Impairment and derecognition of PP&E and intangibles
An asset is impaired when its carrying amount is not recoverable. International Financial Reporting Standards (IFRS) write it down to the higher of fair value less costs to sell and value in use. US generally accepted accounting principles (GAAP) first test undiscounted cash flows, then write down to fair value. A sale gives proceeds minus carrying amount.
Before this: Purchased, internally developed and acquired intangibles
On the exam
- Explain and evaluate how impairment and derecognition of property, plant, and equipment and intangible assets affect the financial statements and ratios
Explain and evaluate impairment and derecognition and their effect on the statements and ratios. Expect an impairment calculation under one or both frameworks, a 'reversal allowed?' item and a gain or loss on sale.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
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.
- 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.
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.
Under IFRS, an asset has a carrying amount of 30,000.00, fair value less costs to sell of 22,000.00 and value in use of 25,000.00. The impairment loss is closest to:
30,000.00 − max(22,000.00, 25,000.00) = 5,000.00
Impairment loss5,000.00
- 30000−25000=25000 is the higher of 22000 and 25000, so zero or negative means no loss
- 30000ENTER25000−25000 is the higher of 22000 and 25000, so zero or negative means no loss
ENTER enter (on the HP, puts the number on the stack)
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.
Undiscounted cash flows only decide whether to write down. They never set the size of the loss.
Under US GAAP, an asset held for use has a carrying amount of 30,000.00, undiscounted expected cash flows of 28,000.00 and a fair value of 23,000.00. The impairment loss is closest to:
30,000.00 > 28,000.00, so impaired: 30,000.00 − 23,000.00 = 7,000.00
Impairment loss7,000.00
- 30000−28000=positive, so not recoverable
- 30000−23000=loss against fair value
- 30000ENTER28000−positive, so not recoverable
- 30000ENTER23000−loss against fair value
ENTER enter (on the HP, puts the number on the stack)
Try this 0 of 3
- Find numbers where US GAAP books a bigger loss than IFRS
- Make the IFRS loss disappear without changing the carrying amount
- Pass the US GAAP test while fair value is half the carrying amount or less
Recoverable amount is the higher of 22,000 and 25,000: 25,000. Loss 5,000.
Show working
IFRS: recoverable = max(23,000 − 1,000, 25,000) = 25,000; loss = max(0, 30,000 − 25,000) = 5,000
US GAAP: step 1, is 30,000 > 32,000? No. Stop: loss = 0
Either way: profit, assets and equity fall; no cash moves. Later depreciation is lower. Reversals: IFRS allows them (not for goodwill), US GAAP does not for assets held for use.
- 30000−25000=5000
- 30000ENTER25000−5000
ENTER enter (on the HP, puts the number on the stack)
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 |
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.
- 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
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.
A company sells an asset that cost 120.00 and has accumulated depreciation of 75.00 for 38.00. The gain (a negative figure is a loss) is closest to:
38.00 − (120.00 − 75.00) = -7.00
Gain (negative = loss)-7.00
- 120−75=carrying amount
- +|-+38=gain, negative if a loss
+|- change sign
- 120ENTER75−carrying amount
- CHS38+gain, negative if a loss
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
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.
Memorize this
MemorizeIFRS versus US GAAP impairment of PP&E and finite-life intangibles
| IFRS (International Accounting Standard 36, IAS 36) | US GAAP | |
|---|---|---|
| Steps | One | Two |
| Impaired when | Carrying amount > recoverable amount | Carrying amount > undiscounted expected cash flows |
| Compared with | Higher of fair value less costs to sell and value in use | Step 2: fair value |
| Loss | CA − recoverable amount | CA − fair value (only if step 1 fails) |
| Reversal (held for use) | Allowed (not goodwill) | Prohibited |
Memory hook IFRS takes the HIGHER of two values, which gives the asset the benefit of the doubt. US GAAP first asks "will the cash even come back?" on undiscounted cash flows, and only then writes down to fair value.
Know it cold IFRS: loss = CA − max(FVLCS, VIU). US GAAP: no loss if CA ≤ undiscounted cash flows; otherwise CA − fair value.
MemorizeTesting frequency and special cases
| Asset | When tested / treated |
|---|---|
| PP&E and finite-life intangibles | When indicators exist, assessed each reporting date |
| Indefinite-life intangibles and goodwill | At least annually |
| Held for sale | At reclassification: write down to fair value less costs to sell; stop depreciating |
| Reversal, held for sale | Allowed under both, up to the earlier write-down |
| Reversal, held for use | IFRS: yes, capped; US GAAP: no |
Memory hook Annual tests are for assets that are never amortized (indefinite life, goodwill). Held for sale means no more depreciation.
Know it cold IFRS reversal never takes the asset above what its carrying amount would have been without the impairment. Goodwill is never reversed.
MemorizeDerecognition
| Event | Gain or loss |
|---|---|
| Sale | Proceeds − carrying amount; proceeds in investing cash flow |
| Abandonment or retirement | Loss = carrying amount (no proceeds) |
| Exchange | Fair value used for the new asset − carrying amount of the old |
| Spin-off to shareholders | No gain or loss; shown as held for distribution / discontinued operations |
Memory hook Carrying amount = cost − accumulated depreciation. Everything is measured against that number.
Know it cold Gain or loss = proceeds − carrying amount. The indirect method removes it from CFO and puts the cash in CFI.
- 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
-
- 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
Quick example
Fair value less costs to sell 540, value in use 585. The recoverable amount is the higher, 585.
Quick example
Carrying amount 640, recoverable amount 585. Loss = 640 − 585 = 55. If CA is below RA, no loss.
- 640−585= 55
- 640ENTER585− 55
ENTER enter (on the HP, puts the number on the stack)
Quick example
Carrying amount 640, undiscounted cash flows 615, fair value 590. 640 > 615, so impaired: loss = 640 − 590 = 50.
- 640−615= 25, positive, so not recoverable
- 640−590= 50
- 640ENTER615− 25, positive, so not recoverable
- 640ENTER590− 50
ENTER enter (on the HP, puts the number on the stack)
Quick example
Cost 460, accumulated depreciation 330, sold for 150. Carrying amount 130; gain = 150 − 130 = 20.
- 460−330= carrying amount 130
- +|-+150= 20
+|- change sign
- 460ENTER330− carrying amount 130
- CHS150+ 20
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
Quick example
Carrying amount now 18,000. Without the earlier impairment it would be 26,000. Recoverable amount is 21,000. Reversal = min(21,000, 26,000) − 18,000 = 3,000.
- 21000−18000= 3000
- 21000ENTER18000− 3000
ENTER enter (on the HP, puts the number on the stack)
How it is asked
-
IFRS impairment with three values
CA 710, fair value less costs to sell 565, value in use 645. Loss?
Recoverable = max(565, 645) = 645; loss = 65. Using the lower value (145) is the trap.
-
US GAAP: does it even fail step 1?
CA 430, undiscounted cash flows 455. Loss?
430 < 455, so recoverable: no impairment. Reporting an IFRS-style loss is the trap.
-
US GAAP loss measured against what?
CA 650, undiscounted 615, value in use 575, fair value 535. Loss?
Fails step 1; loss = 650 − 535 = 115. Measuring against undiscounted cash flows (35) or value in use (75) is the trap.
-
Gain or loss on sale
Cost 360, accumulated depreciation 255, proceeds 85.
Carrying 105; 85 − 105 = loss of 20. Gain of 85 or loss of 275 (against cost) are the traps.
Exam traps
- IFRS: taking the lower of fair value less costs to sell and value in use. The recoverable amount is the higher.
- US GAAP: measuring the loss against undiscounted cash flows. Undiscounted cash flows only decide whether to write down; fair value sets the size.
- US GAAP: reversing an impairment on an asset held for use. It is prohibited; IFRS allows it, within a cap.
- Saying an impairment reduces operating cash flow. It is a non-cash charge.
- Comparing sale proceeds with original cost instead of carrying amount.
Checkpoint
4 exam-style questions. About 90 seconds each.
1Under IFRS, an asset has a carrying amount of 900, fair value less costs to sell of 740, value in use of 820 and undiscounted future cash flows of 950. The impairment loss is closest to:
2Under US GAAP, an asset held for use has a carrying amount of USD 900k, undiscounted future cash flows of USD 870k, value in use of USD 820k and fair value of USD 780k. The impairment loss is closest to:
3In the year after a company recognizes a large impairment loss on a machine it still uses, compared with no impairment, the company will most likely report:
4A machine that cost EUR 800k and has accumulated depreciation of EUR 560k is sold for EUR 300k. The company reports:
Key takeaways
- IFRS: loss = carrying amount − higher of (fair value less costs to sell, value in use).
- US GAAP: if carrying amount > undiscounted cash flows, loss = carrying amount − fair value.
- Reversals: IFRS yes (never goodwill, never above the no-impairment carrying amount); US GAAP no for assets held for use.
- Impairment is non-cash: net income, assets and equity fall, CFO does not, and later depreciation is lower.
- Gain or loss on sale = proceeds − carrying amount. Abandonment loses the full carrying amount.
Quick example
Fair value less costs to sell 540, value in use 585. The recoverable amount is the higher, 585.
Quick example
Carrying amount 640, recoverable amount 585. Loss = 640 − 585 = 55. If CA is below RA, no loss.
- 640−585= 55
- 640ENTER585− 55
ENTER enter (on the HP, puts the number on the stack)
Quick example
Carrying amount 640, undiscounted cash flows 615, fair value 590. 640 > 615, so impaired: loss = 640 − 590 = 50.
- 640−615= 25, positive, so not recoverable
- 640−590= 50
- 640ENTER615− 25, positive, so not recoverable
- 640ENTER590− 50
ENTER enter (on the HP, puts the number on the stack)
Quick example
Cost 460, accumulated depreciation 330, sold for 150. Carrying amount 130; gain = 150 − 130 = 20.
- 460−330= carrying amount 130
- +|-+150= 20
+|- change sign
- 460ENTER330− carrying amount 130
- CHS150+ 20
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
Quick example
Carrying amount now 18,000. Without the earlier impairment it would be 26,000. Recoverable amount is 21,000. Reversal = min(21,000, 26,000) − 18,000 = 3,000.
- 21000−18000= 3000
- 21000ENTER18000− 3000
ENTER enter (on the HP, puts the number on the stack)
All Financial Statement Analysis formulas, every lesson
Practice exam-style questions on Analysis of Long-Term Assets
Questions about this lesson?
Where this comes back
- PP&E disclosures, fixed asset turnover and asset age Analysis of Long-Term Assets
- Financial Reporting Quality Financial Statement Analysis
Questions candidates ask
What is the difference between IFRS and US GAAP impairment tests?
IFRS compares the carrying amount with the recoverable amount, the higher of fair value less costs to sell and value in use, and writes down the excess. US GAAP first tests whether undiscounted cash flows cover the carrying amount and only if not writes down to fair value.
Can impairment losses be reversed?
Under IFRS, yes for assets other than goodwill, up to what the carrying amount would have been without the impairment. Under US GAAP, no for assets held for use. Assets held for sale can be written back up to the earlier loss under both.
How do you calculate a gain or loss on sale of an asset?
Subtract the carrying amount (cost minus accumulated depreciation) from the proceeds. Cost 120 and accumulated depreciation 75 give a carrying amount of 45. A sale at 38 is a loss of 7.
Does impairment affect cash flow?
No. It is a non-cash charge that lowers net income, assets and equity. Under the indirect method it is added back, so operating cash flow is unchanged (before any tax effect).
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