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6.2 Impairment of long-lived assets held for use—general
Publication date: 30 Nov 2020
us IFRS & US GAAP guide
The IFRS-based impairment model might lead to the recognition of impairments of long-lived assets held for use earlier than would be required under US GAAP.
There are also differences related to such matters as what qualifies as an impairment indicator and how recoveries in previously impaired assets get treated.
Differences relating to goodwill impairment are discussed in SD 13, Business Combinations.
US GAAP |
IFRS |
Long-lived assets that are held and used are tested for impairment at the asset group level. US GAAP requires a two-step impairment test and measurement model as follows:
Step 1—The carrying amount is first compared with the undiscounted cash flows. If the carrying amount is lower than the undiscounted cash flows, no impairment loss is recognized, although it might be necessary to review depreciation (or amortization) estimates and methods for the related asset.
Step 2—If the carrying amount is higher than the undiscounted cash flows, an impairment loss is measured as the difference between the carrying amount and fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Fair value should consider the impact of the related current and deferred tax balances and should be based on the assumptions of market participants and not those of the reporting entity.
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IFRS uses a one-step impairment test. The carrying amount of an asset is compared with the recoverable amount. The recoverable amount is the higher of (1) the asset’s fair value less costs of disposal or (2) the asset’s value in use.
A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. It can be a single asset. In practice, individual assets do not usually meet the definition of a CGU. As a result, assets are rarely tested for impairment individually but are tested within a group of assets. See SD 6.2.1 for additional information on asset groupings under US GAAP and IFRS.
Fair value less costs of disposal represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date less costs of disposal. Current and deferred tax balances, with the exception of unused tax losses, and their associated cash flows, are taken into account when calculating fair value less costs of disposal, if a market participant would also include them.
Value in use represents entity-specific or CGU-specific future pretax cash flows discounted to present value by using a pretax, market-determined rate that reflects the current assessment of the time value of money and the risks specific to the asset or CGU for which the cash flow estimates have not been adjusted.
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An asset group should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. ASC 360-10-35-21 provides examples of such impairment indicators. Changes in market interest rates are not considered impairment indicators.
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A CGU is impaired when its carrying amount exceeds its recoverable amount. IAS 36.12 to IAS 36.14 provide examples of such impairment indicators, which are generally consistent with the impairment indicators in US GAAP. However, changes in market interest rates can potentially trigger impairment and, hence, are impairment indicators (e.g., an increase in market interest rates that affect the discount rate used in calculating the nonfinancial asset’s value in use).
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The reversal of impairments is prohibited.
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If certain criteria are met, the reversal of impairments, other than those of goodwill, is permitted.
For noncurrent, nonfinancial assets (excluding investment properties and biological assets) carried at fair value instead of depreciated cost, impairment losses related to the revaluation are recorded in other comprehensive income to the extent of prior upward revaluations (i.e., revaluation surplus), with any further losses being reflected in the income statement.
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6.2.1 Impairment of long-lived assets—asset groupings
Determination of asset groupings is a matter of judgment and could result in differences between IFRS and US GAAP.
Indefinite-lived intangible assets, including goodwill, are governed by ASC 350 under US GAAP. See SD 6.8 for additional information on the accounting for such indefinite-lived intangible assets under US GAAP and IFRS.
US GAAP |
IFRS |
For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities. In limited circumstances, a long-lived asset (e.g., a corporate asset) might not have identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and of other asset groups. In those circumstances, the asset group for that long-lived asset should include all assets and liabilities of the entity.
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A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. It can be a single asset. If an active market (as defined by IFRS 13) exists for the output produced by an asset or group of assets, that asset or group should be identified as a CGU, even if some or all of the output is used internally.
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Generally, debt instruments should not be included in an asset group as they do not represent the lowest level of identifiable cash flows (i.e., debt payments are generally funded at the corporate level and are not attributable to an asset group). If debt is tied to specific assets within the asset group, or the asset group is a business or reporting unit, there may be circumstances when it is appropriate to include the cash flows associated with debt.
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Liabilities are generally excluded from the carrying amount of the CGU. However, there may be circumstances when it is not possible to determine the recoverable amount without considering a recognized liability (e.g., asset retirement obligations, restoration obligations). In such cases, the liability should be included in the CGU.
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A lease liability for a finance lease is generally viewed as “debt like” and therefore is excluded from an asset group. For operating lease liabilities, an entity may elect to either (1) include the carrying amount of the operating lease liabilities in the asset group and include the associated operating lease payments in the cash flows or (2) exclude the carrying amount of the operating lease liabilities from the asset group and exclude the associated operating lease payments from the cash flows.
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While lease right-of-use assets are included in a CGU, when testing value in use, the related lease liabilities should be excluded because they are a form of financing and all financing cash flows are explicitly excluded from value in use (IAS 36 para 50(a)). While this position is clear for value in use, it is less so for fair value less cost of disposal (FVLCD) models, since IAS 36 has little specific guidance on determining FVLCD. Generally, if the buyer of a CGU is required to assume the lease liability, the FVLCD would also include the liability.
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6.2.2 Impairment of long-lived assets—cash flow estimates
As noted above, impairment testing under US GAAP starts with undiscounted cash flows, whereas the starting point under IFRS is discounted cash flows. Aside from that difference, IFRS is more prescriptive with respect to how the cash flows themselves are identified for purposes of calculating value in use.
US GAAP |
IFRS |
Future cash flow estimates used in an impairment analysis should include:
US GAAP specifies that the remaining useful life of a group of assets over which cash flows may be considered should be based on the remaining useful life of the “primary” asset of the group.
Cash flows are from the perspective of the entity itself. Expected future cash flows should represent management’s best estimate and should be based on reasonable and supportable assumptions consistent with other assumptions made in the preparation of the financial statements and other information used by the entity for comparable periods.
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IAS 36 provides little specific guidance when measuring the recoverable amount using fair value less costs of disposal. Therefore, when the recoverable amount is determined using fair value less costs of disposal, the measurement guidance in IFRS 13 applies.
However, cash flow estimates used to calculate value in use under IFRS should include:
Cash flow projections used to measure value in use should be based on reasonable and supportable assumptions of economic conditions that will exist over the asset’s remaining useful life. Cash flows expected to arise from future restructurings or from improving or enhancing the asset’s performance should be excluded.
Cash flows are from the perspective of the entity itself. Projections based on management’s budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified.
Estimates of cash flow projections beyond the period covered by the most recent budgets/forecasts should extrapolate the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country in which the entity operates, or for the market in which the asset is used unless a higher rate can be justified.
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