Accounting for a Fixed Asset’s Impairment Loss. Are you at a loss as to whether you have a loss?

3 minute read time.

The concept of impairments is only used for financial reporting purposes and never for tax. For tax purposes, an asset is either depreciable or not. It is a different story under GAAP (Generally Accepted Accounting Prnciples), however.

 

Under both GAAP and IFRS (International Financial Reporting Standards), an asset is written down for impairment when it is probable a loss has occurred. However, the process for assessing a loss is different for each. (This also should give the reader an idea of the issues the two boards must face to achieve a successful convergence of the two sets of standards.)

 

According to GAAP, intangible assets with indefinite lives (including goodwill) must be analyzed at least annually (or more often if needed) for impairment. GAAP uses a two step approach for assessing impairment losses whereby:

  • Step #1: The carrying value of the asset is compared to the undiscounted cash flows it expects to generate. If the carrying value is lower, no impairment loss is recognized. If the carrying value is more, the amount of impairment loss must then be determined.
  • Step #2: To determine the amount of the impairment loss, calculate the difference between the asset’s carrying amount and its fair value.

 

According to IFRS, all intangible assets are amortized over their useful lives. If no useful life can be determined, the asset should be tested for impairment. Once impairment is indicated on an asset, an impairment loss may be recognized. However, unlike GAAP, a subsequent reversal of an impairment loss for all assets other than goodwill must be recognized if certain criteria are met. For GAAP purposes, impairment losses are never reversed.

 

Impairment write-downs are completed in a single-step method under IFRS, making write-downs easier and, therefore, more likely to be recorded. Under IFRS and according to IAS 36, Impairment of Assets, the carrying amount of an asset is compared with its recoverable amount and, when the carrying amount is more, the asset must be revalued to its lower recoverable amount. The “recoverable amount” is the greater of:

  • The asset’s fair value less the cost to sell the asset, or
  • The asset’s value-in-use (VIU)*

 

*VIU is equal to the present value of the future cash flows expected to be derived from the asset or cash-generating unit (CGU). The “CGU” is the smallest identifiable group of assets generating cash inflows that are independent of cash inflows from other groups of assets. A CGU can range from being an individual asset to the business as a whole.

 

When grouping assets for assessing impairment losses under GAAP, intangible assets without a finite life can only be grouped with other such intangible assets; they cannot be grouped with either goodwill or assets that have determinable lives. There is no such rule under IFRS.

Under IFRS, impairment losses are measured at the individual asset level. If that cannot be done, then it is done at the cash-generating unit level.

Fascinating Fixed Assets Fact: The guidance for the accounting of the impairment of goodwill and indefinite-lived intangible assets is found in FASB ASC 350, Intangibles—Goodwill and Other, while the guidance for the impairment or disposal of other long-lived assets is found in FASB ASC 360, Property, Plant, and Equipment.