- Capitalizing Vs. Expensing Costs
- Financial Reporting of Intangible Assets
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Methods on Financial Statements
- Depreciation – Important Points
- Amortization of Intangible Assets
- Revaluation Model for Fixed Assets
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Derecognition of PPE and Intangible Assets
- Disclosures Related to PPE and Intangible Assets
- Financial Reporting of Investment Property Vs. PPE
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.
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.
|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:|
|Impact on Balance Sheet||Asset is written down on the balance sheet to the recoverable amount||Asset value is written down to fair value.|
|Impact on Income Statement||An impairment losses is recorded on the income statement equal to Carrying value – Recoverable amount||A loss charge is taken on the income statement equal to the reduction in asset value on the balance sheet.If fair value is not known, discount value of future cash flows is used.|
|Loss reversal||Loss can be reversed if value of impaired assets recovers in the future. Loss reversal is limited to original impairment loss.||Loss reversal is not permitted.|
Types of Asset Impairment
- Write-downs– Asset values have changed as a result of changing market conditions.
- Restructurings – Asset value declines associated with the re-organization of business operations.
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