IFRS for Long-lived Assets & R&D

IFRS for Long-lived Assets & R&D
Acct 592 4/19/2017 IFRS for Long-lived Assets & R&D With comparison to US GAAP Definitions from IAS 16 – basically very similar to US GAAP 6 The following terms are used in this Standard with the meanings specified: Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. Recoverable amount is the higher of an asset’s net selling price and its value in use. The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity. Prepared by Teresa Gordon

IFRS for long-lived assets including intangibles
Acct 592 4/19/2017 IFRS for long-lived assets including intangibles Relevant IFRS: IAS 16, Property, Plant and Equipment IAS 38, Intangible Assets, IAS 36, Impairment of Assets IFRS 5, Non-current Assets Held for Sale and Discontinued Operations) Definitions from IAS 38, para 8 – basically similar to US GAAP Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. An intangible asset is an identifiable non-monetary asset without physical substance. The residual value of an intangible asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity. Prepared by Teresa Gordon

Plant, Property & Equipment
Acct 592 4/19/2017 Plant, Property & Equipment IFRS PP&E can be carried at historical cost or revalued amount less accumulated depreciation & impairment Interest costs are capitalized if criteria of IAS23 are met No inclusion of ARO in cost of asset when used for production of inventories US GAAP PP&E must be carried at historical cost less accumulated depreciation Interest costs must be capitalized if FAS34 requirements are met AROs are recognized where there is a obligation to be met at retirement (no exception) Prepared by Teresa Gordon

Plant, Property & Equipment
Acct 592 4/19/2017 Plant, Property & Equipment Revaluation under IFRS Entity must choose cost model or revaluation model for an entire class of property, plant & equipment [IAS16, para. 29] If revaluation model is chosen, fair values that can be reliably determined must be done with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period [IAS16, para. 31] Prepared by Teresa Gordon

Revaluation under IFRS
Acct 592 4/19/2017 Revaluation under IFRS Increase in value: Debit asset and report comprehensive income The associated AOCI is called “revaluation surplus” Decrease in value: Credit asst and … First, debit revaluation surplus to the extent it exists (for the specific asset) and report that portion of the loss in comprehensive income Any remaining loss reduces profit & loss for the period Prepared by Teresa Gordon

Class Discussion - Brainstorm
Acct 592 4/19/2017 Class Discussion - Brainstorm What is it about American culture and history that makes upward revaluation unacceptable? If you are not an American, what is it about your culture (or others) that make upward revaluation acceptable? Prepared by Teresa Gordon

Research & Development
Acct 592 4/19/2017 Research & Development IFRS Development costs must be capitalized and amortize if criteria are met Cost to develop websites must be capitalized if criteria are met, including probably future economic benefit In-process R&D acquired as part of business combination is capitalized Revaluation is allowed although rare US GAAP Expense R&D as incurred Website cost capitalization depends on phase of spending based on SOP 98-1 and/or FAS86 IPR&D acquired as part of business combination is expensed immediately Revaluation is not allowed Definitions from IFRS (direct quotes – IAS 38 para 8 Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Prepared by Teresa Gordon

Research vs. Development under IFRS (IAS38, para. 54-57)
Acct 592 4/19/2017 Research vs. Development under IFRS (IAS38, para ) First step – classify internally generated intangible assets as being in either (1) a research phase or (2) a development phase Research is expensed as incurred Development costs are capitalized only when the entity can demonstrate all of the following: Next slide – 6 criteria Research phase 54 No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. 55 In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred. 56 Examples of research activities are: activities aimed at obtaining new knowledge; the search for, evaluation and final selection of, applications of research findings or other knowledge; (c) the search for alternatives for materials, devices, products, processes, systems or services; and (d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services. Prepared by Teresa Gordon

Capitalization Criteria [IAS38 ¶57]
Acct 592 4/19/2017 Capitalization Criteria [IAS38 ¶57] The technical feasibility of completing the intangible Its intention to complete the intangible asset Its ability to use or sell the intangible asset How the intangible asset will generate probable future economic benefits The availability of adequate technical, financial and other resources to complete Reliable measurement of related expenditures An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset. (d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. (f) its ability to measure reliably the expenditure attributable to the intangible asset during its development. Prepared by Teresa Gordon

Acct 592 4/19/2017 Caveats in IAS 38 Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets. Past expenses cannot not later be recognized as part of an intangible asset IFRS language (direct quote) 60 To demonstrate how an intangible asset will generate probable future economic benefits, an entity assesses the future economic benefits to be received from the asset using the principles in IAS 36 Impairment of Assets. If the asset will generate economic benefits only in combination with other assets, the entity applies the concept of cash-generating units in IAS 36. 61 Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated by, for example, a business plan showing the technical, financial and other resources needed and the entity’s ability to secure those resources. In some cases, an entity demonstrates the availability of external finance by obtaining a lender’s indication of its willingness to fund the plan. 62 An entity’s costing systems can often measure reliably the cost of generating an intangible asset internally, such as salary and other expenditure incurred in securing copyrights or licences or developing computer software. Past expenses not to be recognised as an asset 71 Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part of the cost of an intangible asset at a later date. Prepared by Teresa Gordon

Deferred Costs (Intangible Assets)
Compare to FAS 86 Deferred Costs (Intangible Assets) R & D Costs (Expense) Inventory Costs Technological feasibility established Software available for commercial production Software sold Software project initiated

IFRS amortization rules – basically similar to US GAAP
Acct 592 4/19/2017 IFRS amortization rules – basically similar to US GAAP Intangible assets with indefinite life are not amortized – but are tested for impairment Intangible assets with finite useful lives Allocated on a systematic basis over the useful life to reflect pattern of the economic benefits expected Cease amortization at date asset is classified as held for sale Intangible assets with finite useful lives Amortisation period and amortisation method 97 The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset. 98 A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the unit of production method. The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits. There is rarely, if ever, persuasive evidence to support an amortisation method for intangible assets with finite useful lives that results in a lower amount of accumulated amortisation than under the straight-line method. 99 Amortisation is usually recognised in profit or loss. However, sometimes the future economic benefits embodied in an asset are absorbed in producing other assets. In this case, the amortisation charge constitutes part of the cost of the other asset and is included in its carrying amount. For example, the amortisation of intangible assets used in a production process is included in the carrying amount of inventories (see IAS 2 Inventories). Prepared by Teresa Gordon

Review of uS GAAP FAS 86 – accounting for software Acct 592 4/19/2017
Prepared by Teresa Gordon

FASB 86 - review Applies to
Computer software to be sold, leased or otherwise marketed.

FASB 86 - review Expense: Capitalize:
all costs incurred to establish the technological feasibility of a computer software product Classify as R & D Capitalize: costs incurred between time technological feasibility is established up until the product is ready for sale Costs to capitalize Costs of producing product masters and other subsequent costs incurred up until time product is ready for general release to customers.

FAS 86 Technological feasibility is established when
All planning, designing, coding & testing activities have been completed. A working model has been completed & tested. IFRS version: In the development phase of an internal project, an entity can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits. This is because the development phase of a project is further advanced than the research phase. 59 Examples of development activities are: (a) the design, construction and testing of pre-production or pre-use prototypes and models; (b) the design of tools, jigs, moulds and dies involving new technology; (c) the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and (d) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services. I could find no IFRS definition of technical feasibility

FAS86 Amortization of Computer Software
Amortization expense is the greater of a. SL over estimated remaining economic life, or b. Book * Current Gross Revenues Value Current and Future Gross Revenues Evaluate Capitalized Software Costs At each balance sheet date. Write down to net realizable value if necessary.

Impairment of Assets – IAS 36
Acct 592 4/19/2017 Impairment of Assets – IAS 36 US GAAP FAS 144 PP&E FAS 142 Intangibles & Goodwill My impression so far Somewhat similar to US GAAP but “all in one place” and uses same test rather than variations – at least with respect to long-lived nonfinancial assets – IFRS also excludes biological assets like farm animals, special industry assets (insurance companies), investment property measured at fair value, employee-related benefits, deferred tax assets, construction contract assets Prepared by Teresa Gordon

Impairment of long-lived assets
Acct 592 4/19/2017 Impairment of long-lived assets IFRS: 1-step process Recoverable amount is higher of Fair value less cost to sell Value in use Discounting required in evaluation stage Impairment losses must be reversed if circumstances change (except goodwill) FASB: 2-step process FAS 144—for an asset in use, undiscounted future cash flows from use establish recoverability used for the impairment calculation Not considered impaired unless undiscounted cash flows are less than carrying value Discounting occurs only for the step 2 valuation stage Impairment losses cannot be reversed Prepared by Teresa Gordon

IFRS 1-step test Impaired if recoverable amount > carrying value
Acct 592 4/19/2017 IFRS 1-step test Impaired if recoverable amount > carrying value At end of each reporting period, look for indications of impairment Impairment tests need not be done if there are no indications of impairment EXCEPTION Intangible assets with indefinite useful life (including goodwill) and intangible asset not yet available for use For these assets, impairment test is at end of reporting period Direct quotes from IAS36 8 An asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12–14 describe some indications that an impairment loss may have occurred. If any of those indications is present, an entity is required to make a formal estimate of recoverable amount. Except as described in paragraph 10, this Standard does not require an entity to make a formal estimate of recoverable amount if no indication of an impairment loss is present. 9 An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. 10 Irrespective of whether there is any indication of impairment, an entity shall also: (a) test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognised during the current annual period, that intangible asset shall be tested for impairment before the end of the current annual period. (b) test goodwill acquired in a business combination for impairment annually in accordance with paragraphs 80–99. 11 The ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. Therefore, this Standard requires an entity to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for use. Similar to US GAAP which requires annual impairment tests for intangibles with indefinite lives but not for other long-lived assets Prepared by Teresa Gordon

When there is an indication of possible impairment:
Acct 592 4/19/2017 When there is an indication of possible impairment: Carrying Value Recoverable Amount Value in Use Fair value less cost to sell It is not always necessary to do both fair value less cost to sell AND value in use: If the FV is greater than the carrying amount then no further consideration need be given to VIU (value in use). The more complex issues arise when the FV is NOT greater than the carrying value so a VIU calculation is necessary. Testing individual assets for impairment is theoretically possible but rare – in most cases, the analysis is done at the “operating level” or what IASB calls a “cash generating unit” or CGU CGU is the smallest identifiable group of assets that together have cash inflows that are largely independent of the cash flows from other assets IAS 36 Prepared by Teresa Gordon

Step 2 Step 1

IAS36 – Indicators of impairment
Acct 592 4/19/2017 IAS36 – Indicators of impairment Decline in market value greater than expected as a result of normal use or passage of time Significant adverse changes affecting entity including economic, technological, legal environment Higher interest rates which would make future cash flows less valuable Evidence of physical damage or obsolescence Plans to discontinue use, dispose of asset, etc. IAS36, para 12 selected quotes External sources of information (a) during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use. (b) significant changes with an adverse 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 an asset is dedicated. (c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially. (d) the carrying amount of the net assets of the entity is more than its market capitalisation. Internal sources of information (e) evidence is available of obsolescence or physical damage of an asset. (f) significant changes with an adverse 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, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.2 (g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. 13 The list in paragraph 12 is not exhaustive. An entity may identify other indications that an asset may be impaired and these would also require the entity to determine the asset’s recoverable amount or, in the case of goodwill, perform an impairment test in accordance with paragraphs 80–99. 14 Evidence from internal reporting that indicates that an asset may be impaired includes the existence of: cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted; actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted; a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset; or operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future. 15 As indicated in paragraph 10, this Standard requires an intangible asset with an indefinite useful life or not yet available for use and goodwill to be tested for impairment, at least annually. Apart from when the requirements in paragraph 10 apply, the concept of materiality applies in identifying whether the recoverable amount of an asset needs to be estimated. For example, if previous calculations show that an asset’s recoverable amount is significantly greater than its carrying amount, the entity need not re-estimate the asset’s recoverable amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset’s recoverable amount is not sensitive to one (or more) of the indications listed in paragraph 12. Prepared by Teresa Gordon

FAS 144 Indicators of impairment
Events or changes in circumstances that could indicate that the carrying amount may not be recoverable Decline in market value Change in way asset is used or physical change in asset Adverse changes in legal factors or business climate Probable sale of asset before end of useful life Current period losses with history of operating or cash flow losses associated with asset When to Test a Long-Lived Asset for Recoverability FAS144, Par. 8 8. A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances: a. A significant decrease in the market price of a long-lived asset (asset group) b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group) e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group) f. A current expectation that, more likely than not, 6 a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. FAS144, Par. 9 9. When a long-lived asset (asset group) is tested for recoverability, it also may be necessary to review depreciation estimates and method as required by FASB Statement No. 154, Accounting Changes and Error Corrections, or the amortization period as required by FASB Statement No. 142, Goodwill and Other Intangible Assets. 7 Any revision to the remaining useful life of a long-lived asset resulting from that review also shall be considered in developing estimates of future cash flows used to test the asset (asset group) for recoverability (paragraph 18). However, any change in the accounting method for the asset resulting from that review shall be made only after applying this Statement.

Timing of impairment tests
Acct 592 4/19/2017 Timing of impairment tests Very Similar IFRS When an indication of impairment is observed (look for them at least annually) Land, buildings, equipment Intangible assets with finite life At least annually (at same time of year but not necessarily at year end) Intangibles with indefinite life including goodwill Intangibles not yet in use (development costs) US GAAP When indication of impairment exists (FAS 144) long-lived assets intangibles subject to amortization (FAS142, para. 15) At least annual tests for intangibles with indefinite life including goodwill GW tested at reporting unit level – related to segment reporting rules FAS131 Detailed evaluation of fair value may not be required every year Recognition and Measurement of an Impairment Loss FAS142, Par. 15 15. An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets by applying the recognition and measurement provisions in t paragraphs 7–24 of that Statement. In accordance with Statement 144, an impairment loss shall be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. When to Test Goodwill for Impairment FAS142, Par. 26 26. Goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests in certain circumstances (refer to paragraph 28). The annual goodwill impairment test may be performed any time during the fiscal year provided the test is performed at the same time every year. Different reporting units may be tested for impairment at different times. FAS142, Par. 27 27. A detailed determination of the fair value of a reporting unit may be carried forward from one year to the next if all of the following criteria have been met: a. The assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination. (A recent significant acquisition or a reorganization of an entity’s segment reporting structure is an example of an event that might significantly change the composition of a reporting unit.) b. The most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin. c. Based on an analysis of events that have occurred and circumstances that have changed since the most recent fair value determination, the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is remote. Prepared by Teresa Gordon

Timing of impairment tests
Acct 592 4/19/2017 Timing of impairment tests Very Similar IFRS When an indication of impairment is observed (look for them at least annually) Land, buildings, equipment Intangible assets with finite life At least annually (at same time of year but not necessarily at year end) Intangibles with indefinite life including goodwill Intangibles not yet in use (development costs) US GAAP When indication of impairment exists (FAS 144) long-lived assets intangibles subject to amortization (FAS142, para. 15) At least annual tests for intangibles with indefinite life including goodwill GW tested at reporting unit level – related to segment reporting rules FAS131 Detailed re-evaluation each year can be waived if previous impairment test showed significant “headroom” IAS 36, ¶15 and FAS142 ¶27) Recognition and Measurement of an Impairment Loss FAS142, Par. 15 15. An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets by applying the recognition and measurement provisions in t paragraphs 7–24 of that Statement. In accordance with Statement 144, an impairment loss shall be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. When to Test Goodwill for Impairment FAS142, Par. 26 26. Goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests in certain circumstances (refer to paragraph 28). The annual goodwill impairment test may be performed any time during the fiscal year provided the test is performed at the same time every year. Different reporting units may be tested for impairment at different times. FAS142, Par. 27 27. A detailed determination of the fair value of a reporting unit may be carried forward from one year to the next if all of the following criteria have been met: a. The assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination. (A recent significant acquisition or a reorganization of an entity’s segment reporting structure is an example of an event that might significantly change the composition of a reporting unit.) b. The most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin. c. Based on an analysis of events that have occurred and circumstances that have changed since the most recent fair value determination, the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is remote. Prepared by Teresa Gordon

IAS36 – Measuring recoverable amount (1)
Acct 592 4/19/2017 IAS36 – Measuring recoverable amount (1) Recoverable amount can be for an individual asset unless the asset does not generate cash flows that are largely independent of other assets In this case, use a cash-generating unit (CGI) to which the asset belongs This is the usual case Direct quote from IAS36: 19 It is not always necessary to determine both an asset’s fair value less costs to sell and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. 20 It may be possible to determine fair value less costs to sell, even if an asset is not traded in an active market. However, sometimes it will not be possible to determine fair value less costs to sell because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In this case, the entity may use the asset’s value in use as its recoverable amount. 21 If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs to sell, the asset’s fair value less costs to sell may be used as its recoverable amount. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal proceeds, as the future cash flows from continuing use of the asset until its disposal are likely to be negligible. 22 Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs (see paragraphs 65–103), unless either: (a) the asset’s fair value less costs to sell is higher than its carrying amount; or (b) the asset’s value in use can be estimated to be close to its fair value less costs to sell and fair value less costs to sell can be determined. Prepared by Teresa Gordon

IAS36 – Measuring recoverable amount (2)
Acct 592 4/19/2017 IAS36 – Measuring recoverable amount (2) Value in Use – based on calculations that include: Estimate of future cash flows related to asset Expectations about possible variations in amount or timing of future cash flows The time value of money Price for bearing uncertainty inherent in the asset Other factors such as illiquidity Direct quote from IAS36: Value in use 30 The following elements shall be reflected in the calculation of an asset’s value in use: (a) an estimate of the future cash flows the entity expects to derive from the asset; (b) expectations about possible variations in the amount or timing of those future cash flows; (c) the time value of money, represented by the current market risk-free rate of interest; (d) the price for bearing the uncertainty inherent in the asset; and (e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. 31 Estimating the value in use of an asset involves the following steps: (a) estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and (b) applying the appropriate discount rate to those future cash flows. 32 The elements identified in paragraph 30(b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, ie the weighted average of all possible outcomes. Appendix A provides additional guidance on the use of present value techniques in measuring an asset’s value in use. Prepared by Teresa Gordon

IAS36 – VIU (3) Discount rate to use Discount rate
Acct 592 4/19/2017 IAS36 – VIU (3) Discount rate to use Discount rate The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of: the time value of money the risks specific to the asset for which the future cash flow estimates have not been adjusted Direct quote from IAS36: Discount rate 55 The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of: (a) the time value of money; and (b) the risks specific to the asset for which the future cash flow estimates have not been adjusted. 56 A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the asset. This rate is estimated from the rate implicit in current market transactions for similar assets or from the weighted average cost of capital of a listed entity that has a single asset (or a portfolio of assets) similar in terms of service potential and risks to the asset under review. However, the discount rate(s) used to measure an asset’s value in use shall not reflect risks for which the future cash flow estimates have been adjusted. Otherwise, the effect of some assumptions will be double-counted. 57 When an asset-specific rate is not directly available from the market, an entity uses surrogates to estimate the discount rate. Appendix A provides additional guidance on estimating the discount rate in such circumstances. Prepared by Teresa Gordon

IAS36 – Compare recoverable amounts (4)
Acct 592 4/19/2017 IAS36 – Compare recoverable amounts (4) Value in Use (discounted cash flows) Discount the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal using appropriate discount rate Fair Value less costs to sell (market-based) Best FV would be a binding sales agreement in an arm’s length transaction Next best would be based on identical or similar assets traded in an active market Never actually recommends discounted expected cash flow analysis Direct quote from IAS36: Value in use 30 The following elements shall be reflected in the calculation of an asset’s value in use: (a) an estimate of the future cash flows the entity expects to derive from the asset; (b) expectations about possible variations in the amount or timing of those future cash flows; (c) the time value of money, represented by the current market risk-free rate of interest; (d) the price for bearing the uncertainty inherent in the asset; and (e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. 31 Estimating the value in use of an asset involves the following steps: (a) estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and (b) applying the appropriate discount rate to those future cash flows. 32 The elements identified in paragraph 30(b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, ie the weighted average of all possible outcomes. Appendix A provides additional guidance on the use of present value techniques in measuring an asset’s value in use. Prepared by Teresa Gordon

Impairment Example Johnson Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Johnson's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment.

Impairment Example (con’t)
The management of Johnson Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $80,000 per year. The fair value of the equipment is $240,000 (based on market values of similar equipment). No goodwill was associated with the purchase of the equipment.

FAS 144 solution (slide a) Determine if an impairment loss should be recognized. Annual depreciation for the equipment has been $45,000 ($1,000,000 - $100,000)/20 years. Current book value of the equipment is: Original cost $1,000,000 Accumulated depreciation , ($45,000 * 8 years) Book value $ 640,000

FAS 144 solution (slide b) Determine if an impairment loss should be recognized. Anticipated future cash flows $ 560,000 (7 years * $80,000 per year) Look at the flow chart – should we recognize an impairment? The fair value is lower, so an impairment loss should be recognized.

FAS 144 solution (slide c) The “step 2” phase: Determine the amount of the loss and prepare the journal entry to record the loss. The impairment loss is equal to $400,000 ($640,000 - $240,000) -- the difference between the book value of the equipment and its fair value. The impairment loss would be recorded as follows: Acc’d Depreciation ,000 Loss on Impairment ,000 Equipment ,000

VARIATION of Example (FAS144 solution, slide d)
What journal entry should Johnson Company make if future cash flows related to the equipment were $980,000 in total? Since the future cash flows (undiscounted) equal $980,000 and this amount is greater than the book value of $640,000, Johnson Company will not do anything. No impairment is recognized and no upward revaluation is recorded. No journal entry needed.

IFRS solution to the impairment example (slide 1)
Acct 592 4/19/2017 IFRS solution to the impairment example (slide 1) Synopsis of facts: Carrying value = $640,000 Future cash flows from use = $80,000 per year for 7 years Market-based fair value less cost to sell = $240,000 Determine VIU using 5% rate Prepared by Teresa Gordon

IFRS solution to the impairment example (slide 2)
Acct 592 4/19/2017 IFRS solution to the impairment example (slide 2) Determine VIU: N=7, i=5%, FV=0, PMT=$80,000. PV = $462,910 Recoverable amount = higher of FV ($240,000) and VIE ($462,910) Therefore, loss is $177,090 (BV 640,000 – VIE 462,910) Prepared by Teresa Gordon

IFRS solution to the impairment example (VARIATION)
Acct 592 4/19/2017 IFRS solution to the impairment example (VARIATION) Synopsis of facts: Carrying value = $640,000 Future cash flows from use = $140,000 per year for 7 years Market-based fair value less cost to sell = $240,000 Determine VIU using 5% rate Prepared by Teresa Gordon

Your IAS36 Solution to Variation of Example:
Acct 592 4/19/2017 Your IAS36 Solution to Variation of Example: Fair value less cost to sell = $240,000 Carrying value = $640,000 Determine VIU: (n=7, i=5%, FV=0, PMT=$140,000) Prepared by Teresa Gordon

IAS36 Solution to Variation of Example:
Acct 592 4/19/2017 IAS36 Solution to Variation of Example: Determine VIU: N=7, i=5%, FV=0, PMT=$140,000. PV = $810,092 Recoverable amount = higher of FV ($240,000) and VIE ($810,092) Therefore, no loss is recognized (BV 640,000 < VIE 810,092) Not for student version Prepared by Teresa Gordon

Comparing the solutions
Acct 592 4/19/2017 Comparing the solutions Under FAS144 Under IAS36 Original facts Loss = $177,090 VARIATION No loss recognized Original facts Loss = $400,000 VARIATION No loss recognized Prepared by Teresa Gordon

US GAAP Goodwill Impairment Test is not quite the same as the FAS 144 test
We test goodwill for impairment at least annually (see hidden “review slides”) This is 2-step test similar to the FAS144 test we just examined

Impairment: Overall comparison
Acct 592 4/19/2017 Impairment: Overall comparison Similar rules overall but impairment test is different which can cause large $$ differences in reported earnings VIU is discounted version of discounted cash flow approach to estimating fair value that is used in US only if no market-based fair value is available Big differences IFRS requires that impairment losses be restored (except for goodwill) while FASB does not permit restoration Prepared by Teresa Gordon

Review of us gaap Impairment tests – FAS 142 & 144 Acct 592 4/19/2017
Prepared by Teresa Gordon

Impairment or Disposal of Long-lived Assets - FASB 144
For assets to be held and used: Carrying value is written down to fair value when projected future cash flows (undiscounted) are less than carrying value Scope Land, Buildings and Equipment Natural resources Intangible assets FASB 147 says FAS144 covers long-term customer-relation intangible assets in the banking industry

Assets held for use See flow chart
Note that FASB 144 has different rules for assets to be sold or abandoned that are NOT on this flow chart

FAS 144: Assets held for use
When should impairment be recognized? Testing each asset each period would be too costly We wait for a “triggering event”

FAS 144 Impairment test when
Events or changes in circumstances indicate that the carrying amount may not be recoverable Decline in market value Change in way asset is used or physical change in asset Adverse changes in legal factors or business climate Probable sale of asset before end of useful life Current period losses with history of operating or cash flow losses associated with asset

To apply FAS144 impairment tests
A long-lived asset shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. This is referred to as a “primary asset” approach – because we need to have a group of assets that generates cash flows

A FAS144 impairment loss is recognized if
Carrying amount of asset (book value) is greater than undiscounted future cash flows related to use and disposal of asset The asset is written down to fair value The fair value becomes the new carrying value (book value) and depreciation is recorded over remaining useful life Restoration of a previously recognized impairment loss is prohibited.

Triggering Event

Determining fair value
FASB 144 describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, or a range is estimated for the amount of possible future cash flows

Long-lived assets to be disposed of and NOT held for use
FAS These rules are NOT covered on the earlier flow chart

FAS144 - Long-lived assets to be disposed of by sale
Classified as “held for sale” in period in which all of the following 6 criteria are met: Management commits to a plan to sell the asset Asset is available for immediate sale in its present condition Active program to locate a buyer has been initiated

Long-lived assets to be disposed of by sale (FAS 144)
Continued from previous slide - Classified as “held for sale” in period in which all of the following 6 criteria are met: Sale is probable within one year Asset is being actively marketed for a reasonable price It is unlikely that the plan to sell will be changed

Measurement under FAS144 (Assets to be disposed of)
Write asset down to the LOWER of Carrying amount Fair value less cost to sell Depreciation If asset will be sold, stop depreciation If asset will be abandoned, exchanged, etc, Depreciation continues but reduced life should be reflected in amounts charged to expense Costs to sell = Includes incremental direct costs to transact the sale Broker commissions Legal and title transfer fees Closing costs Generally does not include costs to protect or maintain asset, such as: Insurance, Security services, utilities Assets to be disposed of other means Situations include: Abandonment Exchange for similar productive asset Distribution to owners in a spinoff The asset shall continue to be classified as “held and used” until it is disposed of

FAS144 - Assets to be disposed of other means
Asset stays in PP&E Depreciation estimates should be revised to reflect shortened life Depreciation ends and a gain or loss is recorded when the property is “disposed of”

FAS144 The “disposed of” date:
Abandoned The date it ceases to be used Exchanged or distributed to owners through a spinoff The date when it is exchanged or distributed

Review of goodwill accounting
Acct 592 4/19/2017 FAS 142 – Impairment test for goodwill Review of goodwill accounting Prepared by Teresa Gordon

Under FASB 142: Goodwill is not amortized because it has an indefinite life. Instead, a two-stage impairment test is performed at least annually Impairment losses on goodwill Presented in aggregate on income statement as separate line item Presented before income from continuing operations FAS142 Impairment Losses - Goodwill At same time each year, the goodwill of a reporting unit is subjected to a two step impairment test

2-step impairment test for GW
1. Determine fair values of all identifiable tangible and intangible assets (other than goodwill) and the fair values of all liabilities If fair value is greater than carrying value, no impairment loss is recorded If fair value is LESS than carrying value, perform step two

2-step impairment test for GW
Implied goodwill is the difference between the fair values as determined in step 1 and the carrying value without goodwill 2. If implied goodwill is less than the carrying value of goodwill, recognize an impairment loss for the difference

2-step impairment test Detailed evaluation can be carried forward to the next year without change if No significant changes in assets and liabilities in the reporting unit Most recent evaluation indicated substantial margin of implied goodwill over the carrying value of goodwill The likelihood that a current fair value determination would be less than the current carrying value is considered remote

Interim impairment tests
If events and circumstances indicate that impairment is more likely than not, an interim impairment test must be conducted: Adverse change in business climate Unanticipated competition Loss of key personnel Adverse action or assessment by a regulator

Asset Retirement Obligations
Acct 592 4/19/2017 Asset Retirement Obligations FIN 47 - Accounting for Conditional Asset Retirement Obligations: an interpretation of FASB Statement No. 143 Prepared by Teresa Gordon

Acct 592 4/19/2017 Do we need to review FAS 143? There are lecture notes on the “notes” page at the course web site I’m not sure if there will be time to fit this topic in this semester but some of you have done a research case on AROs (in Acct 414 or 315) If you know nothing about this topic and want to do something for extra credit, ask about this case Prepared by Teresa Gordon

Asset retirement obligations
Acct 592 4/19/2017 Asset retirement obligations FIN 47 (March 2005) would clarifies that a legal obligation to perform an asset retirement activity that is conditional on a future event is within the scope of FASB Statement No. 143 Uncertainty surrounding the timing and method of settlement that may be conditional on events occurring in the future would be factored into the measurement of the liability rather than the recognition of the liability. If there is insufficient information to estimate the fair value, the liability would be initially recognized in the period in which sufficient information is available for an entity to make a reasonable estimate of the liability’s fair value. Prepared by Teresa Gordon

Acct 592 4/19/2017 ARO Examples Telephone company uses wood poles that are chemically treated No legal requirement to remove poles from ground However, if and when poles are removed from the ground, special disposal procedures are mandated by law An asset retirement obligation should be estimated at date of purchase Example 1 A2. A telecommunications entity owns and operates a communication network that utilizes wood poles that are treated with certain chemicals. There is no legal requirement to remove the poles from the ground. However, the owner may replace the poles periodically for a number of operational reasons. Once the poles are removed from the ground, they may be disposed of, sold, or reused as part of other activities. There is existing legislation that requires special disposal procedures for the poles in the particular state in which the entity operates. A3. At the date of purchase of the treated poles, the entity has the information to estimate a range of potential settlement dates, the potential methods of settlement, and the probabilities associated with the potential settlement dates and methods based on established industry practice. Therefore, at the date of purchase, the entity is able to estimate the fair value of the liability for the required disposal procedures using an expected present value technique. Prepared by Teresa Gordon

ARO Example Facility currently owned contains asbestos
Acct 592 4/19/2017 ARO Example Facility currently owned contains asbestos Since acquisition, regulations are put into place that require special handling if building is renovated or demolished ARO should be recognized when regulations go into effect, if entity can reasonably estimate fair value of the liability A10. Although the timing of the performance of the asset retirement activity is conditional on the factory undergoing major renovations or being demolished, existing regulations create a duty or responsibility for the entity to remove and dispose of asbestos in a special manner, and the obligating event occurs when the regulations are put in place. Therefore, an asset retirement obligation should be recognized when regulations are put in place if the entity can reasonably estimate the fair value of the liability. In this example, the entity believes that there is an indeterminate settlement date for the asset retirement obligation because the range of time over which the entity may settle the obligation is unknown or cannot be estimated. Therefore, the entity cannot reasonably estimate the fair value of the liability. Accordingly, the entity would not recognize a liability for the asset retirement obligation when regulations are put in place, but it should disclose (a) a description of the obligation, (b) the fact that a liability has not been recognized because the fair value cannot be reasonably estimated, and (c) the reasons why fair value cannot be reasonably estimated. The company would recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value Prepared by Teresa Gordon

IFRS for Long-lived Assets & R&D

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IFRS for Long-lived Assets & R&D

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