Impairment of Long-Lived Assets

A Comparison under the ASC and IFRS

Presented to the
Accountancy Department
De La Salle University

In Partial Fulfillment of
The Course Requirements in
MODFIN2 K34

Co, Joshua Tan

A. Phenomena Being Studied

It is important for any firm to properly state their assets and liabilities so that they may
present proper information in their financial statements. Property, plant, and equipment are an
important part of the financial position of an entity and makes up the bulk of their assets.
Overstating these may result to overconfident decisions by the firm and misinterpretations from
creditors and investors. Understating them on the other hand, may result in missed opportunities
especially in terms of business decisions and investments. With that said it is indeed one of the
most important aspects to account for properly. Depreciation is simple enough to properly
allocate the depreciable amount of an asset over its useful life. Impairment on the other hand is a
much more complicated matter. While depreciation poses a more systematic approach,
impairment requires more of assessment and appraisal, and that is where difficulty may arise. An
accounting paper done by Sergey Komissarov, Joseph T. Kastanin, and Katherine Rick, entitled
Impairment of Long-Lived Assets, gives us an understanding of the differences between the
Financial Accounting Standards Boards (FASB) Accounting Standards Codifications (ASC)
approach and the International Accounting Standards Board s (IASB) approach through its
implementation of International Financial Reporting Standards (IFRS). The paper shows how
these 2 approach the process of impairment and how large the disparities may be between
companies that use one or the other. Particularly the paper looks at ASC topic 350 on property,
plant, and equipment and topic 350 on Intangible assets, and compares those to IFRS (IAS 16)
on property, plant, and equipment, and IAS 38 on intangible assets.

B. Key Concepts
Impairment by definition is a fall in the market value of an asset when its recoverable
amount is lower than its carrying amount. This is to properly value the asset when there is
evidence that its carrying value cannot be recoverable in full. It is important to note that assets
should not be carried above its recoverable amount, following a conservative approach in
accounting. Recoverable amount now, is defined as the net amount expected to be recovered
from the net inflows and outflows of cash from the continued use of the asset and its subsequent
disposal. The paper uses the term long-lived assets as the term for non-current assets, but they
essentially mean the same thing. The paper clearly distinguishes between tangible and intangible
assets, particularly putting emphasis on goodwill. Goodwill can be defined, as an intangible asset

that is not specifically identifiable, doesnt have a definite life, and it is part of the business and
entity. Putting it in other words, goodwill is present in an entity due to the success of the
company, so much so that its value is higher than its current carrying amount. As we learned in
our modfin2 class, cash generating unit are the smallest identifiable group of assets that generate
cash flows to the entity from continuing use. These groups may refer to departments, product
lines, and the like. It is important to note here that these CGUs must be the smallest group
identifiable and must be independent of cash flows form other groups. As part of determining the
recoverable amount, we will run into the term, value in use, which is basically the present net
worth of the asset calculated by taking the present value of its future net cash flows to the entity.

C. Analysis of Framework
Based on what we learned from our modfin2 class, after initial measurement, a firm will
choose either the cost model or the revaluation model as its accounting policy for subsequent
measurement for property, plant and equipment. Revaluation model uses the fair value method at
date of revaluation less any impairment loss and depreciation. By this method, the value of the
asset can go way beyond its carrying amount, following the movements in fair value, and must
be done with sufficient regularity. The revalued amount must always be at the fair value
appraised by professionals. If the fair value is not obtainable, then the revalued amount must be
the depreciated replacement cost. We however will be talking more about the cost model where
in the carrying amount should be compared to the recoverable amount and the difference when
the recoverable amount is lower, shall be written off as impairment loss. The paper talks about
how ASC and IFRS both provide the following: external and internal qualitative factors that
determine impairment, treat impairment currently and prospectively, apply impairment equally to
individual assets and groups and liabilities, testing for impairment at the lowest level of assets or
liabilities, combination of goodwill and other non-identifiable assets, and require a certain level
of disclosure for the impaired assets. So both ASC and IFRS agree as to how to address
impairment. When talking about qualitative impairment factors, ASC and IFRS have similar
characteristics. These are when: there is a significant decrease in the market price for the asset, a
decrease in the productive utilization of the asset, a radical change in the legal environment of
the asset, an increase in expected costs, continuous losses (negative cash flows), and greater than
50% probability that an asset will be prematurely disposed off. Both again agree on when

impairment should be recognized. The paper also mentions factors in terms of goodwill as
follows: a subsidiary has recognized impairment, a business being disposed off that contains
goodwill, a significant group of the reporting entity will be disposed off, an increase in input
factors, a decrease in cash flows, a change in key personnel, a change in the market for the
product, and a change in macroeconomic factors. With that said, IFRS has 2 additional factors:
when the entity issues dividends and the carrying amount in the consolidated statements exceeds
those in the separate statements, and also when dividends are declared exceeding the total
comprehensive income. Here we see that IFRS is a step ahead of ASC in that it recognizes an
impairment of goodwill (as the paper mentioned, are in millions of dollars) in consolidated
financial statements as well as dividend distribution.

The main cut off however between the ASC and the IFRS, and where considerable
disparities arise, is in the way they recognize if an asset is impaired or not. The ASC requires
first that the asset undergo a recoverability test based on expected undiscounted cash flows from
continual use of the asset and its eventual disposal. If there is evidence of impairment from the
recoverability test, the firm then compares the fair value of its asset to the carrying amount; any
excess of the carrying amount over the fair value is the impairment. When there is goodwill
present, ASC requires that the testing should be at the reporting-unit level up till one level below
a segment. The ASC also prohibits the reversal of previously written off accounts. The authors
observe that the ASC follows a certain 2-step approach in determining whether the asset is
impaired or not. The first step is to compare between an entitys fair value and carrying amount
including goodwill, being that if carrying value exceeds fair value there is impairment. The
second step would be to compare the implied fair value of the goodwill with its carrying amount.
Looking at the IFRS, goodwill the company deems itself to have must be allocated to all related
cash generating units, and cannot be higher than the segment level. Instead of a recoverability
test, the firm simply compares the carrying amount of the asset between the higher of its fair
value and value in use. The impairment loss naturally being the difference, when carrying
amount is higher than the recoverable amount. Thus the IFRS does not follow a 2-step approach
like the ASC does. The IFRS also requires previous impairment to be reassessed at each
reporting date to ensure that the impairment still holds, thereby allowing a recovery if it does not
hold. The IFRS, however, does not permit the recovery of the impairment to go beyond the

carrying amount of the asset when it was impaired. Lastly, when looking at the disclosure
requirements, both the ASC and IFRS provide the following for PPE the facts and circumstances
surrounding the impairment and the methods used in determining fair value. For goodwill, any
impairment loss and any significant changes in the allocation of goodwill. For other intangible
assets they require quantitative information and significant inputs that are unobservable. Again
IFRS is more comprehensive in that it adds a few more disclosure requirements: sensitivity
testing results and whether the impairment arose out of the fair value or value in use values.

D. Insights
I believe that now I have a deeper insight on just how important properly stating a
companys assets are especially in terms of its goodwill, which is always something difficult to
estimate. I got this insight due to the fact that actual data and real figures were stated in the
article. Theory just doesnt do justice to the millions of dollars (euros) that goodwill can
accumulate and just how large this impact has on firms and companies. On a side note, the
authors also cited another paper done by The CPA Journal entitled, Goodwill Nonimpairments: Evidence from Recent Research and Suggestions for Auditors, where in it gave
certain ideas on why firms would want to misstate their impairment on good will, or rather, why
firms and especially managers would be incentivized to misappropriate impairment. These
include: causing the companys earnings to go down, a decrease in a CEOs compensation,
damage to a CEOs reputation, and a violation of a bond indenture or agreement. By
misappropriating their values, the CEO could actually be earning more money, much like what
happened in the 2008 financial crises where in firms would go bankrupt, but their CEOs would
walk away with millions in their pockets. I guess impairment of assets is a form of anti-fraud by
not overstating the values of companies

From this paper, I have come to realized just how big a role goodwill is in the financial
statements of an entity, and that it could make or break an entity. This just goes to show up big a
role an image plays in the real world. Moreover I realize now just why firms spend so much time
on properly training their employees, building a good customer base, and pay so much for
marketing, it is all simply for one thing, this goodwill. With that said it is all the more important
that intangible assets like this should be carefully analyzed so as not to overstate them.

E. Articles Major Contribution

The main point the authors are driving at is the fact that there is indeed a massive
disparity between the USGAAP and the IFRS, and this in turn could affect the efficacy of the
financial statements as well as the potency of the decisions of stakeholders. It showed one of the
many standards where in IFRS differs from US GAAP. The paper explains very well the
disparities in values, especially in good will, of firms that use IFRS and those that use ASC. This
calls into play the ever importance of conformity and uniformity. Aside from the costs to convert
financial statements from IFRS to ASC and vice versa, there is also the problem of
misappropriation. What is considered right in the ASC may not necessarily be the same for IFRS.
In this scenario, the idea is that a firm that is not doing so well under the US GAAP may be at
par with a firm doing very well under the IFRS. This may lead to bad decisions, particularly in
terms of joint ventures or mergers. The article sums this up in 4 instances: the impairment of
assets may occur in IFRS much earlier than in GAAP, impairment in IFRS may be lower than
GAAP, IFRS may incur a reversal of impairment, and impairment disclosures may vary between
the two.

F. New Learnings
I learned that even though we cannot fully conclude that the IFRS is the better and more
proper standard, there is a reason why most countries, if not all, have shifted to, or are shifting
to, IFRS. It is for the simple reason, I believe, that the IFRS is more comprehensive and more
complete than the US GAAPs ASC. This chapter on impairment is just one of the many other
standards where in the IFRS may be more comprehensive. Overall I learned that IFRS does not
only allow for more factors of impairment for goodwill, but also has a better approach towards
measuring goodwill. I believe that the IFRS gets this spot on. It assures that goodwill is properly
stated in big companies and conglomerates by looking at their dividends. It recognizes
impairment when the carrying amount in the consolidated financial statements exceeds that of
the individual and there are dividends distributed. This may happen a lot since consolidated
financial statements may be large and doing well, but it isnt directly proportional to each of the
individual companies. By that, it means that just cause one individual company does well, it does
not mean other individual companies are doing as well. With that, a conglomerate may look like

it is doing well even though it has failing companies, thus their goodwill must be decreased. This
makes it easier to detect fraud when the individual firm would want to overstate its financial
statements. This may lead me to believe that the US GAAP might have a tendency (as proven by
this standard) of protecting larger and bigger companies and conglomerates, which are what
many Americans complain about. I also believe that basing recoverable value on value in use as
well as fair value is more efficient since it gives the firm a better opportunity to revalue its assets.
Which shows that fair value is not the only factor to look at in determining recoverable amount.
Like the paper mentioned, the IFRS is different from the ASC in that it introduces value in use.
This gives us the idea that recoverable amount isnt only based on what the market dictates, but
also on how much value it can bring to the firm in the years to come. I learned that an asset
might have different values in use to many different companies although it may only have one
fair value. Therefore an equipment may be of no value to the market, but could possible be
essential to the operations of a company. Using both to analyze the recoverable amount poses
more proper accounting. I also believe that opportunity to recover an impairment loss makes
more sense than completely ignoring a recovery when certain events change in the business
world and a recovery is imminent. Finally I find it crucial that disclosures related to impairment
losses include sensitivity testing results with respect to goodwill since this is a way of not
overstating goodwill and again a form of preventing fraud. By showing how possibly volatile an
asset it, noted by the goodwill, the firm would not look over appealing to investors, and would
play on the conservative plain in accounting. All in all I believe that IFRS is dressed to prevent
financial fraud and promote conservatism. A move towards IFRS would be beneficial not just for
the US, but also those in business with them.

G. Lingering Questions
One may wonder that with the US GAAP being less comprehensive than the IFRS that
crisis like the 2008 financial crisis and even that of Enron were bound to happen. Impairment is
just one of the many standards that IFRS may be more complete in and a deeper look into the
structure of the US GAAP as well as a restructuring may be necessary. Although those using the
IFRS may hav its own share of financial fraud, none could have been as bad as that of Enron. It
is the duty of accountants to properly and fairly state the accounts of the companies to all
interested users, which is why so much attention is paid to proper ethics. It is important that

companies adhere to this and not give in to their selfish pride and greed. It is also the duty of the
governing bodies in the respective countries to assure that these are done properly. It is a
complicated effort, which is why it must be a joint effort of responsibility and honesty of all
parties involved.

H. Possible Application
With all that said, the paper poses the question of which standard is better or more
applicable? The answer to that I believe is the standard that would state more proper and correct
values as well as disclosures. Accounting is the business form of communicating to interested
parties the performance of the entity. It therefore should not lie to the investors, nor should it try
to cheat them. The standard that must be chosen must be the one that will take care of the
stakeholders for they are the blood and soul of any business. Of course there will always be
loopholes, which is why the standards must constantly be updated and renewed to battle against
fraud. Through this accounting will be able to not only help the stakeholders but also everyone
else, as a business impacts the world in many-many ways.