Under IFRS, when must firms assess long-lived assets for impairment?
Annually assess for indications of impairment such as decline in market value or physical condition.
What determines whether an asset is impaired under IFRS?
When the book value exceeds the recoverable amount.
How is ‘recoverable amount’ defined under IFRS?
The higher of fair value less selling costs and value in use (present value of future cash flows).
What happens when an asset is impaired under IFRS?
It is written down to its recoverable amount, and the impairment loss is recognized in the income statement.
Can impairment losses be reversed under IFRS?
Yes, up to the amount of the original loss.
Under US GAAP, when is impairment testing required for long-lived assets?
Only when there is an indication that the asset’s carrying amount may not be recoverable.
What are the two steps in US GAAP impairment testing?
- Determine if the asset is impaired by comparing book value to undiscounted future cash flows. 2. If impaired, measure loss as book value minus fair value.
Can impairment losses be reversed under US GAAP?
No, loss reversals are prohibited for assets held for use.
What discounting approach does US GAAP use for impairment testing?
Step 1 uses undiscounted cash flows; Step 2 uses fair value or discounted cash flows if fair value is unknown.
Given a machine with book value £800k, expected cash flows £795k, and fair value £790k, what’s the impairment under IFRS?
Recoverable amount = higher of value in use (£785k) and fair value less selling costs (£760k). Impairment = £800k - £785k = £15k.
Under the same example, what’s the impairment under US GAAP?
Step 1: Impaired since £800k > £795k. Step 2: Impairment = £800k - £790k = £10k.
How does impairment affect the balance sheet?
Reduces assets and equity through impairment charge.
How does impairment affect the income statement?
Decreases current net income but increases future net income due to lower depreciation.
How does impairment affect cash flow?
No impact—impairments are noncash charges.
How do impairments affect asset turnover ratios?
Increase, as total assets are reduced.
How do impairments affect debt-to-equity ratio?
Increase, since equity decreases.
How do impairments affect current and future ROA/ROE?
Current ROA/ROE decrease; future ROA/ROE increase due to lower asset and equity bases.
What might past overstated earnings indicate regarding impairment?
They suggest insufficient depreciation prior to impairment.
Why can impairment timing be seen as earnings management?
Because management has discretion over when to recognize impairment losses.
What should analysts do after an impairment?
Reassess forecasts of future earnings and cash flows.
When is an asset tested for impairment when classified as held for sale?
At the point it’s transferred from held for use to held for sale.
How is the impairment test for assets held for sale conducted?
Compare book value to net realizable value (fair value – selling costs).
Can impairment losses on assets held for sale be reversed?
Yes, up to the amount of the original loss under both IFRS and US GAAP.
Is depreciation recognized on assets held for sale?
No, depreciation stops once classified as held for sale.
