An Executive Guide to IFRS: Content, Costs and Benefits to Business

Impairment

This is another of those areas where the two comprehensive bases of accounting are fairly similar, but the practical detail differs in some ways that may on occasion be significant. IAS 36 Impairment requires that goodwill and intangible assets with an indefinite life should be tested at each balance sheet date for impairment, but other assets are tested only if there is some indication that impairment may have taken place. The impairment test involves comparing the ‘recoverable amount’ (the higher of either the fair value less costs to sell or the present value of expected future cash flows) with the carrying amount and writing down the carrying amount if it is above the recoverable amount. Once goodwill is impaired, the impairment cannot be reversed, but other impairments can be cancelled if the situation improves subsequently.

This compares with the general position of US GAAP, which is a two-step process. The carrying amount is compared with the present value of the expected future cash flows. If the carrying amount is higher, the asset is written down to fair value. Impairments cannot be reversed.

Linked to impairment is the notion of the Cash Generating Unit (CGU). Under IFRS this is the smallest unit that is capable of generating cash flows independently of the rest of the group. Impairment under IFRS is done at the CGU level. Where a CGU has been acquired as part of the acquisition of another company, the acquiring company is required to allocate goodwill down ...