The rules for the impairment, or write-down, of non-current assets can vary significantly in national GAAP. Continental European countries with a Commercial Code typically have a requirement that, at each balance sheet date, the carrying value of an asset should not exceed its current value. However, some countries allow that an impairment is only recognized if it is thought that the loss of value is permanent, meaning that (say) a temporary drop in property prices would not necessarily trigger an impairment. Another issue that varies from asset to asset and country to country is the extent to which an impairment provision can be reversed subsequently.

The general standard in IFRS for impairment is IAS 36 Impairment of Assets. This applies to most non-current assets, but not to special assets such as financial instruments, investment property, inventory and agricultural assets. The basic rule is that the carrying value of an asset must not exceed its ‘recoverable amount’. The recoverable amount is the higher of the fair value less costs to sell and cash flows realizable through use. In other words, as long as the entity thinks the asset could be turned into more cash than its accounting value, the accounting value is justified. If not, the accounting value must be reduced to the recoverable amount.

The standard does, however, introduce a concept that is not found in national law (although it is found in US GAAP). This is the Cash Generating Unit (CGU). The idea is that ...

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