Impairment

Question 1

Impairment

Answer 1

Impairment is an unanticipated decline in the value of an asset

When an impairment occurs, under IFRS/US GAAP, a write-down is required

Question 2

Impairment effects

Answer 2

- Carrying value of assets decrease

- Impairment charge reduces net income

- no effect on cash flows (non-cash charge)

Question 3

Under IFRS, an asset is impaired when

Answer 3

carrying amount > recoverable amount

recoverable amount = higher of (fair value - selling cost) or (value-in-use)

Question 4

Under US GAAP, an asset is impaired when

Answer 4

carrying amount > fair value

and only when carrying amount is deemed to be unrecoverable

Both conditions need to be satisfied in order to claim impairment

Question 5

How to test for impairment

Answer 5

1) Ask: are there indications of impairment? If not, no need to test. If yes, test for impairment
2) Compare recoverable amount vs carrying amount. If recoverable amount is < carrying amount, must recognize impairment loss

Question 6

The recoverable amount under IFRS is

Answer 6

The higher of (fair value - selling cost) or value-in-use (Σdiscounted cash flow provided by that asset)

Question 7

The recoverable amount under US GAAP is

Answer 7

recoverable amount = Σ undiscounted cash flows

So, if recoverable amount < carrying value and is determined to be unrecoverable:

Impairment Loss = carrying value - fair value