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Loss on impairments

Loss on impairments

Accounting for impairments of long –lived assets was issued by the FASB in 1995. In this standard, an impairment occurs when the carrying amount of an asset and certain identifiable intangibles is not recoverable and, therefore a write-off is needed.

Many changes lead to an impairment of an asset, here are some of them:

  1. A decrease in the market value of an asset
  2. A change in the extent of the asset.
  3. a forecast that demonstrates continuing losses associated with an asset.

In accordance to IAS (International Accounting standards) and FASB (financial accounting standard board)

There are some similarities and differences with respect to loss on impairments.

According to the similarities between the two standards:

  1. (IAS36) prescribes the accounting and disclosure for impairments of all assets .It replaces the requirements for assessing the recoverability of an asset and recognizing impairment losses that were included in :

IAS16 (property, plant and equipment).

IAS22 (business communications)

IAS28(accounting for investments)

IAS31(financial reporting of interest in joint venture)

According to FASB, loss on impairments is found in standard121 .It establishes the accounting standards for the impairments of long lived assets, certain identifiable intangibles and good will related to those assets to be held and used for long lived assets and certain identifiable intangibles to be disposed of.

  1. (IAS) AN asset is impaired when the carrying amount of the asset exceeds its recoverable amount. Also ht describes some indications that an impairment loss may have occurred. If any of those indications is present, an enterprise is required to make a formal estimate of recoverable amount. If no indications of a potential impairment loss is present, this standard does not require an interprise to make a formal estimate of recoverable amount.

3) According to the FASB, long lived assets are recorded at cost but during time it depreciates . This practice has been modified in some circumstances when an asset has been determined to be impaired , in which the asset has been written down to a new carrying amount that is less than the remaining cost and a loss has been recognized

According to the disclosures for (IAS36) , for each class of assets , the financial statement should disclose:

  1. The amount of impaired losses recognized in the income statement during the period.
  2. The amount of reversals of impairment loses recognized in the income statement during the period
  3. The amount of impairment loss recognized directly in equity during the period .
  4. The amount of reversals of impairment losses recognized directly in equity during the period.

According to the FASB, the disclosures in the financial should be:

  1. A description of assets to be disposed of, the facts and circumstances leading to the expected disposal date, and the carrying amount of those assets.
  2. If applicable the business segment in which assets to be disposed of are held .
  3. The gain or loss
  4. the results of operations for assets to be disposed of to the extent that those results are included in the

Entity results of operations for the period and can be identified.

  4) In (IAS) 36 in case of no market value is existing, present value of expected future net cash flows should use, In accordance to FASB, also we estimate the net cash flow.

 According to the dissimilarities:

1) IN (IAS) 36 goodwill arising on acquisition represents a payment made by an acquirer in anticipation of future economic benefits. The future economic benefits may results from synergy between the identifiable assets acquired or from assets, which individually, do not qualify for recognition in the financial statement. Goodwill doesn’t generate cash flows independently from other assets or groups of assets and, therefore the recoverable amount of goodwill as an individual asset cannot be determined. As a consequence, if there is an indication that goodwill may be impaired, recoverable amount is determined for the cash generating unit to which goodwill belongs. This amount is then compared to the carrying amount of this cash generating

Unit and any impairment loss is recognized

With respect to the FASB, if an asset being tested for recoverability was acquired in a business combination accounted for using the purchase method. The goodwill that arose in that transaction should be included as a part of the asset grouping in determining recoverability. If some but not all assets acquired in that transaction are being tested for recoverability on a pro-rata bases using the relative fair values of the long lived assets and identifiable intangibles acquired at the acquisition data. Unless there is evidence to suggest that some other method of associating the goodwill with those assets is more appropriate. In instances where goodwill is identified with assets that are subjected to an impairment loss, the carrying amount of the identified goodwill should be eliminated as before making any reduction of the carrying amounts of impaired long –lived assets and identifiable intangibles.

  1. According to discount rate about IAS. The institution must apply the appropriate discount rate to these future cash flows.

With respect to the FASB, the company market rate interest should be used in discounting to present value.

3) According to discount rate about IAS, The institution must apply the appropriate discount rate to these future cash flows.

With respect to the FASB, the company market rate interest should be used in discounting to present value.

  1. In (IAS) estimates of cash flows should include:
  1. projections of cash flows from the continuing use of the asset
  2. projections of cash flows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use ) and that can be directly attributed , or allocated on a reasonable and consistent bases to the asset
  3. Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
  4. Projections of cash outflows include future overheads that can be attributed directly , or allocated on a reasonable and consistent basis , to the use of the asset
  5. When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale , the estimate of future cash outflows includes an estimate of any further cash outflows that is expected to be incurred before the asset is ready for use or sale .

For example, this is the case for a building under construction or for a development project that is not yet completed.

With respect to the FASB,

1) The board recognizes that judgements, estimates, and projections will be required for measuring impaired assets and that precise information about the relevant attributes of those assets seldom will be available.

Partly as a result, the board decided that the measurement guidance provided in this statement should be general.

2) The board agreed that one method of obtaining an appropriate measure in some situations is to project expected future cash flows and to discount those cash flows at a current rate that considers the risk inherent in those cash flows .The board decided not to address issues about how to project cash flows or what interest should be associated with those cash flows. The board currently has a separate project on present value based measurements in accounting on its agenda to consider the latter issue

5) IN IAS, an impairment loss should be recognized as an expense in the income statement for asset carried at cost and treated as a revaluation decrease for asset carried at revalued amount

IN FASB, an impairment loss should be reported as a part of income from continuing operations. This loss

Should be reported as an extraordinary item.

As a conclusion, The FASB and the IAS are two important organizations in which they share many common standards as well as many differences among them in recognizing and considering each statement.

Source: Essay UK -

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