IAS 36 - Impairments.

Name: IAS 36 - Impairments.
Uploaded: 2017-07-18T16:17:37+00:00
Duration: PTM27S53
Channel: Catherine Logan
Description: IAS 36 - Impairments.

IAS 36 - Impairments

Executive summary IFRS has a one-step approach for determining impairment of fixed assets while US GAAP has a two-step approach. IFRS allows reversal of impairment losses on fixed assets, while this is prohibited using US GAAP.

Progress on convergence
Impairment was one of the short-term convergence projects agreed to by the FASB and IASB in their 2006 Memorandum of Understanding. In their September 2008 meeting, the FASB and IASB decided to defer work on convergence on impairment until other work is completed.

Periodic valuation Impairment
US GAAP IFRS Impairment indicators for an asset include such items as significant change in its use, projected losses related to its use, a significant decline in its market value, etc. Similar Similar An impaired asset must be written down, and the charge is recorded in income.

Periodic valuation Impairment – impairment indicators and recoverability test
US GAAP ASC requires a review for impairment indicators in PP&E “whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.” A recoverability test is required: If the carrying amount of the asset exceeds the sum of the expected net future undiscounted cash flows, then the asset is not recoverable and an impairment loss must be calculated. IFRS IAS 36 requires an entity to assess annually whether there are any indicators of impairment. There is no recoverability test, simply calculate an impairment loss if impairment indicators are present.

Periodic valuation Impairment – calculating the impairment loss
US GAAP The impairment loss is the excess of the carrying value of the asset compared to its fair value (with fair value calculated according to ASC ). Note that per ASC , transaction costs (selling costs) are not included in the determination of fair value; however, these costs would be used to help determine the most advantageous market per ASC to then determine the appropriate fair value for that market. IFRS IAS 36 determines the impairment loss as the excess of the carrying value of the asset over its recoverable amount: The recoverable amount is the higher of the fair value less costs to sell or value in use (the discounted net present value of expected future cash flows from the asset).

Periodic valuation Impairment – recording the impairment loss
US GAAP The impairment loss is always reported through net income. IFRS The impairment loss is recognized in OCI to the extent that it is reversing a prior upward revaluation. Otherwise, it is included in net income.

Periodic valuation Impairment – reversal of the impairment loss
US GAAP A reversal of the impairment loss is prohibited. IFRS The impairment loss can be reversed up to the newly calculated recoverable amount, but it cannot exceed what the original carrying amount, net of depreciation, would have been.

Example 7: On January 1, 2008, a company acquired a piece of equipment for $100,000. It was decided that the equipment would be depreciated over ten years with zero salvage value. At December 31, 2011, the equipment has significantly decreased in value due to technological innovations in the industry in which the company operates. The current carrying value of the equipment is $60,000 ($100,000 cost less $40,000 of accumulated depreciation). The expected future undiscounted cash flows from the use of this equipment are $61,000. The discounted net present value of expected cash flows from this piece of equipment is $51,000. Additionally, the fair value of the piece of equipment is $50,000 and the selling costs are minimal. Is the equipment impaired under either US GAAP or IFRS?

Example 7 solution: Using US GAAP, the carrying value of the equipment of $60,000 is less than the expected future undiscounted cash flows of $61,000, so the equipment is NOT impaired. Using IFRS, the equipment is impaired because the carrying value of $60,000 is greater than the recoverable amount of $51,000.

Example 8: Use the same facts as the previous example, except the expected future undiscounted cash flows from the use of this equipment are $59,000. What, if any, impairment loss should be recorded using US GAAP and IFRS? Show any required journal entries.

Example 8 solution: Using US GAAP, the piece of equipment now fails the recoverability test. The $60,000 carrying value of the equipment exceeds the sum of the expected net future undiscounted cash flows of $59,000. Therefore, an impairment loss must be calculated. The impairment loss is the difference between the carrying value of $60,000 and the fair value of $50,000. A $10,000 impairment loss would be recorded as follows: Impairment loss $ 10,000 Equipment $ 10,000 Using IFRS, there are impairment indicators so an impairment loss must be calculated. Using IAS 36, the recoverable amount is $51,000 (the higher of the net fair value of $50,000 or the discounted net present value of the cash flows of $51,000). Therefore, a $9,000 impairment loss needs to be recorded as follows: Impairment loss $ 9,000 Equipment* $ 9,000 *Note that the credit could be recorded to an accumulated impairment loss account instead of being recorded directly to the asset account. This would allow management to easily track accumulated impairment losses for potential reversal as discussed in example 9.

Example 9: Use the same facts as the previous example, except in 2013 it is discovered that the technological innovations related to this piece of equipment are not effective. As a result, the fair value of this piece of equipment is now $41,000. The discounted net present value of expected cash flows from this piece of equipment is also $41,000. Using IFRS, what amount of the original impairment loss of $9,000 can be reversed? Show any required journal entries to reverse the impairment loss.

Example 9 solution: The impairment loss can be reversed up to the newly calculated recoverable amount of 41,000, but it cannot exceed what the original carrying amount, net of depreciation, would have been. Impaired Not impaired Net asset value 2010 $ 60,000 $ 60,000 Impairment 2010 (9,000) 51,000 Depreciation 2011 $51,000/(6) (8,500) (10,000) Depreciation 2012 $51,000/(6) (8,500) (10,000) 34,000 $ 40,000 Reversal of impairment loss 6,000 $ 40,000 Equipment* $ 6,000 Impairment loss $ 6,000 *Note that if the impairment was initially credited to an accumulated impairment loss account instead of being recorded directly to the asset account , the accumulated impairment loss account would be debited instead of the asset account.

Periodic valuation Impairment – frequency of testing for indefinite-lived intangible assets including goodwill US GAAP IFRS Indefinite-lived intangible assets including goodwill must be reviewed at least annually for impairment, regardless of the existence of impairment indicators. Similar

Periodic valuation Impairment – frequency of impairment testing for finite-lived assets
US GAAP Finite-lived intangibles are tested whenever impairment indicators exist. A review for impairment indicators for finite-lived intangible assets is performed whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. IFRS The existence of impairment indicators must be assessed annually for finite-lived assets.

Periodic valuation Impairment – determination for indefinite-lived intangible assets other than goodwill US GAAP IFRS A one-step process is used to determine whether to impair indefinite-lived assets other than goodwill. Similar

Periodic valuation Impairment – determination for finite-lived intangible assets
US GAAP A two-step approach is used for determining impairment of finite-lived assets: 1. A recoverability test is performed first. The carrying amount of the asset is compared to the sum of the future undiscounted cash flows generated through use and eventual disposition. 2. If it is determined the asset is not recoverable, an impairment loss is calculated. IFRS A one-step approach is used if impairment indicators exist. The one-step determination is that same calculation used to determine the amount of the loss.

Periodic valuation Impairment – determination for goodwill
US GAAP A two-step approach is also used for determining impairment of goodwill similar to finite-lived assets; however, the recoverability test (step 1) is done at the reporting unit (RU) level, which is typically thought of as an operating segment or one step below an operating segment. The test compares the carrying amount of the RU (including goodwill) to the fair value of the RU. IFRS A one-step approach is used that requires an impairment loss to be calculated for goodwill at the CGU level (as defined following) if impairment indicators exist.

Periodic valuation Impairment calculation – finite and indefinite-lived intangible assets other than goodwill US GAAP The impairment loss for finite and indefinite-lived intangible assets (other than goodwill) is the amount by which the carrying amount of the asset exceeds its fair value, as calculated in accordance with ASC 820, Fair Value Measurements and Disclosure. Note that per ASC , transaction costs (selling costs) are not included in the determination of fair value; however, these costs would be used to help determine the most advantageous market per ASC to then determine the appropriate fair value for that market. IFRS The impairment loss is the amount by which the carrying amount of the asset exceeds its recoverable amount: The recoverable amount is the higher of: The fair value less costs to sell. The value in use (the present value of future cash flows in use, including disposal value). Note the definition of fair value in IFRS has certain differences from the definition in US GAAP.

Periodic valuation Impairment calculation – goodwill
US GAAP The impairment is the amount by which the carrying amount of the goodwill exceeds the implied fair value of the goodwill within its RU. The implied fair value is the fair value of the RU less the fair value of the net assets (excluding goodwill) of the RU. IFRS Using IFRS, the impairment is the amount by which the cash generating unit (CGU) carrying amount exceeds its recoverable amount (as defined above). A CGU is defined in IAS 36.6 as, “... the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.” The impairment amount is first allocated to reduce goodwill to zero, then to the other assets in the CGU pro rata on the basis of the carrying value of each asset.

Summary of impairment of intangibles
Frequency of test Number of steps in the impairment determination calculation process Impairment determination Impairment calculation IFRS allows reversal of impairment? Type of intangible asset US GAAP IFRS US GAAP US GAAP only Finite lived When indicators exist Annually 2 1 Recoverability test (1) Carrying value less fair value Carrying value less recoverable amount (4) Yes Indefinite lived, other than goodwill None Goodwill Fair value test on RU (2) Carrying value less implied fair value (3) Carrying value of CGU less recoverable amount of CGU (4) No Compare the carrying value to the sum of undiscounted cash flows. Compare the carrying value of the reporting unit to the fair value of the RU(including goodwill). The implied fair value of goodwill equals the fair value of the RU less the fair value of the net assets (excluding goodwill) of the RU. Recoverable amount is the higher of: (1) the fair value less selling costs and (2) the present value of future discounted cash flows.

Impairment determination and calculation example Finite-lived intangible asset
The Corporate Protection Company (CPC) has a patent on new fingerprint security technology. The fair value of the patent is $18 million, excluding selling costs of $3 million. The present value of future cash flows is $16 million The sum of the undiscounted future cash flows is $19 million CPC currently carries the patent at a value of $20 million. What journal entries would CPC prepare to record an impairment of the patent using both US GAAP and IFRS?

Example 4 solution: US GAAP Recoverability test: is the carrying value greater than the sum of the future undiscounted cash flows? Yes, since $20 million is greater than $19 million. Calculation of the impairment: Carrying value - fair value = $20 million - $18 million Journal entry to record the impairment: Impairment loss $2 million Patent $2 million

Example 4 solution (continued): IFRS Test for impairment: does the carrying amount exceed the recoverable amount? Yes, the carrying amount of $20 million is higher than the recoverable amount of $16 million. The recoverable amount is calculated as the higher of the fair value less the selling costs ($18 million - $3 million = $15 million), and the value in use (present value of future cash flows = $16 million) Calculation of the impairment (note that the determination and calculation of impairment are the same step): Carrying value - recoverable amount = $20 million - $16 million = $4 million Journal entry to record the impairment: Impairment loss $4 million Patent* $4 million *Note that the credit could be recorded to an accumulated impairment loss account instead of being recorded directly to the asset account. This would allow management to easily track accumulated impairment losses for potential reversal as discussed in example 8.

Fountain of Youth Incorporated (FYI) has a patent for some revolutionary new skin care products. The fair value of the patent is $16 million with selling costs of $2 million. The present value of the future cash flows is $14 million. The sum of the undiscounted future cash flows is $15 million. FYI currently carries the patent at a value of $10 million. What journal entries would FYI prepare to record an impairment of the patent using both US GAAP and IFRS?

Example 5 solution: US GAAP: Recoverability test: is the carrying value greater than the sum of the future undiscounted cash flows? No, since $10 million is less than $15 million; therefore, no impairment loss needs to be calculated. IFRS: Test for impairment: does the carrying amount exceed the recoverable amount? No, the carrying amount of $10 million is less than the recoverable amount of $14 million. The recoverable amount is calculated as the higher of fair value less selling costs ($16 million - $2 million = $14 million), and the value in use (present value of future cash flows = $14 million). As there is no impairment, no journal entry is required.

Impairment determination and calculation example Indefinite-lived intangible asset other than goodwill Example 6 The KCH&H Company (KCH&H) has a trademark that it expects to have an indefinite life. The carrying value of the trademark is $750,000. As of December 31, 2010, the fair value of the trademark was $600,000. The present value of the future cash flows is $630,000 and the undiscounted summation of the future cash flows is $700,000. The costs to sell the trademark would be insignificant. What journal entries would KCH&H prepare to record an impairment of the trademark using both US GAAP and IFRS? KCH&H

Impairment determination and calculation example Indefinite-lived intangible asset other than goodwill Example 6 solution: US GAAP: There is not a separate recoverability test for indefinite-lived intangible assets. The fair value test is used. Since the carrying value of the trademark ($750,000) is greater than the fair value ($600,000), KCH&H would writedown the trademark by $150,000. Journal entry to record the impairment: Impairment loss $150,000 Trademark $150,000 IFRS: The impairment loss is calculated as the carrying value ($750,000) less the recoverable amount. The recoverable amount is the greater of the fair value less selling costs ($600,000) and the value in use ($630,000). Therefore, KCH&H would writedown the trademark by $120,000. Impairment loss $120,000 Trademark* $120,000 *Note that the credit could be recorded to an accumulated impairment loss account instead of being recorded directly to the asset account. This would allow management to easily track accumulated impairment losses for potential reversal as discussed in example 8.

Impairment determination and calculation example Goodwill
The Caring Card Company (CCC) has goodwill recorded in two CGUs, as defined under IFRS. These two CGUs make up one reporting unit (RU), as defined under US GAAP. CCC carries the first CGU at a value of $2 million, which includes $500,000 of goodwill. The fair value is $4 million and the recoverable amount of the unit is $4 million. CCC carries the second CGU at a value of $3.5 million, which includes $750,000 attributable to goodwill. The fair value of the CGU is $3 million and the recoverable amount of the unit is $3 million. The fair value of the net assets of the RU excluding goodwill is $6,000,000. Compute the amount of impairment CCC should record using US GAAP and provide any necessary journal entries. Compute the amount of impairment CCC should record using IFRS and provide any necessary journal entries.

Example 7 solution: Carrying value of unit (including goodwill) Carrying value of goodwill Fair value of unit Recoverable amount of unit Fair value of net assets of unit excluding goodwill CGU 1 $2,000,000 $ 500,000 $4,000,000 CGU 2 3,500,000 750,000 3,000,000 RU $5,500,000 $1,250,000 $7,000,000 $6,000,000

Example 7 solution (continued): US GAAP: Recoverability test: does the carrying value of the RU exceed the fair value of the RU? No, since $5.5 million is less than $7 million. Note that if CCC did need to compute an impairment amount, the amount would be determined as the carrying amount of goodwill of $1,250,000 less the implied fair value of goodwill of $1,000,000, which is the fair value of the RU ($7,000,000) less the fair value of the net assets of the RU excluding goodwill ($6,000,000). IFRS: Test of impairment: does the carrying value of the CGU exceed the recoverable amount of the CGU? CGU 1 – No, since $2 million is less than $4 million. CGU 2 – Yes, since $3.5 million is greater than $3 million by $500,000. Journal entry to record the impairment: Impairment loss $500,000 Goodwill $500,000

Periodic valuation Impairment – reversal
US GAAP IFRS A reversal of an impairment loss for goodwill is prohibited. Similar

Periodic valuation Impairment – reversal
US GAAP Reversal of impairment losses is prohibited for all intangible assets. IFRS Finite and indefinite-lived intangible assets (other than goodwill) must be reviewed annually for reversal indicators. If appropriate, a loss may be reversed up to the newly estimated recoverable amount, not to exceed the initial carrying amount adjusted for amortization.

Reversal of impairment loss example Indefinite-lived intangible asset
In addition to the information from example 6, in 2011, KCH&H reviewed its trademark for impairment reversal indicators. Upon review of these indicators, KCH&H determined that reversal of the impairment was appropriate. The fair value of the trademark and the present value of future cash flows is both $800,000. The costs to sell the trademark continue to be insignificant. What journal entries would KCH&H prepare to record the reversal of the impairment loss for the trademark using both US GAAP and IFRS? KCH&H

Reversal of impairment loss example Indefinite-lived intangible asset
Example 8 solution: US GAAP: No reversal of impairment losses is permitted. IFRS: An impairment loss may be reversed up to the newly estimated recoverable amount ($800,000), not to exceed the initial carrying amount adjusted for amortization ($750,000). As this asset has an indefinite life, amortization is not a factor. As the initial carrying amount is less than the newly estimated recovery amount, the reversal is limited to the initial loss that was recorded. The reversal is recorded into income. Journal entry to reverse the impairment losses: Trademark* $120,000 Impairment loss $120,000 *Note that if the impairment was initially credited to an accumulated impairment loss account instead of being recorded directly to the asset account , the accumulated impairment loss account would be debited instead of the asset account.

IAS 36 - Impairments.

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IAS 36 - Impairments.

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