Impairment of Property, Plant, and Equipment – Recognition, Measurement, and Reporting

When the carrying amount of Property, Plant, and Equipment (PP&E) exceeds its recoverable amount, the asset is considered impaired. Impairment ensures that PP&E is not reported above its economic value in the financial statements.

This article explains how impairment of PP&E is recognized and measured under U.S. GAAP (ASC 360) and IFRS (IAS 36), with step-by-step examples and applicable journal entries.

1. What Triggers an Impairment Review?

Impairment reviews are required when there are indicators that the asset’s value may not be recoverable.

✦ Significant decline in market value

✦ Physical damage or obsolescence

✦ Adverse changes in legal, technological, or economic conditions

✦ The asset is idle or held for disposal

✦ The business expects continuing losses from use

Companies must regularly evaluate whether such indicators exist for individual assets or asset groups.

2. U.S. GAAP – Two-Step Impairment Test (ASC 360)

Under GAAP, the impairment model is based on a recoverability test followed by fair value measurement.

Step 1 – Recoverability Test

✦ Compare undiscounted future cash flows from the asset to its carrying amount

✦ If future cash flows < carrying amount → impairment is triggered

Step 2 – Measurement of Impairment Loss

✦ Impairment loss = Carrying amount – Fair value (usually based on discounted cash flows or market price)

Example: ✦ Carrying amount = $500,000 ✦ Undiscounted cash flows = $450,000 → Fail Step 1 ✦ Fair value = $400,000 ✦ Impairment loss = $500,000 – $400,000 = $100,000

Dr. Impairment Loss – $100,000 / Cr. Accumulated Impairment – $100,000.

Impairment is recorded immediately, and no reversal is allowed under GAAP.

3. IFRS – One-Step Approach (IAS 36)

Under IFRS, impairment is assessed in a single step:

✦ Impairment loss = Carrying amount – Recoverable amount

✦ Recoverable amount = higher of:➝ Fair value less costs of disposal➝ Value in use (discounted future cash flows)

Example: ✦ Carrying amount = $600,000 ✦ Value in use = $500,000 ✦ Fair value less costs of disposal = $480,000 ✦ Recoverable amount = $500,000 ✦ Impairment = $600,000 – $500,000 = $100,000

Dr. Impairment Loss – $100,000 / Cr. Accumulated Impairment – $100,000.

Unlike GAAP, IFRS allows reversal of impairment losses under certain conditions, but only up to the asset’s original carrying amount net of depreciation.

4. Cash-Generating Units (CGUs)

If an asset does not generate cash inflows independently, it is tested for impairment as part of a cash-generating unit:

✦ CGU = smallest group of assets generating cash inflows largely independent of others

This is required under IFRS and permitted under GAAP for asset groups with interdependent cash flows.

5. Held-for-Sale Assets

When assets are classified as held for sale under ASC 360-10-45, they are:

✦ Measured at lower of carrying amount or fair value less costs to sell

✦ Depreciation ceases once held for sale

✦ Reassessed at each reporting date

Dr. Loss on Asset Held for Sale – $50,000 / Cr. Asset – $50,000.

This ensures the asset reflects its recoverable disposal value.

6. Journal Entries and Effects

GAAP Impairment Entry:

Dr. Impairment Loss – $60,000 / Cr. Equipment – $60,000.

IFRS Impairment Reversal (if justified in future period):

Dr. Equipment – $20,000 / Cr. Reversal of Impairment Loss – $20,000.

Impairment losses reduce both net income and asset balances. Reversals (IFRS only) improve income in future periods.

7. Disclosure Requirements

Financial statement notes must include:

✦ Amount of impairment loss and reversals

✦ Events leading to the recognition or reversal

✦ Method for determining recoverable amount

✦ For CGUs: carrying amount and basis of allocation

✦ Segment in which the impaired asset is reported