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IFRS vs. GAAP Impairment of Assets

Both U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) require tangible and intangible assets to be written down when impaired. There are distinct differences between U.S. GAAP and IFRS in recognizing and recording impairment, but in principle, they are aligned at what they intend to accomplish. In summary, both standards require entities to test impairment for both finite and infinite lived assets if there appears to be any indication that impairment may exist. Both present similar indicators of when impairment occurs, and goodwill, along with any other indefinite lived assets, must be tested annually for impairment.

However, there are also differences. For finite tangible and intangible assets, U.S. GAAP requires a two step process to test impairment. The first step is to determine if the carrying amount of the assets exceeds undiscounted future cash flows. If it does, then proceed to the next step, which is to compute the impairment, using discounted cash flows. Under IFRS, impairment is determined when the carrying value exceeds the greater of discounted cash flows or fair value adjusted less any disposal costs. As a result, it is more likely that under IFRS, an asset will be impaired earlier.

There are also differences in testing for goodwill and other indefinite lived intangible assets. U.S. GAAP uses a two step process for determining and measuring the impairment. Step one compares the fair value to the carrying value. If the carrying value exceeds the fair value, the asset is impaired. To measure impairment, you must compare the fair value of all assets in which goodwill is measured using a residual approach.

Under IFRS, the determination of impairment and the calculation of impairment are determined in one step. The recoverable value, which is the higher of the present value of future cash flows or the fair value of an asset less costs to dispose is compared to the book value. Any impairment, which is the amount by the which carrying values exceeds the recoverable value, is then allocated first to goodwill and then to the other intangible assets on a pro-rata basis.

U.S. GAAP impairment testing process involves determining the level of impairment based on a valuation of the entire entities tangible and intangible assets. Under IFRS, however, the impairment is equal to the difference between the carrying value and the fair value of the entire entity.

There is another noticeable difference. Under IFRS, impairments for finite assets can be reversed, however the impairment reversal is limited to the original value recorded had impairment not existed. Goodwill impairment can never be reversed.

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