Both IFRS and US GAAP require companies to write down the carrying amount of impaired assets. Impairment reversals for identifiable, long-lived assets are permitted under IFRS but typically not under US GAAP.
An asset is considered to be impaired when its carrying amount exceeds its recoverable amount. Although IFRS and US GAAP define recoverability differently (as described below), in general, impairment losses are recognised when the asset’s carrying amount is not recoverable. The following paragraphs describe accounting for impairment for different categories of assets.
Impairment of Property, Plant, and Equipment
Accounting standards do not require that property, plant, and equipment be tested annually for impairment. Rather, at the end of each reporting period (generally, a fiscal year), a company assesses whether there are indications of asset impairment. If there is no indication of impairment, the asset is not tested for impairment. If there is an indication of impairment, such as evidence of obsolescence, decline in demand for products, or technological advancements, the recoverable amount of the asset should be measured in order to test for impairment. For property, plant, and equipment, impairment losses are recognised when the asset’s carrying amount is not recoverable (i.e. the carrying amount is more than the recoverable amount). The amount of the impairment loss will reduce the carrying amount of the asset on the balance sheet and will reduce net income on the income statement. The impairment loss is a non-cash item and will not affect cash from operations.
Impairment of Intangible Assets with a Finite Life
Intangible assets with a finite life are amortised (carrying amount decreases over time) and may become impaired. As is the case with property, plant, and equipment, the assets are not tested annually for impairment. Instead, they are tested only when significant events suggest the need to test. The company assesses at the end of each reporting period whether a significant event suggesting the need to test for impairment has occurred.
Impairment of Intangibles with Indefinite Lives
Intangible assets with indefinite lives are not amortised. Instead, they are carried on the balance sheet at historical cost but are tested at least annually for impairment. Impairment exists when the carrying amount exceeds its fair value.
Impairment of Long-Lived Assets Held for Sale
A long-lived (non-current) asset is reclassified as held for sale rather than held for use when management’s intent is to sell it and its sale is highly probable. (Additionally, accounting standards require that the asset must be available for immediate sale in its present condition.)
Reversals of Impairments of Long-Lived Assets
After an asset has been deemed impaired and an impairment loss has been reported, the asset’s recoverable amount could potentially increase.
Derecognition
A company derecognises an asset (i.e., removes it from the financial statements) when the asset is disposed of or is expected to provide no future benefits from either use or disposal. A company may dispose of a long-lived operating asset by selling it, exchanging it, abandoning it, or distributing it to existing shareholders.
Sale of Long-Lived Assets
The gain or loss on the sale of long-lived assets is computed as the sales proceeds minus the carrying amount of the asset at the time of sale.
Long-Lived Assets Disposed of Other Than by a Sale
Long-lived assets to be disposed of other than by a sale (e.g., abandoned, exchanged for another asset, or distributed to owners in a spin-off) are classified as held for use until disposal or until they meet the criteria to be classified as held for sale or held for distribution.
