Impairment of Long-lived Assets

A long-lived asset has become impaired when the book value of the asset as recorded on the balance sheet is not expected to be recovered during future operations.

Example

A call center operator recently capitalized a $2 million investment in production fixtures at a leased building.  The call center company’s primary client in this site cancels the existing business contract two months after the investment is made.  The call center firm’s capitalized assets associated with this building may have become impaired, if the company feels that it cannot place new business in this site and must cease operations there.

Events that may cause a “lack of asset value recoverability” could be:

• A decrease in the asset’s market value.
• Adverse changes in the law.
• Adverse changes in the business climate involving the asset.
• Cost overruns on a project associated with the asset.
• The experience or anticipation ofincome statement or cash flow losses associated with the asset.

Both IFRS and US GAAP require impaired assets to be written down and losses recognized in the income statement. However, there are some differences.

	IFRS	US GAAP
Criteria	Must annually assess for circumstances indicating impairment and then test for impairment	Test for impairment only if events and circumstances indicate so.
Impairment condition	Carrying value > Recoverable amount   Recoverable amount = Fair value (less selling cost) or value in use, whichever is higher.   The value in use is the present value of its future cash flow stream from continued use.	US GAAP has a two-step process for determining if an asset impairment charge is required: Recoverability Test– An asset impairment must be recognized once the UNDISCOUNTED future cash flows from an asset fall below the book value of the asset on the balance sheet. Loss Measurement– The amount by which an impaired asset it to be reduced equals the difference between its book value and its fair market value (this can be called “mark to market accounting”).