1. Impairment of Long-lived Assets including Goodwill
Includes Comparison of US GAAP and IFRS

2. Impairment of long-lived assets
Acct 592
3/31/2017
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

3. Timing of impairment tests
Acct 592
3/31/2017
Timing of impairment tests
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 long-lived assets & intangibles subject to amortization
At least annual tests for intangibles with indefinite life including goodwill
GW tested at reporting unit level – related to segment reporting rules
Detailed evaluation of fair value may not be required every year
Direct quotes from FAS 142
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. ….
Recognition and Measurement of an Impairment Loss
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.
Prepared by Teresa Gordon

4. IFRS 1-step test Impaired if recoverable amount > carrying value
Acct 592
3/31/2017
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

5. When there is an indication of possible impairment:
Acct 592
3/31/2017
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

6. US GAAP – “triggering event”
Is there an indication that a long-lived asset might be worth less than carrying value?
List of items AASC – “When to test a long-lived asset for recoverability”
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     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, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.

7. Step 2 Step 1 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.

8. To do tests, we must group assets
There must be CASH FLOWS related to the long-lived assets (so one can apply recoverability test and do discounted cash flow valuation techniques if necessary)
Lowest level for which identifiable cash flows are available
Largely independent of cash flows related to other assets or liabilities
> >    Grouping Long-Lived Assets Classified as Held and Used Currently Viewing:
360 Property, Plant, and Equipment
10 Overall 35 Subsequent Measurement Impairment or Disposal of Long-Lived Assets > Long-Lived Assets Classified as Held and Used >> Grouping Long-Lived Assets Classified as Held and Used
35-23     For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets 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. However, an impairment loss, if any, that results from applying this Subtopic shall reduce only the carrying amount of a long-lived asset or assets of the group in accordance with paragraph
This is referred to as a “primary asset” approach – because we need to have a group of assets that generates cash flows

9. US GAAP: Two-step process
Step 1: Is carrying value “recoverable” through future (undiscounted) cash flows?
If yes, no impairment
If no, go on to Step 2
Step 2: Measure the impairment loss:
Difference between carrying value and fair value of the asset group
Measurement of an Impairment Loss Currently Viewing:
360 Property, Plant, and Equipment
10 Overall 35 Subsequent Measurement Impairment or Disposal of Long-Lived Assets > Long-Lived Assets Classified as Held and Used >> Measurement of an Impairment Loss
35-17     An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use (see paragraph ) or under development (see paragraph ). An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.

10. Snowy Ridge Ski Resort Case
Carrying Value
Undiscounted Cash Flows
Land held for development
16,800K
22,800K
Mountain Division*
12,360K
9,625K
Lodge Division
9,500K
20,849K or 11,355K
Goodwill
4,000K
A The Mountain Division is currently operating at a breakeven on a cash basis. Therefore, the undiscounted cash flows may either be estimated as 0 or its current estimated selling price. In either case, the amount is less than its current carrying value and it is necessary to perform Step 2 of the impairment test.
B The undiscounted future net cash inflows of the Lodge Division may be estimated by multiplying the Gross Profit of the lodge by its estimated useful life. In this approach the undiscounted future cash flows is estimated to be $20,848,800 $694,960*30 years. Alternatively, the undiscounted net cash flow could be assumed to be the same as the Lodge’s current estimated selling price of $11,355,150. In either case these amounts exceed its carrying value of $9,500,000. Therefore, Step 2 of the impairment test is not required. Accordingly, the Lodge Division assets are not impaired and no adjustment to reflect the fair value of the Lodge Division is recorded in the accounting records.
*Mountain division includes $5M special use permit, an intangible asset with indefinite life

11. Step 1 – Snowy Ridge Ski Resort
Only Mountain Division is not recoverable:
Carrying value = $12,360
Future cash flows = $9,625
THEREFORE, go on to Step 2

12. Snowy Ridge Ski Resort Case – fair values from Question 3
Carrying Value
Fair Value
Land held for development
16,800K
13,898K
Mountain Division*
12,360K
9,625K
Lodge Division
9,500K
11,355K to 11,583K
Goodwill
4,000K
??????
Note that one of these is what we’d get from selling the asset so it is the same as one of the undiscounted cash flows from pervious slide
*Mountain division includes $5M special use permit, an intangible asset with indefinite life

13. Mountain Division Fair value = 9,625,000 Carrying value = 12,360,000
Impairment loss = 2,735,000
Allocate between two major assets: 5,000,000 permit % 7,360,000 ski-lifts & infrastructure %
the journal entry would be (given in case solution for question #6)
debit credit
Impairment loss 2,
PP&E ,627,325
Intangible assets ,107,675

14. Mountain Division - IFRS
Value in use = 9,625,000 (PV using 6%)
Fair value less cost to sell = no information, let’s assume $12M less 5% commission = $11.4M
Higher of the two = 11,400,000 Carrying value = 13,360,000 Impairment loss 1,960,000
{It would be equal to US GAAP loss if fair value were $10M less cost to sell}

15. Real Estate Division - IFRS
No loss under US GAAP
Value in use = ,894,675
Carrying value = 16,500,000
Impairment loss = 2,605,325
No loss for Lodging division under US GAAP and IFRS

16. Lodging Division - IFRS
Value in use = 694,960/.06 = 11,582,667
Fair value less cost to sell = 11,355,150 before commission
Higher of the two = $11,582,667
Carrying value = 9,500,000
Therefore NO IMPAIRMENT is recognized

17. What about Goodwill Impairment?
Snowy Ridge Ski Resort
Purchase price 46.5M
Identifiable assets 41.5M
Goodwill M
I think it should be allocated to the operating divisions/reporting units
However, the case authors did not allocate so they used the “company value” of $41M from page 61 (bottom of page)

18. Goodwill Impairment (ASC 350-20-35)
Step 1 (35-4 to 35-8)
Compare the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of a reporting unit is > 0 and fair value > carrying amount
Goodwill is not impaired (second step not necessary)
Otherwise, go to step 2
ASC     The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill.
35-5     The guidance in paragraphs through shall be considered in determining the fair value of a reporting unit.
35-6     If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; thus, the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit is zero or negative, the guidance in paragraph A shall be followed.
35-7     In determining the carrying amount of a reporting unit, deferred income taxes shall be included in the carrying amount of the reporting unit, regardless of whether the fair value of the reporting unit will be determined assuming it would be bought or sold in a taxable or nontaxable transaction.
35-8     If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any.

19. Goodwill Impairment (ASC 350-20-35)
Step 2 (35-10 thru 35-13)
Compare carrying value to FAIR VALUE of the reporting unit (to get the implied fair value of GW)
If Carrying value > implied fair value of GW, the difference is the impairment
The loss cannot be > than carrying value
No upward adjustment after an impairment
Step     The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
Currently Viewing:
35-10     The guidance in paragraphs through shall be used to estimate the implied fair value of goodwill.
35-11     If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.
35-12     After a goodwill impairment loss is recognized, the adjusted
carrying amount of goodwill shall be its new accounting basis.
35-13     Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is recognized.

20. Finding Implied Fair Value of GW
Assign fair values to all net assets of reporting unit as though you were initially recognizing goodwill in a business combination (ASC )
The excess of fair value of a reporting unit over the assigned fair values of assets and liabilities = implied fair value
Determining the Implied Fair Value of Goodwill
   The implied fair value of goodwill shall be determined in the same manner as the amount of goodwill recognized in a business combination or an acquisition by a not-for-profit entity was determined. That is, an entity shall assign the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination or an acquisition by a not-for-profit entity. Throughout this Section, the term business combination includes an acquisition by a not-for-profit entity.
35-15     The relevant guidance in Subtopic shall be used in determining how to assign the fair value of a reporting unit to the assets and liabilities of that unit. Included in that allocation would be research and development assets that meet the criteria in paragraph
35-16     The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

21. Implied Goodwill

22. Step 2 – determine GW impairment (if any)

23. Impairment: US GAAP vs. IFRS Overall comparison
Acct 592
3/31/2017
Impairment: US GAAP vs. IFRS Overall comparison
Similar rules overall but impairment test is different which can cause large $$ differences in reported earnings
VIU is discounted version of recoverable cash flows 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