Key differences between IFRS and US GAAP impairment involve reversal capabilities and testing methods: IFRS allows reversing impairment losses (except for goodwill) and uses a one-step, recoverable-amount approach. US GAAP prohibits reversing impairment losses on long-lived assets held for use, utilizing a two-step, undiscounted cash flow approach.
U.S. GAAP – The carrying value of a reporting unit is tested against its fair value to identify an indication of impairment and then ultimately to quantify an impairment charge. IFRS – The carrying value of the CGU is compared to its recoverable amount, which is defined as the greater of its (i) VIU and (ii) FVLCD.
Although differences exist for recognition and measurement of impairment losses, we find these do not drive IFRS' superior value relevance. Rather, the superiority is driven by IFRS' requirement to reverse impairment losses when expected future cash flows improve. Such reversals are prohibited under US GAAP.
Impairment occurs when a business asset suffers a permanent reduction in fair market value in excess of the book value of the asset on a company's financial statements. Under U.S. generally accepted accounting principles (GAAP), assets that are considered impaired must be recognized as a loss on an income statement.
GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.
The way a balance sheet is formatted is different in the US than in other countries. Under GAAP, current assets are listed first, while a sheet prepared under IFRS begins with non-current assets. The two standards also dictate different approaches to ordering categories on the balance sheet.
The four pillars of IFRS S1 and S2 are governance, strategy, risk management and metrics and targets.
The entity shall estimate the recoverable amount of the CGU that the goodwill has been allocated to and compare this with the carrying amount of that CGU. If the carrying value of the CGU exceeds the recoverable amount of the CGU then the entity must recognize an impairment loss.
If a company records an impairment loss for a held-for-sale asset, then under U.S. GAAP, the company is allowed to subsequently restore the value of the asset back to the carrying amount prior to the impairment. If the asset is held-for-use, then the company is not allowed to recover or reverse the losses.
Goodwill is not amortized but tested for impairment. Under IFRS, goodwill is impaired when the recoverable value of a business unit is less than the carrying value (one-step approach). On the other hand, goodwill is impaired when the carrying value of a business unit exceeds its fair value under U.S. GAAP.
In conclusion, the fundamental distinction between how onerous contracts are treated in accounting under IFRS and US GAAP is that the contract must be recognized as a liability under IFRS. However, under US GAAP, just a loss must be recognized.
An impairment loss for goodwill is never reversed. For other assets, when the circumstances that caused the impairment loss are favourably resolved, the impairment loss is reversed immediately in profit or loss (or in comprehensive income if the asset is revalued under IAS 16 or IAS 38).
The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This difference appears in specific details and interpretations. IFRS guidelines provide much less overall detail than GAAP.
Under IFRS 3 Business Combinations, goodwill is an asset in the CSFP representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. Goodwill is not amortised but must be tested annually for impairment.
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.
Under IFRS, depreciation of an asset is charged on the difference between the assets cost (or revalued cost) less its residual value over its estimated useful life. Estimates of residual values reflect prices at the reporting date given the condition the asset is expected to be in at the end of the useful life.
5 examples of common GAAP violations
The impairment test of goodwill therefore compares the carrying amount of the group of assets containing the goodwill to the recoverable amount of that group of assets. If the carrying amount of the group of assets exceeds its recoverable amount, an impairment loss is recognised.
The Bottom Line for Leaders: An impairment says,"This asset is worth less than we thought." A write-off says, "This asset is worth nothing." Understanding this distinction is key to accurately assessing a company's financial health and the true value of its assets.
For example, IFRS considers an increase in market rates that is likely to impact discount rates as a potential indicator of impairment while US GAAP does not. The annual impairment test may be either a quantitative or a qualitative test.
U.S. GAAP (ASC 350 and ASC 360)
Impairment: PP&E and Intangible Assets– Impairment exists when the carrying amount of an assets exceeds its fair value, but not all impairment is recorded in the financial statements.
The impairment test compares the asset's or (CGU's) carrying amount with its recoverable amount. The recoverable amount is the higher of the amounts calculated under the fair value less cost of disposal and value in use approaches.
IFRS 5 applies to a non-current asset (or disposal group) that is classified as held for distribution to owners. A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale.
Disclosure checklists
Our disclosure checklist outlines the minimum disclosures required by IAS 34 'Interim financial reporting' and other IFRS Acocunting Standards published by the International Accounting Standards Board (IASB). It is intended for the use of existing preparers of IFRS financial statement.
IFRS S1: prescribes how a company prepares and reports its sustainability-related financial disclosures. IFRS S2: sets out supplementary requirements that relate specifically to climate-related risks and opportunities.