ias 36 - impairments. academic resource center property, plant, and equipment page 2 executive...

IAS 36 - Impairments

Academic Resource Center

Property, plant, and equipment

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

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.

An impaired asset must be written down, and the charge is recorded in income.

Similar

Similar

IFRSUS GAAP



Periodic valuationImpairment – impairment indicators and recoverability test

US GAAP

► ASC 360-10-35-21 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 valuationImpairment – 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 820-10-35).

► Note that per ASC 820-10-35-7, 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 820-10-55-45 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 valuationImpairment – 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 valuationImpairment – 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.



Periodic valuationImpairment

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 $ 10,000Equipment $ 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 $ 9,000Equipment* $ 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 $ 60,000Impairment 2010 (9,000)

51,000Depreciation 2011 $51,000/(6) (8,500) (10,000)Depreciation 2012 $51,000/(6) (8,500) (10,000)

34,000 $ 40,000Reversal of impairment loss 6,000

$ 40,000

Equipment* $ 6,000Impairment 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 valuationImpairment – frequency of testing for indefinite-lived intangible assets including goodwill

Similar

IFRSUS GAAP

Indefinite-lived intangible assets including goodwill must be reviewed at least annually for impairment, regardless of the existence of impairment indicators.



Periodic valuationImpairment – frequency of impairment testing for finite-lived assets

IFRS► The existence of impairment indicators

must be assessed annually 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.



Periodic valuationImpairment – determination for indefinite-lived intangible assets other than goodwill

Similar

IFRSUS GAAP

A one-step process is used to determine whether to impair indefinite-lived assets other than goodwill.



Periodic valuationImpairment – determination for finite-lived intangible assets

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.

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.



Periodic valuationImpairment – determination for goodwill

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.

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.



Periodic valuationImpairment calculation – finite and indefinite-lived intangible assets other than goodwill

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.

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 820-10-35-7, 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 820-10-55-45 to then determine the appropriate fair value for that market.



Periodic valuationImpairment calculation – goodwill

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.

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.



Summary of impairment of intangibles

1) Compare the carrying value to the sum of undiscounted cash flows.

2) Compare the carrying value of the reporting unit to the fair value of the RU(including goodwill).

3) 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.

4) Recoverable amount is the higher of: (1) the fair value less selling costs and (2) the present value of future discounted cash flows.

Frequency of test

Number of steps in the impairment

determination calculation

processImpairment

determination Impairment calculationIFRS allows reversal of

impairment?

Type of intangible

asset US GAAP IFRSUS

GAAP IFRSUS GAAP

only US GAAP IFRS

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 Annually Annually 1 1 None

Carrying value less fair value

Carrying value less recoverable amount (4) Yes

Goodwill Annually Annually 2 1Fair value test on RU (2)

Carrying value less implied fair value (3)

Carrying value of CGU less recoverable amount of CGU (4) No



Impairment determination and calculation example Finite-lived intangible asset

Example 4

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 animpairment 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):

IFRSTest 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





Example 5

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 animpairment of the trademark using both US GAAP and IFRS?

®



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.


Trademark* $120,000




Impairment determination and calculation example Goodwill

Example 7The 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.




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 $4,000,000

CGU 2 3,500,000 750,000 3,000,000 3,000,000

RU $5,500,000 $1,250,000 $7,000,000 $7,000,000 $6,000,000

Example 7 solution:




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.


Goodwill $500,000



Periodic valuationImpairment – reversal

Similar

IFRSUS GAAP

A reversal of an impairment loss for goodwill is prohibited.



Periodic valuationImpairment – reversal

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.

US GAAP► Reversal of impairment losses is

prohibited for all intangible assets.



Reversal of impairment loss example Indefinite-lived intangible asset

Example 8

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?

®



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. academic resource center property, plant, and equipment page 2 executive...

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