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Key considerations in determining fair value to measure impairment, and specifically if an impairment is being measured using the fair value less costs of disposal for IFRS, include the following:
  • Market participants — Management may start with internal cash flow estimates, but it then needs to incorporate the perspective of market participants. Reporting entities should not presume that entity-specific projected financial information is representative of market participant assumptions. One of the inputs to the discounted cash flow model is the discount rate. The weighted average cost of capital should reflect the starting point for determining the rate that a market participant would demand based upon industry-weighted average returns on debt and equity adjusted for the relative advantages or disadvantages of the entity, rather than an entity-specific rate.
  • Markets — In determining fair value, a reporting entity must determine the principal or most advantageous market. In general, there may not be a principal market for the sale of the reporting unit (under US GAAP)/cash-generating unit (under IFRS) or indefinite-lived intangible asset being considered in the impairment analysis. If the reporting entity determines that there is no principal or most advantageous market, it should assess potential market participants and develop a hypothetical market based on its assessment of market participant assumptions.
  • Valuation premise — The reporting entity should assess potential markets, considering whether the highest and best use of the asset is alone or in combination with other assets. The reporting entity should use market participant assumptions in this analysis. The highest and best use of the reporting unit/cash-generating unit from the perspective of market participants may differ from that of the reporting entity.
  • Multiple valuation techniques — Although a discounted cash flow model may be the most suitable valuation technique in many cases, management should also consider the use of alternative methodologies each time an impairment test is performed. For example, valuation professions often use the market approach as a secondary method to the income approach when valuing a business. Reporting entities need to consider whether multiple approaches should be used when valuing reporting units/cash generating units. In determining the fair value of the reporting unit/cash generating unit, reporting entities may need to consider a weighting of reasonable results from all methods appropriate in the circumstances.

ASC 820, Example 3, Case A (ASC 820-10-55-36 through ASC 820-10-38A) and IFRS 13, Example 4 (IFRS 13.IE11 through IFRS 13.IE14) provide an example of the application of the ASC 820 framework in an impairment analysis. Issues such as asset groupings and allocations of losses are beyond the scope of this guide.
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