Accounting for Asset Impairment
- Graziano Stefanelli
- Jul 4
- 3 min read
Asset impairment occurs when the carrying amount of a long-lived asset exceeds its recoverable amount, requiring a write-down to reflect a decline in value. The correct identification, measurement, and reporting of impairments are critical for ensuring that financial statements present a true and fair view of a company’s financial position. Asset impairment applies to property, plant, equipment (PPE), intangible assets, and certain financial assets, and is governed by detailed standards under both US GAAP and IFRS.
Scope and When to Test for Impairment
Impairment rules apply to tangible and intangible assets held for use and not held for sale. Testing is triggered when events or changes in circumstances indicate that the carrying amount may not be recoverable. Common triggers include:
Significant decline in market value
Adverse changes in the business or regulatory environment
Obsolescence or physical damage
Underperformance relative to expectations
Plans to dispose of or restructure asset groups
Routine annual impairment tests are required for some assets, such as goodwill and indefinite-lived intangibles.
Recognition and Measurement under US GAAP
For most long-lived assets under US GAAP (ASC 360):
Recoverability Test:Compare the asset’s carrying amount with the sum of the undiscounted future cash flows expected from its use and eventual disposal.
If the carrying amount is less, no impairment is recognized.
If the carrying amount exceeds future cash flows, proceed to step 2.
Impairment Loss Measurement:The impairment loss equals the excess of the carrying amount over the asset’s fair value.
Fair value is typically determined by market prices, appraisals, or discounted cash flows.
Example:
An asset with a $500,000 carrying value is expected to generate $400,000 in undiscounted future cash flows and has a fair value of $350,000.
Impairment loss: $500,000 – $350,000 = $150,000
Journal Entry:
Dr. Impairment Loss ................. $150,000
Cr. Accumulated Impairment ........... $150,000
Recognition and Measurement under IFRS
Under IFRS (IAS 36):
Test for impairment by comparing the asset’s carrying amount to its recoverable amount (the higher of fair value less costs of disposal and value in use).
If carrying amount exceeds recoverable amount, recognize an impairment loss.
Value in use is the present value of estimated future cash flows from continued use and disposal.
Impairment of Goodwill and Indefinite-Lived Intangibles
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and whenever indicators arise.
Under US GAAP: The impairment test compares the carrying amount of the reporting unit, including goodwill, to its fair value.
Under IFRS: Goodwill is allocated to cash-generating units (CGUs) and tested at that level.
Impairment losses for goodwill cannot be reversed.
Subsequent Measurement and Reversal of Impairments
US GAAP: Impairment losses, once recognized, cannot be reversed for assets held for use.
IFRS: Impairment losses (except for goodwill) can be reversed if there is evidence that the recoverable amount has increased, but not above the original carrying amount.
Disclosure Requirements
Both US GAAP and IFRS require companies to disclose:
The amount and nature of recognized impairment losses (and reversals, under IFRS)
The events and circumstances leading to the impairment
The methods and assumptions used to measure recoverable amounts
Segment or asset group details, if material
Relevant Accounting Standards
US GAAP: ASC 360 – Impairment and Disposal of Long-Lived Assets; ASC 350 – Intangibles—Goodwill and Other
IFRS: IAS 36 – Impairment of Assets
Summary Table: Asset Impairment Process
Step | US GAAP | IFRS |
Trigger for Test | Events/changes in circumstances, annual for some | Events/changes, annual for goodwill/intangibles |
Recoverability Test | Undiscounted future cash flows vs. carrying value | Recoverable amount (higher of FV or VIU) |
Impairment Measurement | Carrying value less fair value | Carrying value less recoverable amount |
Reversal of Impairment | Not permitted | Permitted (except for goodwill) |
Disclosure | Required | Required |
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DATA STUDIOS
