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Impairment of Long-lived and Indefinite-lived Assets (IAS 36 (Revised))

Management agreements, franchise agreements, license agreements, customer lists, trademarks, and goodwill represent some of the long-lived and indefinite-lived assets held by Consumer Product companies.

IFRS requires that goodwill and other indefinite-lived intangibles be tested for impairment at least annually, or more frequent if an indicator is present. Other long-lived assets are reviewed at the end of each reporting period for any indication of impairment, and tested for impairment if necessary. IFRS requires impairment testing at the “cash-generating unit” (CGU) level, which is generally similar to the U.S. GAAP “asset group” level, but may result in a lower level of testing.

However, IFRS differs from U.S. GAAP in the method and valuation for calculating impairment, and allows for reversal of impairment with the exception of goodwill. Long-lived asset impairment is a one-step approach under IFRS and is assessed on the basis of recoverable amount, which is calculated as the higher of fair value less costs to sell or value in use (e.g. discounted cash flows). If impairment is indicated, assets are written down to the higher recoverable amount.

Goodwill

Fixed Assets

All Finite & Indefinite-Lived Assets

Step 1

Determine if impairment exists by comparing the total carrying value of the reporting unit to its fair value. If the carrying value exceeds the fair value, go to step 2.

Determine whether impairment exists by comparing the carrying value of the asset group to the undiscounted cash flows. If the carrying value exceeds the undiscounted cash flows, go to step 2.

Determine if impairment exists by comparing the carrying value of the CGU or asset to its recoverable amount as defined above. If the carrying value exceeds the recoverable amount, impairment is recognized for the difference.

Comparison of Impairment Approaches

U.S. GAAP

IFRS

Step 2

Calculate and assign fair value of all other assets and liabilities of reporting unit, remainder equals implied goodwill. Impairment charge is measured as the difference between the carrying value and implied fair value of goodwill.

An impairment charge is recognized by reducing the carrying value of the asset group to its estimated fair value.

Not applicable.

The ultimate effect of IFRS is that impairment will likely occur sooner than under U.S. GAAP, but may not be as high. For example, assume a manufacturing facility’s undiscounted cash flow exceeds the asset carrying value but value in use is less than the asset carrying value. No impairment charge would be recorded under U.S. GAAP as the step 2 test would not be performed. An impairment charge would be recorded under IFRS.

After the recognition of an impairment charge, the depreciation or amortization charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value, on a systematic basis over its remaining useful life. An impairment charge shall be recognized immediately in profit or charge, unless the asset is carried at revalued amount. Any impairment charge of a revalued asset shall be treated as a revaluation decrease.

Reversal of Impairment Charge

Except for goodwill, IFRS allows the reversal of impairment charges if the recoverable amount of an asset has increased since the impairment charge was recognized. An entity should increase the value of the asset to its current recoverable amount and the prior impairment charge recorded is therefore reversed, not above the carrying amount of the asset that would have existed if no impairment charge had been recognized (i.e., the otherwise net carrying amount after regular depreciation expense is deducted). A reversal of an impairment charge for an asset other than goodwill shall be recognized immediately in profit or loss, unless the asset is carried at revalued amount. Any reversal of an impairment charge of a revalued asset shall be treated as a revaluation increase.

Impaired assets must be tracked at original value in order to calculate the amount of impairment reversal. The reversal of the impairment is only allowed to the extent of the impairment previously recognized.. After the reversal of an impairment charge, the amortization amount for the asset should be adjusted on the basis of the new value of the asset, its residual value, and its remaining useful life.

Property, Plant, and Equipment (IAS 16 (Revised))

Property, plant, and equipment (PP&E), one of the most significant line items on a Consumer Product company’s balance sheet, represents a key a r e a o f d i f f e r e n c e b e t w e e n I F R S a n d U . S . G A A P .

Measurement after Recognition

Under IFRS, an entity may elect to value PP&E using either the cost or revaluation model. Under the revaluation model, an entire class of PP&E is revalued at fair value regularly, if fair value can be measured reliably. The revalued amount is the fair value of the asset at the revaluation date less any accumulated depreciation and accumulated impairment charges. Revaluation increases are credited to equity and labeled revaluation surplus. However, if a revaluation decrease has been previously charged to income, then the revaluation increase would be charged to income to the extent of the previous revaluation loss and any additional amount would be credited to equity and labeled revaluation surplus. Revaluation losses are charged first against any revaluation surplus in equity related to the specific asset, and any excess charged to income.

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