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Impairment of Long-lived Assets including Goodwill

Impairment of Long-lived Assets including Goodwill. Includes Comparison of US GAAP and IFRS. Impairment of long-lived assets. IFRS: 1-step process Recoverable amount is higher of Fair value less cost to sell Value in use Discounting required in evaluation stage

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Impairment of Long-lived Assets including Goodwill

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  1. Impairment of Long-lived Assets including Goodwill Includes Comparison of US GAAP and IFRS

  2. Impairment of long-lived assets • IFRS: 1-step process • Recoverable amount is higher of • Fair value less cost to sell • Value in use • Discounting required in evaluation stage • Impairment losses must be reversed if circumstances change (except goodwill) • FASB: 2-step process • FAS 144—for an asset in use, undiscounted future cash flows from use establish recoverability used for the impairment calculation • Not considered impaired unless undiscounted cash flows are less than carrying value • Discounting occurs only for the step 2 valuation stage • Impairment losses cannot be reversed

  3. Timing of impairment tests • IFRS • When an indication of impairment is observed (look for them at least annually) • Land, buildings, equipment • Intangible assets with finite life • At least annually • (at same time of year but not necessarily at year end) • Intangibles with indefinite life including goodwill • Intangibles not yet in use (development costs) • US GAAP • When indication of impairment exists long-lived assets & intangibles subject to amortization • At least annual tests for intangibles with indefinite life including goodwill • GW tested at reporting unit level – related to segment reporting rules • Detailed evaluation of fair value may not be required every year

  4. IFRS 1-step test • Impaired if recoverable amount > carrying value • At end of each reporting period, look for indications of impairment • Impairment tests need not be done if there are no indications of impairment • EXCEPTION • Intangible assets with indefinite useful life (including goodwill) and intangible asset not yet available for use • For these assets, impairment test is at end of reporting period Similar to US GAAP which requires annual impairment tests for intangibles with indefinite lives but not for other long-lived assets

  5. When there is an indication of possible impairment: IAS 36

  6. US GAAP – “triggering event” • Is there an indication that a long-lived asset might be worth less than carrying value? • List of items AASC 360-10-35-21 – “When to test a long-lived asset for recoverability” • Decline in market value • Change in way asset is used or physical change in asset • Adverse changes in legal factors or business climate • Probable sale of asset before end of useful life • Current period losses with history of operating or cash flow losses associated with asset

  7. Step 2 Step 1

  8. To do tests, we must group assets • 360-10-35-23 • There must be CASH FLOWS related to the long-lived assets (so one can apply recoverability test and do discounted cash flow valuation techniques if necessary) • Lowest level for which identifiable cash flows are available • Largely independent of cash flows related to other assets or liabilities This is referred to as a “primary asset” approach – because we need to have a group of assets that generates cash flows

  9. US GAAP: Two-step process • Step 1: Is carrying value “recoverable” through future (undiscounted) cash flows? • If yes, no impairment • If no, go on to Step 2 • Step 2: Measure the impairment loss: • Difference between carrying value and fair value of the asset group

  10. Snowy Ridge Ski Resort Case *Mountain division includes $5M special use permit, an intangible asset with indefinite life

  11. Step 1 – Snowy Ridge Ski Resort • Only Mountain Division is not recoverable: • Carrying value = $12,360 • Future cash flows = $9,625 • THEREFORE, go on to Step 2

  12. Snowy Ridge Ski Resort Case – fair values from Question 3 Note that one of these is what we’d get from selling the asset so it is the same as one of the undiscounted cash flows from pervious slide *Mountain division includes $5M special use permit, an intangible asset with indefinite life

  13. Mountain Division • Fair value = 9,625,000 • Carrying value = 12,360,000 • Impairment loss = 2,735,000 • Allocate between two major assets:5,000,000 permit 40.5%7,360,000 ski-lifts & infrastructure 59.5%

  14. Mountain Division - IFRS • Value in use = 9,625,000 (PV using 6%) • Fair value less cost to sell = no information, let’s assume $12M less 5% commission = $11.4M • Higher of the two = 11,400,000Carrying value = 13,360,000Impairment loss 1,960,000 {It would be equal to US GAAP loss if fair value were $10M less cost to sell}

  15. Real Estate Division - IFRS • No loss under US GAAP • Value in use = 13,894,675 • Carrying value = 16,500,000 • Impairment loss = 2,605,325 • No loss for Lodging division under US GAAP and IFRS

  16. Lodging Division - IFRS • Value in use = 694,960/.06 = 11,582,667 • Fair value less cost to sell = 11,355,150 before commission • Higher of the two = $11,582,667 • Carrying value = 9,500,000 • Therefore NO IMPAIRMENT is recognized

  17. What about Goodwill Impairment? • Snowy Ridge Ski Resort • Purchase price 46.5M • Identifiable assets 41.5M • Goodwill 4.0M • I think it should be allocated to the operating divisions/reporting units • However, the case authors did not allocate so they used the “company value” of $41M from page 61 (bottom of page)

  18. Goodwill Impairment (ASC 350-20-35) • Step 1 (35-4 to 35-8) • Compare the fair value of a reporting unit with its carrying amount, including goodwill. • If the carrying amount of a reporting unit is > 0 and fair value > carrying amount • Goodwill is not impaired (second step not necessary) • Otherwise, go to step 2

  19. Goodwill Impairment (ASC 350-20-35) • Step 2 (35-10 thru 35-13) • Compare carrying value to FAIR VALUE of the reporting unit (to get the implied fair value of GW) • If Carrying value > implied fair value of GW, the difference is the impairment • The loss cannot be > than carrying value • No upward adjustment after an impairment

  20. Finding Implied Fair Value of GW • Assign fair values to all net assets of reporting unit as though you were initially recognizing goodwill in a business combination (ASC 350-20-35-14) • The excess of fair value of a reporting unit over the assigned fair values of assets and liabilities = implied fair value

  21. Implied Goodwill

  22. Step 2 – determine GW impairment (if any)

  23. Impairment: US GAAP vs. IFRS Overall comparison • Similar rules overall but impairment test is different which can cause large $$ differences in reported earnings • VIU is discounted version of recoverable cash flows approach to estimating fair value that is used in US only if no market-based fair value is available • Big differences • IFRS requires that impairment losses be restored (except for goodwill) while FASB does not permit restoration

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