Both under IFRS and US GAAP, when the value of an asset decreases drastically, a company must recognize an impairment loss on the asset by reducing its carrying amount. This charge is in addition to the depreciation and amortization expense which is used to allocate the cost of the asset over its useful life. While IFRS allows reversal of impairment loss when the asset recovers its value, US GAAP does not.
Accounting for impairment loss on property, plant and equipment
Impairment loss on an item of PPE is recognized when the asset’s carrying amount exceeds its recoverable amount. At each year-end, a company assesses whether there are indications of impairment of an item of PPE, such as obsolescence, technological change, etc. When indications exist, the asset is tested for impairment.
Under IFRS, a company calculates recoverable amount as the higher of value in use and fair value less costs to sell of the asset and recognizes impairment loss equal to the excess of carrying amount over the recoverable amount.
Value in use equals the present value of expected net cash flows that an asset generates.
Under US GAAP, an asset’s carrying amount is considered to be non-recoverable if it exceeds the undiscounted cash flows of the asset, in which case the impairment loss is recognized equal to the excess of the asset’s fair value over its carrying amount.
Recognizing impairment loss on intangible assets
Impairment accounting for intangible assets with finite useful life is essentially the same as that for property, plant, and equipment. A company must assess an asset for signs of impairment at the year-end, and conduct impairment testing when there are indications of impairment.
Intangible assets with indefinite useful life are not amortized but are tested at least annually for impairment.
Impairment of assets held for sale
When management intends to sell an asset (which is available for sale in its present condition) and the same is highly probable, the company tests the asset for impairment, recognize any impairment losses such that the asset’s carrying amount is brought down to its fair value less costs to sell, reclassify the asset as held for sale, and cease charging any depreciation or amortization on the asset.
Accounting for reversal of impairment losses
When the recoverable amount of an asset that has been previously impaired recovers, IFRS allows reversal of impairment losses already recognized on the asset. It does not mean that the carrying amount is brought back to the recoverable amount but that the losses are reversed.
US GAAP allows reversal of impairment losses on assets held for sale, but does not allow it on assets held for own use.