Impairment of Assets - GAAP vs IFRS

You can not open a newspaper or watch the evening news without hearing about "globalization of world economies." In a nutshell, is the process by which local or regional economic customs and traditions become one and merge into a functioning society. It comes as no surprise to those who follow the accounting standards around the world that the United States Generally Accepted Accounting Principles (GAAP) as promulgated by the Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) promulgated by the Accounting Standards Board (IASB) are beginning the process of merging into a single set of accounting rules functioning. Although the convergence of these rules does not expect to be held up to 2011 (soon) the awareness of the differences is important for accounting professionals.

Accounting for impairment of assets is an area where there are significant differences between GAAP and IFRS. Both GAAP and IFRS generally agree that, when it becomes clear a company can not reasonably expect to recover the carrying value of certain plant assets through the sale or use, the asset should be written at its fair value. The write-off is indicated as a value. Very often, asset impairment is due to a significant decrease in asset value or market use, adverse legal factors, drastic cost increases, and / or a projection that demonstrates continuing losses associated with a resource. However, GAAP and IFRS differ in the methodology used to determine impairment.

Methodology to determine failure GAAP uses a two-stage test of recoverability. Phase one, requires companies to estimate future undiscounted cash expected from use of the asset and its final disposition. If the sum of future net cash flows is less than the carrying amount of the asset, the company believes that the compromised resource. However, if the sum of future net cash flows equals or exceeds the carrying amount, the asset is not compromised. If there was a loss of value, the second step is to determine the loss by subtracting the fair value of the value of the asset.

To illustrate, assume that ABC Inc. owns a property with a book value of $ 600,000 ($ 800,000 $ 200,000 cost less depreciation) and a market value of $ 525 000. ABC Inc. expects that future cash flows from the asset to be $ 580,000. Applying the GAAP methodology above, the test would indicate that the recoverability of future cash flows are less than the net book value of $ 600,000. As such, there has been a loss of value and the difference between the carrying amount of the asset and its market value is the loss of value. ABC Inc. should record the loss in value as follows:

Impairment Loss $ 75,000
Depreciation of $ 75,000

Conversely, IFRS methodology uses a phased approach. This approach requires that the impairment loss is calculated "if there are indications of impairment." This approach is based on discounted future net cash flows undiscounted and next compared to the carrying value of GAAP as required in the methodology. Furthermore, the impairment loss is calculated as the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the following: 1) fair value less costs to sell, or 2) the use value (ie the present value of future cash flows from salvage value).

Another significant difference between IFRS and how the reversal is managed. According to GAAP, after an impairment los, the small amount of an asset held for use that becomes the new cost basis. A company may change its cost basis for future amortization or additional disabilities. To illustrate, in the above example ABC Inc. wrote the business to reflect its fair value of $ 525 thousand at the end of 2008. However, at the end of 2009, ABC Inc. determines that the fair value of the property is $ 550,000. The value of the asset should not change in 2009, except for the depreciation in 2009. In this way, ABC Inc. is prohibited restoration of a permanent impairment in value of an asset held for use.

In contrast, IFRS requires that all long-lived assets (other than goodwill) must be reviewed annually for indicators of reversal. Where appropriate, the loss can be reversed up to the new estimated recoverable amount, not to exceed the initial carrying amount adjusted for depreciation. This course is a significant departure from GAAP, and will likely lead to interesting discussions and the convergence date approaches .......