115 CFA
File: - Financial Analysis - Reading 26 - 5. Impairment of Assets

5. Impairment of Assets

i. explain the impairment of property, plant, and equipment and intangible assets;

What is impairment of an asset?
Sometimes a long-term asset may lose some of its revenue-generating ability prior to the end of its useful life. (e.g., a significant decrease in the market value, physical change, or use of the assets). If the carrying amount of the asset is determined not to be recoverable, an asset impairment occurs and the carrying value should be written down. The amount of the write-down is recorded as a loss.

What is the two-step recoverability test used by US GAAP to determine impairment?
1. Recoverability test. Impairment must be recognized when the carrying value of the assets exceeds the undiscounted future cash flows from their use and disposal.
2. Loss measurement. The excess of the carrying amount over the fair value of the assets. If the fair value is not available, the present value of future cash flows discounted at the firm's incremental borrowing rate should be used.

Does US GAAP allow for reversal of impairments?
It is not permitted for assets held for use. It is permitted for assets held for sale.

Does IFRS permit reversal of impairments?
Yes, but not to exceed the initial carrying amount adjusted for depreciation.

What is goodwill, how does it come to be recorded in the accounts?
Goodwill stems from such factors as a good reputation, loyal customers, and superior management. Any business that earns significantly more than a normal rate of return actually has goodwill, but it is only recorded in the books if it is purchased by acquiring another business at a price higher than the fair market value of its net identifiable assets.

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