Impairment of Long-Lived Assets: Recognition, Measurement, and Financial Reporting

Long-lived assets such as property, plant, equipment (PPE) and intangible assets with finite lives are critical to a company's operations and future cash flows.

However, events or changes in circumstances can reduce the expected benefits from these assets, requiring companies to assess and recognize impairment losses when necessary.

This article explains the definition, recognition criteria, measurement rules, and disclosure requirements for the Impairment of Long-Lived Assets under U.S. GAAP (ASC 360) and IFRS (IAS 36), with practical examples and journal entries.

1. What Is an Impairment of a Long-Lived Asset?

An impairment occurs when the carrying amount of a long-lived asset (or asset group) exceeds its recoverable amount (future economic benefits).

Key terms:

✦ Carrying amount — Book value after depreciation and amortization

✦ Recoverable amount — The higher of:

Fair value less costs to sell

Value in use (present value of future cash flows)

2. When to Test for Impairment

Under U.S. GAAP (ASC 360), companies must test for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Common impairment triggers:

✦ Significant decline in market value

✦ Adverse changes in technology, laws, or economy

✦ Accumulated operating losses or cash flow losses

✦ Expectation of disposing the asset earlier than originally estimated

Under IFRS (IAS 36), impairment testing is mandatory:

✦ At least annually for certain assets (goodwill, indefinite-lived intangibles)

✦ When impairment indicators exist for other long-lived assets

3. Two-Step Impairment Testing Approach (U.S. GAAP)

Under ASC 360, impairment testing follows a two-step approach:

Step 1: Recoverability Test

✦ Compare the undiscounted expected future cash flows of the asset to its carrying amount.

• If undiscounted cash flows ≥ carrying amount → No impairment.

• If undiscounted cash flows < carrying amount → Proceed to Step 2.

Step 2: Measurement of Impairment Loss

✦ Impairment loss = Carrying amount – Fair value

Fair value can be determined through:

✦ Market prices

✦ Appraisals

✦ Discounted cash flow models

4. Single-Step Approach (IFRS)

Under IFRS (IAS 36), impairment testing is more straightforward:

✦ Compare carrying amount directly with the recoverable amount.

✦ If carrying amount exceeds recoverable amount → Recognize an impairment loss.

No recoverability test using undiscounted cash flows — IFRS focuses directly on fair value or value in use.

5. Practical Example – Impairment Test

A company owns equipment:

• Carrying value = $500,000

• Undiscounted future cash flows = $450,000

• Fair value less costs to sell = $400,000

Under U.S. GAAP:

• Step 1: $450,000 < $500,000 → Fail recoverability test → Impairment triggered.

• Step 2: Impairment loss = $500,000 – $400,000 = $100,000

Journal Entry:

Debit: Impairment Loss – $100,000

Credit: Accumulated Impairment (or Equipment) – $100,000

Under IFRS:

• Compare carrying value directly with recoverable amount.

• $500,000 > $400,000 → Impairment loss = $100,000 (same result).

6. Subsequent Accounting After Impairment

After recognizing impairment:

✦ The reduced carrying amount becomes the new cost basis.

✦ Depreciation or amortization is recalculated based on the new basis.

Under U.S. GAAP, reversal of impairment losses is not permitted (except for certain assets like held-for-sale).

Under IFRS, reversal of impairment losses is allowed (except for goodwill) if there is an indication that the recoverable amount has increased.

7. Grouping of Assets: Cash-Generating Units (CGUs)

Sometimes assets must be tested together:

✦ U.S. GAAP: Asset group is the lowest level for which identifiable cash flows exist.

✦ IFRS: Test at the level of a Cash-Generating Unit (CGU) — smallest group generating largely independent cash inflows.

Grouping is important to ensure that impairment testing reflects actual usage and economics of the assets.

8. Disclosure Requirements

Companies must disclose:

✦ Description of impaired assets

✦ Events or changes leading to impairment

✦ Amount of impairment losses recognized and recovered

✦ Method used to determine fair value (e.g., market price, discounted cash flow)

✦ For IFRS: Key assumptions used in value-in-use calculations

Transparent disclosure helps users understand the risks and changes associated with the entity’s asset base.

9. Key Differences Between U.S. GAAP and IFRS

Aspect	U.S. GAAP (ASC 360)	IFRS (IAS 36)
Test method	Two-step approach	Single-step approach
Focus on cash flows	Undiscounted cash flows (Step 1)	Discounted cash flows (always)
Reversal of impairment	Not permitted (except held-for-sale assets)	Permitted (except goodwill)
Grouping	Asset group	Cash-Generating Unit (CGU)