IFRS requires annual reviews of long-lived assets (other than goodwill) for reversal indicators. A loss may be reversed up to the newly estimated recoverable amount, not to exceed the initial carrying amount adjusted for depreciation. This is a significant departure from GAAP, so what are the financial statement implications? Is it a good thing or bad?

Accounting for Impairments

From a GAAP perspective, the asset is recorded at its historical cost, less accumulated depreciation. In other words, the value of the asset is recorded at its original cost less depreciation expenses incurred since the date of purchase. The standard for impairment is one that requires the asset to be written down to its fair market value if it is determined that the fair market value is less than its carrying value. The write-down is recorded as an impairment loss on the income statement. There are numerous ways to determine the fair market value of an asset, but the most common is to seek out comparable market prices.

IFRS Impairment Approach

The new impairment approach adopted by IFRS is much more straightforward than GAAP. It eliminates the need to determine the fair market value of the asset, as well as the need to recognize future cash flows. Instead, the impairment loss is determined by subtracting the recoverable amount of the asset from its carrying amount. The recoverable amount of the asset is defined as the higher of its fair value less costs to sell or its value in use. Value in use is determined by calculating the present value of future cash flows associated with the asset.