Question

Hi Max. Thanks so much for starting this discussion thread! In terms of asset impairments, U.S. GAAP does tend to be a bit more conservative and also provides clear parameters for establishing estimated fair value. If the asset’s fair value falls below cost, then we must recognize the loss in the financial statements in order to avoid overstating net income or assets. Under U.S. GAAP, the asset’s fair value subsequently increases, we are not permitted to “write-up” the asset. Class, what are your thoughts on this rule? Why do you think we have it in place?

Answer 1

Under IFRS, IAS 36 Impairment of asstes refers to reduction in value of Future Economic Benefits of an asset or say it is an advanced depreciation. It seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e., higher of fair value less costs of disposal and value in use).

Impairment loss is the amount by which the carrying amount of an asset (asset as in balance sheet minus accumulated depreciation and accumulated impairment losses) or cash-generating unit exceeds its recoverable amount. At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired. If there is an indication as mentioned in the list by IAS 36, then the asset's recoverable amount must be calculated and accordingly the loss be treated in financial statements.

There is provision of reversal of impairment loss under IAS 36 for an asset other than goodwill only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If this is the case, then the carrying amount of the asset shall be INCREASED to its recoverable amount. However, impairment can be reversed upto lower of following : a/. Impairment loss recognised minus savings in depreciation b/. Recoverable amount minus carrying amount

We cannot write-up the asset value upto the fair value increased subsequently as it does not considers cost of disposal or value in use. A reversal reflects a increase in the estimated service potential of an asset, either from use or sale, since the date when an entity LAST RECOGNISED an impairment loss for that asset. For true and fair view of financial statements, we have to consider losses, depreciation, costs for disposal and other factors affecting the value of an asset as it would reflect true financial position of an entity and therefore, IAS 36 puts limitations on reversal of impairment and value of asset to be recognised. (Moreover, it is fundamental theory to recognise losses even if we are not sure but not to recognise profits/income unless it is earned.) Whenever reversal of impairment loss is applied, provision for impairment loss is cancelled against profit/loss.

After reversal is recognised, the depreciation charge for the asset shall be adjusted in future periods to allocate the asset's revised carrying amount, less its residual value, on a systematic basis over its remaining useful life.