asset group.

Under IFRSs, if an impairment indicator is determined to exist as of a reporting date, the entity should test for recoverability. Paragraphs 18–23 of IAS 36 indicate that recoverability is calculated by comparing the asset's carrying amount with the greater of its (1) fair value less costs to sell or (2) value in use. If the carrying amount of the asset or cash-generating unit exceeds the higher recoverable amount, an impairment expense should be recorded. The recorded amount should be the difference between the asset's carrying amount and the higher recoverable amount.

It may not be necessary to calculate both the fair value less costs to sell and the value in use. If one of these two estimates is greater than the carrying amount, no further calculations are needed.

Note that under U.S. GAAP, there may be situations in which the fair value of the long-lived asset or asset group is less than the carrying amount but no impairment is recorded because the undiscounted cash flows are greater than the carrying amount and the long-lived asset or asset group passes step 1. Accordingly, an impairment recorded under IAS 36 may not be recorded under ASC 360-10.

Fair Value Definition

In accordance with ASC 820-10, the fair value of the long-lived asset or asset group should be calculated as the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The transaction to sell the asset is a hypothetical transaction considered from the perspective of a market participant that holds the asset. Therefore, the definition of fair value focuses on the price that would be received to sell the asset (an exit price), not the price that would be paid to acquire the asset (an entry price). ASC 820-10 amended ASC 360-10 to indicate that for long-lived assets, an expected present value technique will often be the appropriate technique with which to estimate fair value. However, because the guidance in ASC 820-10 is considered from the perspective of a market participant, the entity's intended use of the asset is not relevant. The determination of fair value assumes the highest and best use of the asset that will maximize its value to a market participant. The highest and best use can be based on either an "in-use" or an "in-exchange" valuation premise. The in-use premise would provide maximum value to a market participant through the asset's use in combination with other assets. The in-exchange premise would provide maximum value if the assets within the group were sold separately. Both standards use the concept of the highest and best use of an asset when describing how fair value is calculated. The IFRS term "fair value less costs to sell" is similar to the U.S. GAAP "in-exchange" fair value definition in ASC 820-10.

Under IFRSs, to calculate an asset's fair value less costs to sell, an entity should use the "amount obtainable from the sale of an asset or cash-generating unit in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal." The main difference between ASC 820-10 and IAS 36 regarding the exchange premise and fair value less costs to sell is that under IAS 36 transaction costs are deducted from the fair value calculation, whereas under ASC 820-10 subtraction of transaction costs is prohibited. Paragraph 28 of IAS 36 states that examples of such costs include "legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale."

Under IFRSs, to calculate an asset's fair value less costs to sell in accordance with paragraphs 25–29 of IAS 36, an entity should use the "amount obtainable from the sale of an asset or cash-generating unit in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal." The selling price should be a price that would be obtained in a binding agreement in an arm's-length transaction. If there is no binding agreement or active market, the entity should use the best market information available to reflect an amount that could be obtained. The main difference between ASC 820-10 and IAS 36 regarding the exchange premise and fair value less costs to sell is that under IAS 36 transaction costs are deducted from the fair value calculation, whereas under ASC 820-10 subtraction of transaction costs is prohibited. Paragraph 28 of IAS 36 states that examples of such costs include "legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale."

According to paragraphs 30–57 of IAS 36, the asset's value in use should be determined by (1) measuring the asset's future cash inflows and outflows and future cash flows from the ultimate disposal of the asset and (2) applying an appropriate discount rate. The IFRS term "value in use" is similar to the fair value calculation required for entities that have not yet adopted ASC 820-10, since both measurements use the discounted future cash flows to measure fair value and are developed from the perspective of the reporting entity. These measurements are also similar to the income approach under the "in-use" valuation premise in ASC 820-10, with one significant difference. ASC 820-10 requires that fair value measurements using unobservable inputs should reflect the entity's own assumptions about the assumptions that market participants would use in pricing the asset, while IFRSs may be based on entity-specific information.

Recording the Impairment

Under ASC 360-10-35-20, if an asset is impaired, the impairment loss should trigger the adjustment of the carrying amount of a long-lived asset to a new cost basis. ASC 360-10-35-20 further states, "For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset." That is, the asset's accumulated depreciation should be written off to reset the value of the asset.

Under IAS 36, as discussed in paragraphs 58–64, if an asset's carrying amount is greater than its recoverable amount, an impairment loss should be recorded. This may be done either by adjusting the carrying amount of the asset directly or through the use of a contra-account to the asset, which would not reset the cost basis of the asset but would decrease its overall value. An entity may want to use a contra-account to also allow for the asset to be revalued if there were any subsequent changes in the facts and circumstances associated with the asset that would require the reversal of impairment losses.

After recording the entries mentioned above, an entity is required to do the following under both U.S. GAAP and IFRSs:

  • Once an impairment loss has been applied to an asset, the amount amortized for that asset should be recalculated on the basis of the asset's new adjusted value, residual value, and remaining useful life.
  • If an asset group or cash-generating unit is used to calculate the impairment loss, the impairment loss generally should be allocated to each asset on a pro rata basis by using the relative carrying amounts of the asset in the asset group or unit.

Reversal of Impairment Charge

According to ASC 360-10-35-20 under U.S. GAAP, because an asset is considered to have a new cost basis after an impairment loss is recorded, the reversal (or "restoration") of a previously recognized impairment loss is prohibited.

Under paragraphs 110–116 of IAS 36, if changes are determined to have occurred in the recoverable amount of an asset, use of an asset, or economic conditions of an asset, an entity should reevaluate the recoverable amount of the asset to determine whether an impairment loss recognized in a prior period no longer exists. Paragraph 111 of IAS 36 outlines the following examples of situations in which impairment may no longer exist:

In assessing whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications:

External sources of information

a. there are observable indications that the asset's value has increased significantly during the period.

b. significant changes with a favourable effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which the asset is dedicated.

c. market interest rates or other market rates of return on investments have decreased during the period, and those decreases are likely to affect the discount rate used in calculating the asset's value in use and increase the asset's recoverable amount materially.

Internal sources of information

a. significant changes with a favourable effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, the asset is used or is expected to be used. These changes include costs incurred during the period to improve or enhance the asset's performance or restructure the operation to which the asset belongs.

b. evidence is available from internal reporting that indicates that the economic performance of the asset is, or will be, better than expected.

If any of the above situations are determined to exist and the recoverable amount of an asset has increased since the impairment loss was recognized, an entity should increase the value of the asset to its current recoverable amount. The prior impairment charge recorded is therefore reversed to profit or loss.

When reversing the impairment loss of an asset, the entity should not increase the carrying amount of the asset above the carrying amount that would have existed if no impairment loss had been recognized (i.e., the otherwise net carrying amount after regular depreciation expense is deducted).

After the reversal of an impairment loss, the amortization amount for the asset should be adjusted on the basis of the new value of the asset, its residual value, and its remaining useful life.

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1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

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