Question

1. Prepare a memorandum of the accounting requirements for the impairment of long-term assets under the US GAAP and IFRS including a comparison of the two methods. You must include citations from the Accounting Standards Codification (ASC) and the International Accounting Standards (IAS) in your memo. Treat your memo as a formal memo addressed to the Chief Financial Officer (CFO), which will also be reviewed by the company’s auditors.

Answer 1

In US GAAP, ASC 860 -10 provides guidance on Impairment of long lived assets to be tested. Please find attached US GAAP memorandum as solution.

Impairment Memo                                                                                  

Date: XX

                                                           

Sub: Impairment testing of Long lived assets & Intangible assets of XX for FY XX

INTRODUCTION

This memo is prepared to identify whether fixed assets of XX is subject to impairment loss or not as per the following US GAAP codifications

• ASC 360 on Property Plant & Equipment.
• ASC 350 & ASC 805 on Goodwill and Other Intangible assets.

GAAP REQUIREMENT

As per ASC 360-10-35-21, Long-lived Assets are to be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Following are the indications suggested –

Sr. No.	Impairment Indications	Assessment
1	A significant decrease in the market price of a long-lived asset (asset group).	No such event occurred which indicates significant decline of market value of assets.
2	A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition.	No significant adverse change has occurred to the best of our knowledge.
3	A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator.	No change in legal factors or business climate that could adversely affect the value of long-lived assets has taken place.
4	An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group).	No instances of accumulation of cost which is significantly excess of the amount originally expected.
5	A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)	The projected cash flow of the company is positive.
6	A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.	No such instance has occurred.

The Management has set a process of confirming the above details from the technical team, Financial & Planning Department, Legal team. Based on the same, there are no exceptions brought to the notice which triggers the above indicators.

Evaluation: - Even though none of the above indicates the existence of an impairment situation, impairment testing is made with the use of projected cash flows to identify existence of impairment loss if any.

METHODOLOGY

Determining the fair value of long lived assets & Intangible assets (excluding Customer relationship & Goodwill)

Fair Value/ Value in use

Estimating the value in use/ Fair value of an asset involves the following steps:

(a) Estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal; and

(b) Test recoverability based on undiscounted cash flow from use or disposition of such assets. If carrying amount of asset exceeds the undiscounted cash flows, the Company recognizes an impairment loss measure by which the carrying amount of long lived assets exceeds the fair value.

Estimated future cash flow (all the figures are estimated)

                                                                                                                                                                (USD Mn)

Particulars	20XX-XX	20XX-XX	20XX-XX	20XX-XX	20XX-XX	Next 5 years
EBITDA	XX	XX	XX	XX	XX	XX
Taxes	XX	XX	XX	XX	XX	XX
EBITDA (Net of taxes)	XX	XX	XX	XX	XX	XX
Tax savings on Depreciation	-	-	-	-	-	-
IRU Cash Rev (in excess of GAAP Rev) (Net of Tax)	XX	-
Capex	(XX)	(XX)	(XX)	(XX)	(XX)	(XX)
Changes in Working Capital	X	X	X	X	X	X
Net Cash Flows	XX	XX	XX	XX	XX	XX
Undiscounted Cash Flows	XX

Arriving of cash flow towards Long lived assets & Intangible.                                        (USD Mn)

Description	Value	Basis
Total Value of the Business   (A)	XX	Cash flows & Terminal Value
Less-
Investments                           (B)	XX	Market Value (Excluded as income from investment not considered in value of business)
Other Non-Current Assets        (C)	XX	Carrying Amount
Current Assets                        (D)	XX	Carrying amount
Current Liabilities   & Non-Current Liabilities                 (E)	(XX)	AP +ST debts Accrued expenses +Other non-current liabilities
Intangibles (Customer Relationship & Goodwill)                            (F)	XX	Carrying Amount
Total G (B+C+D+E+F)	XX
Fair Value of Fixed Assets H (A-G) (excluding Customer Relationship & Goodwill)	XX	Cash flow towards Fixed assets
Value of Fixed Assets             (I)	XX	Carrying Amount of PPE and intangibles excluding customer relationship and goodwill
S No.	Area	Basis
Assumption- 1	Cash Flows	Cash flow for fourteen years - It is established practice that Cash flow projections should only include growth assumptions, for the foreseeable future, generally not more than three to five years. It is unlikely that support can be obtained for assumptions relating to growth beyond five years. Since the objective of determining the fair value of enterprise is to identify the fair value of fixed assets whose useful life is expected to be of 14 years. It was treated as appropriate and reasonable to have cash flow projection for five year based on growth assumption and to identify the expected cash flow over the remaining useful life of assets conservatively. Taking a terminal growth rate of 2% in EBITDA over the remaining useful life after 5 years.
Assumption- 2	Working Capital	Working capital is negative for XX moreover the entity is expecting cash inflow rather than cash outflow hence on a conservative basis, entity have ignored such inflow over long run.
Assumption- 3	Carrying amount of current assets and noncurrent assets	Carrying amount of current assets and noncurrent assets approximates their fair value due to short term nature of these instruments.

IMPAIREMENT ANALYSIS & CONCLUSION

• Carrying value of Long lived assets & Intangible Assets (excluding Goodwill & customer Relationship) and CWIP as on 31^st December, 20XX is $ 1000 mn.

• Net Recoverable amount of CGU is $ 1,500 mn.

As per above, Net recoverable amount of CGU is $ 1,500 mn. is greater than carrying value of Long lived assets is 1,000 mn. Therefore, no impairment is required to be recognized.

As per IAS 36, Impairment is recorded when an asset's carrying amount exceeds the higher of the asset's value in use (discounted present value of the asset's expected future cash flows) and fair value less costs to sell.

Impairment Memo                                                                                  

Date: XX

                                                           

Sub: Impairment testing of Long lived assets & Intangible assets of XX for FY XX

INTRODUCTION

This memo is prepared to identify whether fixed assets of XX is subject to impairment loss or not as per the following

• IAS 36 Impairment of Assets

As per IAS 36, Impairment is recorded when an asset's carrying amount exceeds the higher of the asset's value in use (discounted present value of the asset's expected future cash flows) and fair value less costs to sell.

GAAP REQUIREMENT

As per IAS 36, Long-lived Assets are to be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Following are the indications suggested –

External sources of information
Sr. No.	Impairment Indications	Assessment
1	During the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use;	No such event occurred which indicates significant decline of market value of assets.
2	Significant changes with an adverse effect on the enterprise have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated;	No change in legal factors or business climate that could adversely affect the value of long-lived assets has taken place.
3	Market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;	No such event noticed thereby impact on assets recoverable amount materially.
4	The carrying amount of the net assets of the reporting enterprise is more than its market capitalization	No such event occurred which indicates significant decline of market value of assets.

Internal sources of information
Sr. No.	Impairment Indications	Assessment
1	Evidence is available of obsolescence or physical damage of an asset;	No such evidence have been noticed during the financial year
2	Significant changes with an adverse effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include plans to discontinue or restructure the operation to which an asset belongs or to dispose of an asset before the previously expected date	No such instance has occurred during the financial year.
3	Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected	No such evidence available

The Management has set a process of confirming the above details from the Technical teams, Financial Planning Department, Legal team on a quarterly basis. Based on the same, there are no exceptions brought to the notice which triggers the above indicators.

Evaluation: - Even though none of the above indicates the existence of an impairment situation, impairment testing is made with the use of projected cash flows to identify existence of impairment loss, if any.

Further to above External & Internal sources of information we also test an asset for impairment by using cash flow of XX as per methodology discussed in details in this note. Therefore, if estimated Discounted cash flow or fair value whichever is higher from business is lower than assets carrying amount then assets value is reduced to that extend.

METHODOLOGY

Determining the fair value of long lived assets & Intangible assets (excluding Customer relationship & Goodwill)

Fair Value / Value in use (whichever is higher)

Estimating the value in use/ Fair value of an asset involves the following steps:

(a) Estimating the discounted future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal; and

(b) Test recoverability based on undiscounted cash flow from use or disposition of such assets. If carrying amount of asset exceeds the undiscounted cash flows, the Company recognizes an impairment loss measure by which the carrying amount of long lived assets exceeds the fair value.

Estimated future cash flow (all the figures are estimated)

                                                                                                                                                                (USD Mn)

Particulars	20XX-XX	20XX-XX	20XX-XX	20XX-XX	20XX-XX	Next 5 years
EBITDA	XX	XX	XX	XX	XX	XX
Taxes	XX	XX	XX	XX	XX	XX
EBITDA (Net of taxes)	XX	XX	XX	XX	XX	XX
Tax savings on Depreciation	-	-	-	-	-	-
IRU Cash Rev (in excess of GAAP Rev) (Net of Tax)	XX	-
Capex	(XX)	(XX)	(XX)	(XX)	(XX)	(XX)
Changes in Working Capital	X	X	X	X	X	X
Net Cash Flows	XX	XX	XX	XX	XX	XX
discounted Cash Flows	XX

Arriving of cash flow towards Long lived assets & Intangible.                                        (USD Mn)

Description	Value	Basis
Total Value of the Business   (A)	XX	Cash flows & Terminal Value
Less-
Investments                           (B)	XX	Market Value (Excluded as income from investment not considered in value of business)
Other Non-Current Assets        (C)	XX	Carrying Amount
Current Assets                        (D)	XX	Carrying amount
Current Liabilities   & Non-Current Liabilities                 (E)	(XX)	AP +ST debts Accrued expenses +Other non-current liabilities
Intangibles (Customer Relationship & Goodwill)                            (F)	XX	Carrying Amount
Total G (B+C+D+E+F)	XX
Fair Value of Fixed Assets H (A-G) (excluding Customer Relationship & Goodwill)	XX	Cash flow towards Fixed assets
Value of Fixed Assets             (I)	XX	Carrying Amount of PPE and intangibles excluding customer relationship and goodwill
b. Net recoverable value of CGU: Fair value of Fixed Assets – XX Less: Cost of selling fixed assets (xx) Net recoverable value - XXX
S No.	Area	Basis
Assumption- 1	Cash Flows	Cash flow for fourteen years - It is established practice that Cash flow projections should only include growth assumptions, for the foreseeable future, generally not more than three to five years. It is unlikely that support can be obtained for assumptions relating to growth beyond five years. Since the objective of determining the fair value of enterprise is to identify the fair value of fixed assets whose useful life is expected to be of 14 years. It was treated as appropriate and reasonable to have cash flow projection for five year based on growth assumption and to identify the expected cash flow over the remaining useful life of assets conservatively. Taking a terminal growth rate of 2% in EBITDA over the remaining useful life after 5 years.
Assumption- 2	Working Capital	Working capital is negative for XX moreover the entity is expecting cash inflow rather than cash outflow hence on a conservative basis, entity have ignored such inflow over long run.
Assumption- 3	Carrying amount of current assets and noncurrent assets	Carrying amount of current assets and noncurrent assets approximates their fair value due to short term nature of these instruments.

IMPAIREMENT ANALYSIS & CONCLUSION

• Carrying value of Long lived assets & Intangible Assets (excluding Goodwill & customer Relationship) and CWIP as on 31^st December, 20XX is $ 1000 mn.

• Value in use of CGU is $ 1,800 Mn

• Net Recoverable amount of CGU is $ 1,500 mn.

As per above, value in use of CGU is $ 1,800 mn. (higher of value in use & Net Recoverable amount) is greater than carrying value of Long lived assets is 1,000 mn. Therefore, no impairment is required to be recognized.