What are the key differences between IFRS and US GAAP for asset impairment testing?

Question

AcadiFi · Accepted Answer

Asset impairment is one of the most tested IFRS vs. GAAP comparison topics on the CFA Level I exam. The differences are significant.

```mermaid
flowchart LR
    subgraph IFRS["IFRS - IAS 36"]
        A1[Indicator of Impairment?] -->|Yes| B1[Compare Carrying Value
vs Recoverable Amount]
        B1 --> C1{CV > Recoverable?}
        C1 -->|Yes| D1[Write down to
Recoverable Amount]
        C1 -->|No| E1[No Impairment]
        D1 --> F1[Reversal Allowed
up to original CV]
    end
    subgraph GAAP["US GAAP - ASC 360"]
        A2[Indicator of Impairment?] -->|Yes| B2[Step 1: Compare CV
vs Undiscounted CFs]
        B2 --> C2{CV > Undiscounted CFs?}
        C2 -->|Yes| D2[Step 2: Write down
to Fair Value]
        C2 -->|No| E2[No Impairment]
        D2 --> F2[NO Reversal
Permitted]
    end
```

**IFRS (IAS 36) — One-Step Test:**
1. If indicators of impairment exist, compare carrying value to the **recoverable amount** (higher of fair value less costs of disposal and value in use).
2. If carrying value > recoverable amount, write down to recoverable amount.
3. **Reversals are permitted** (except for goodwill) up to the original carrying amount net of depreciation.

**US GAAP (ASC 360) — Two-Step Test:**
1. **Recoverability test:** Compare carrying value to **undiscounted future cash flows**. If CV < undiscounted CFs, stop — no impairment.
2. **Measurement step:** If CV > undiscounted CFs, write down to **fair value**.
3. **No reversal permitted** — once written down, the new lower value becomes the cost basis.

**Example:** Dunmore Energy owns a power plant with a carrying value of $50 million.
- Expected undiscounted cash flows: $48 million
- Fair value: $38 million
- Value in use (discounted CFs): $42 million

**Under US GAAP:** Step 1 fails (CV $50M > undiscounted $48M), so proceed to Step 2. Write down to fair value $38M. Impairment loss = **$12 million**. No future reversal.

**Under IFRS:** Recoverable amount = higher of fair value ($38M) and value in use ($42M) = $42M. CV $50M > $42M, so impairment loss = **$8 million**. If conditions improve next year, the impairment can be reversed.

**Why the difference matters:** US GAAP's undiscounted cash flow screen means some assets pass Step 1 even when their economic value (fair value) is below carrying value. IFRS catches those cases because it uses discounted amounts.

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What are the key differences between IFRS and US GAAP for asset impairment testing?

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