LOS I requires us to:
explain the impairment of property, plant, and equipment and intangible assets.
Impairment is the unanticipated decline in the value of assets, causing its obsolescence or decline in its use.
1. Impairment of Tangible Assets
a. Both IFRS and U.S. GAAP require that the impaired assets be impaired by writing down loss in the income statement. However, reversal of the impairment loss on the subsequent increase in the value of the asset is only permitted under the IFRS (it is not allowed in U.S. GAAP).
b. When an asset is impaired, there is:
i. the decline in the carrying value of an asset,
ii. reduction in the net income due to impairment charge, and
iii. no impact on the cash flows (as impairment is a non-cash charge).
c. In order to impair an asset, it should first be tested for impairment.
d. Under IFRS, an asset is impaired when the carrying amount of the asset is greater than the recoverable amount of the asset. And the recoverable amount is the higher of net fair value (i.e. fair value of the asset minus its selling cost) and its value-in-use.
e. Under GAAP, an asset should be impaired if two conditions are satisfied:
i. carrying amount of asset is greater than its fair value, and
ii. when the carrying amount is deemed to be unrecoverable.
2. Impairment of Intangible Assets with Finite Life
Intangible assets are only tested for impairment upon the occurrence of significant adverse events. And once it is established that the asset would require impairment, the same treatment is given to it as tangible assets.
3. Intangible Assets with Indefinite Life
These assets are tested at least annually for impairment. And necessary treatment is provided if it is established that there is a fall in the value of the asset.
4. Long-Lived Asset Held for Sale
a. These are those assets that no longer have use for the business, but still, have value if sold. So, these assets are held for sale. They are thus transferred from their original asset class to a new class, which is ‘held for sale assets’.
b. These assets, once transferred from their original class, are no longer depreciated or amortized.
c. Upon reclassification, these assets are tested for impairment. And once it is established that impairment is required, the same treatment is afforded to the asset, as is given to the tangible assets.
5. Reversal of Impairment
a. Under GAAP if an asset is held for use, no reversal is allowed. However, if the asset is held for sale the impairment may be reversed if there is a subsequent increase in the fair value of the asset.
b. Under IFRS the reversal of impairment is permitted for both classes of assets (i.e. held for sale and assets held for use). However, the reversal of impairment can be made, or the asset may be revalued upwards only to the extent of the original impairment loss provided.