Impairment of Long-lived Assets including Goodwill

Includes Comparison of US GAAP and IFRS

Impairment of long-lived assets

• IFRS: 1-step process– Recoverable amount is

higher of• Fair value less cost to sell• Value in use

– Discounting required in evaluation stage

– Impairment losses must be reversed if circumstances change (except goodwill)

• FASB: 2-step process• FAS 144—for an asset in use,

undiscounted future cash flows from use establish recoverability used for the impairment calculation– Not considered impaired unless

undiscounted cash flows are less than carrying value

– Discounting occurs only for the step 2 valuation stage

– Impairment losses cannot be reversed

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Timing of impairment tests

• IFRS– When an indication of impairment is

observed (look for them at least annually)

• Land, buildings, equipment• Intangible assets with finite life

– At least annually • (at same time of year but not

necessarily at year end)• Intangibles with indefinite life

including goodwill• Intangibles not yet in use

(development costs)

• US GAAP– When indication of impairment

exists long-lived assets & intangibles subject to amortization

– At least annual tests for intangibles with indefinite life including goodwill

• GW tested at reporting unit level – related to segment reporting rules

• Detailed evaluation of fair value may not be required every year

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IFRS 1-step test• Impaired if recoverable amount > carrying

value– At end of each reporting period, look for

indications of impairment– Impairment tests need not be done if there are

no indications of impairment– EXCEPTION

• Intangible assets with indefinite useful life (including goodwill) and intangible asset not yet available for use

• For these assets, impairment test is at end of reporting period

Similar to US GAAP which requires annual impairment tests for intangibles with indefinite lives but not for other long-lived assets

When there is an indication of possible impairment:

Carrying Value Compared withRecoverable

AmountHighe

r of

Value in Use orFair value less cost to sell

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IAS 36

US GAAP – “triggering event”• Is there an indication that a long-lived asset might

be worth less than carrying value?• List of items AASC 360-10-35-21 – “When to test

a long-lived asset for recoverability”– Decline in market value– Change in way asset is used or physical change in

asset– Adverse changes in legal factors or business climate– Probable sale of asset before end of useful life– Current period losses with history of operating or cash

flow losses associated with asset

Impairmentloss = excessof BV over FV

No impairmentrecorded. Usecarrying value.

FASB 144 - Impairment ofAssets To Be Held and Used

No

Yes

Yes

Eventsindicate possible

impairment?

Is BV >undiscountedfuture CFs?

Yes Yes

No

Can FV beestimated based on

MV of similarassets?

Find FV bydiscountingfuture cashflows (CFs)

No

No

Quoted market prices

availablefor FV?Step 1

Step 2

To do tests, we must group assets• 360-10-35-23• There must be CASH FLOWS related to the

long-lived assets (so one can apply recoverability test and do discounted cash flow valuation techniques if necessary)

– Lowest level for which identifiable cash flows are available

– Largely independent of cash flows related to other assets or liabilities

This is referred to as a “primary asset” approach – because we need to have a group of assets that generates cash flows

US GAAP: Two-step process• Step 1: Is carrying value “recoverable” through

future (undiscounted) cash flows?– If yes, no impairment– If no, go on to Step 2

• Step 2: Measure the impairment loss:– Difference between carrying value and fair value

of the asset group

Snowy Ridge Ski Resort Case

Carrying Value Undiscounted Cash Flows

Land held for development 16,800K 22,800KMountain Division* 12,360K 9,625KLodge Division 9,500K 20,849K or

11,355KGoodwill 4,000K

*Mountain division includes $5M special use permit, an intangible asset with indefinite life

Step 1 – Snowy Ridge Ski Resort• Only Mountain Division is not recoverable:• Carrying value = $12,360• Future cash flows = $9,625

• THEREFORE, go on to Step 2

Snowy Ridge Ski Resort Case – fair values from Question 3

Carrying Value Fair Value

Land held for development 16,800K 13,898KMountain Division* 12,360K 9,625KLodge Division 9,500K 11,355K to

11,583KGoodwill 4,000K ??????

*Mountain division includes $5M special use permit, an intangible asset with indefinite life

Note that one of these is what we’d get from selling the asset so it is the same as one of the undiscounted cash flows from pervious slide

Mountain Division• Fair value = 9,625,000• Carrying value = 12,360,000• Impairment loss = 2,735,000

• Allocate between two major assets:5,000,000 permit 40.5%7,360,000 ski-lifts & infrastructure 59.5%

Mountain Division - IFRS• Value in use = 9,625,000 (PV using 6%)• Fair value less cost to sell = no information,

let’s assume $12M less 5% commission = $11.4M

• Higher of the two = 11,400,000Carrying value = 13,360,000Impairment loss 1,960,000

{It would be equal to US GAAP loss if fair value were $10M less cost to sell}

Real Estate Division - IFRS• No loss under US GAAP

• Value in use = 13,894,675• Carrying value = 16,500,000• Impairment loss = 2,605,325

• No loss for Lodging division under US GAAP and IFRS

Lodging Division - IFRS• Value in use = 694,960/.06 = 11,582,667• Fair value less cost to sell = 11,355,150 before

commission• Higher of the two = $11,582,667• Carrying value = 9,500,000• Therefore NO IMPAIRMENT is recognized

What about Goodwill Impairment?• Snowy Ridge Ski Resort

– Purchase price 46.5M– Identifiable assets 41.5M– Goodwill 4.0M

• I think it should be allocated to the operating divisions/reporting units

• However, the case authors did not allocate so they used the “company value” of $41M from page 61 (bottom of page)

Goodwill Impairment (ASC 350-20-35)• Step 1 (35-4 to 35-8)• Compare the fair value of a reporting unit with

its carrying amount, including goodwill. – If the carrying amount of a reporting unit is > 0

and fair value > carrying amount• Goodwill is not impaired (second step not necessary)

– Otherwise, go to step 2

Goodwill Impairment (ASC 350-20-35)• Step 2 (35-10 thru 35-13)• Compare carrying value to FAIR VALUE of the

reporting unit (to get the implied fair value of GW)– If Carrying value > implied fair value of GW, the

difference is the impairment– The loss cannot be > than carrying value– No upward adjustment after an impairment

Finding Implied Fair Value of GW• Assign fair values to all net assets of reporting

unit as though you were initially recognizing goodwill in a business combination (ASC 350-20-35-14)

• The excess of fair value of a reporting unit over the assigned fair values of assets and liabilities = implied fair value

Implied GoodwillUS GAAP IFRS

Snowy Ridge Ski Resort

Fair values of Identifiable Assets

at 6/30/X2

Fair values of Identifiable

Assets at 6/30/X2Cash 540,000$ 540,000$ Investment in debt securities 4,565,000 4,565,000 Mountain division 9,625,000 11,400,000 Lodge and related equipment 11,355,150 11,582,667Real estate/land held for development and sale 13,894,675 13,894,675 Accounts payable (150,000) (150,000) Bank loans (1,500,000) (1,500,000) Net assets 38,329,825 40,332,342 Fair value estimate 41,000,000 41,000,000 Implied goodwill 2,670,175 667,658

Step 2 – determine GW impairment (if any)

US GAAP IFRSImplied goodwill 2,670,175 667,658 Carrying value of goodwill 4,000,000 4,000,000 Impairment of goodwill to recognize 1,329,825 3,332,342

Impairment: US GAAP vs. IFRS Overall comparison

Similar rules overall but impairment test is different which can cause large $$ differences in reported earningsVIU is discounted version of recoverable cash

flows approach to estimating fair value that is used in US only if no market-based fair value is available

Big differencesIFRS requires that impairment losses be restored

(except for goodwill) while FASB does not permit restoration

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