Wednesday, 11 January 2012

Impairment of Long-lived Tangible Asset Held for Use - FRA (CFA Level II)

Under IFRS:

• Impairment losses are recognized when: Carrying amount of the asset > recoverable amount of the asset
   where Recoverable amount is higher of (Fair value - Costs to sell) and Value in use.
   Value in use = discounted expected future cash flows.

• Companies are required to assess at least annually whether there are any indications of impairment of an asset.
• Goodwill and identifiable intangible assets that are not amortized must be tested for impairment at least annually.

Under U.S. GAAP:

• Under U.S. GAAP, there is a two step test which is used to determine whether the asset is impaired.
    1) Recoverability test: Asset's carrying amount is not recoverable when:
    Carrying value of the asset > Undiscounted expected future cash flows
    2) Impairment loss measurement: When asset's carrying amount is not recoverable, then
    Impairment Loss = Carrying amount of an asset - Fair value of an asset (or discounted value of
    expected future cash flows)
• Companies must undertake an impairment test only when “events or circumstances indicate that carrying value of an asset is not recoverable on permanent basis”.

• Goodwill and identifiable intangible assets that are not amortized must be tested for impairment at least annually.

Examples of indicators of impairment test include:
• Significant adverse change in asset’s physical condition,
• Significant adverse change in legal or economic factors, or
• Significant decrease in the market price among others.

Effects of Impairment loss:  
• It reduces the carrying  amount of the asset on balance sheet.
• It reduces net income on the income statement.
• Impairment loss is a non-cash item and thus, it does not affect operating cash flows.
• Debt-to-total assets and fixed asset turnover ratios increase due to impairment loss because it reduces the carrying amount of fixed assets and thus total assets


  1. This is a good revision for me. I like the notes

  2. Is it normal that in the impairment loss measurement we do subtract selling cost from the fair value according to IFRS but not under USGAAP.

    Thank a lot!