Impairment and derecognition of PP&E and intangibles

When is a long-lived asset impaired?

When its carrying amount is more than the company can recover from it. Depreciation spreads cost over a life; impairment is an unexpected drop in value on top of that. Both frameworks require a write-down, but they define “recover” differently.

Property, plant, and equipment (PP&E) and finite-life intangibles are not tested every year. At each reporting date the company looks for indicators such as obsolescence, falling demand or a technology change, and runs a test only if it finds one. Indefinite-life intangibles and goodwill are different: they are not amortized, so they are tested at least annually.

Impairment of PP&E and finite-life intangibleschecked when there are indicators

• IFRS: one step Memorize compare CA with recoverable amount
  • Recoverable amount higher of FVLCS and value in use
  • Loss CA − recoverable amount
• US GAAP: two steps Memorize assets held for use
  • Step 1: recoverability CA > undiscounted cash flows?
  • Step 2: measurement loss = CA − fair value

How does IFRS measure the loss?

Memorize

In one step: compare the carrying amount with the recoverable amount , the higher of two values. Fair value less costs to sell is what a sale would net. Value in use is the present value of the cash flows the company expects the asset to produce.

$$RA = \max(FVLCS,\ VIU)$$

$$L = CA - RA$$

Taking the higher of the two is the point: the asset is only written down to the best the company can get from it, by selling or by using it. If CA is at or below RA, there is no loss.

How does US GAAP measure the loss?

Memorize

In two steps, for assets held for use. Step 1 is the recoverability test : is the carrying amount more than the undiscounted cash flows the asset is expected to produce? If not, stop. There is no impairment. If it is, step 2 writes the asset down to fair value.

$$L = \begin{cases} CA - FV & \text{if } CA > UCF \\ 0 & \text{otherwise} \end{cases}$$

Undiscounted cash flows only decide whether to write down. They never set the size of the loss.

What about intangibles, held-for-sale assets and reversals?

Finite-life intangibles follow the same tests as PP&E. Indefinite-life intangibles are tested at least annually: under US GAAP the loss is the excess of carrying amount over fair value; under IFRS it is the excess over recoverable amount. Goodwill is covered in the balance sheet module.

An asset is held for sale when management intends to sell it, the sale is highly probable and the asset is available for immediate sale in its present condition. At reclassification the company tests it: if carrying amount exceeds fair value less costs to sell, it writes the asset down to that amount. Depreciation and amortization then stop.

An impairment reversal writes an asset back up after its recoverable amount has recovered:

Case	IFRS	US GAAP
Held for use	Reversal allowed, shown in profit (never for goodwill)	Prohibited
Held for sale	Allowed, up to the earlier write-down	Allowed, up to the earlier write-down
Cap	Carrying amount cannot exceed what it would have been with no impairment (net of normal depreciation)	n/a

$$Reversal = \min(RA,\ CA_{\text{no impairment}}) - CA_{\text{now}}$$

Exam tip IFRS lets you reverse an impairment but never revalue an asset above its pre-impairment path. If an option has the asset climbing above the no-impairment amount, it is wrong.

What does an impairment do to the statements and ratios?

It is a non-cash charge, so the effect is on profit and the balance sheet, not on cash. The next years look better than they would have.

	Year of impairment	Later years
Net income	Lower (loss in profit)	Higher (depreciation falls)
Total assets and equity	Lower	Lower than without the write-down
Cash flow from operations	Unchanged (the loss is added back)	Unchanged
Debt-to-equity	Higher	Higher than if no impairment
Return on assets (ROA), margins, asset turnover	ROA usually lower	Higher: smaller denominator and lower depreciation

For Lakeshore, assume five years of life remain. Before the write-down, depreciation is 30,000 ÷ 5 = 6,000 a year. After it, 25,000 ÷ 5 = 5,000. Pre-tax profit is 1,000 higher every year, on a smaller asset base.

Analysts read impairments as evidence that past spending or acquisitions were overvalued. They check the assumptions in the notes (discount rates, growth rates), because value in use rests on management judgment.

How is an asset removed from the books?

Derecognition means removing an asset from the books. It happens when the asset is disposed of or no future benefit is expected from using or selling it. Routes: sale, exchange, abandonment, or distribution to shareholders. Assets disposed of other than by sale stay classified as held for use, and keep being depreciated and tested, until they leave.

Derecognitiondisposed of, or no future benefits expected

• Sale Memorize gain or loss = proceeds − CA
• Abandonment Use it loss = CA
• Exchange Use it gain or loss = fair value received − CA given up
• Spin-off Use it no gain or loss; distributed to shareholders

$$G = P - (C - AD)$$

P is the proceeds, C the original cost, AD accumulated depreciation, and C − AD the carrying amount. The gain or loss on sale goes in profit, often in other income. In the cash flow statement, the full proceeds are an investing inflow, and under the indirect method the gain is subtracted (or the loss added back) in CFO so the cash is not counted twice.

Abandonment or retirement works like a sale with no proceeds, so the loss equals the carrying amount. In an asset exchange , remove the asset given up, record the new one at fair value (the fair value of the asset given up unless the one received is more clearly evident), and book the difference as a gain or loss. A machine carried at 45 with a fair value of 52, swapped for another, records the new asset at 52 and a gain of 7. If no reliable fair value exists, the new asset takes the old carrying amount and no gain or loss arises. A spin-off distributes a whole business to shareholders at no gain or loss; its assets and liabilities are shown as held for distribution, with the results in discontinued operations.

Go deeper Cash-generating units and management judgment

Assets rarely produce cash on their own. IFRS tests impairment for the smallest group of assets that generates largely independent cash inflows, called a cash-generating unit. Value in use then relies on forecast cash flows, growth rates and a discount rate chosen by management. Small changes swing the answer, which is why analysts read the sensitivity disclosures and why large, late write-offs raise reporting-quality questions.

Go deeper Revaluation model interaction

Under IFRS, an asset carried at a revalued amount first uses any decrease against the revaluation surplus in equity before it hits profit. The impairment rules in this lesson apply to the cost model, which is what the exam tests.