Questions:
What is the requirement for impairment of an asset under GAAP?

What are the differences in accounting for impaired Assets under IFRS and GAAP?

Reference answers:
In accounting, impairment is a permanent reduction in the value of a company asset. It may be a fixed asset or an intangible asset. When testing an asset for impairment, the total profit, cash flow, or other benefits that can be generated by the asset is periodically compared with its current book value. If the book value of the asset exceeds the future cash flow or other benefits of the asset, the difference between the two is written off, and the value of the asset declines on the company's balance sheet.

Under generally accepted accounting principles (GAAP) assets are considered to be impaired when their fair value falls below their book value.

Any write-off due to an impairment loss can have adverse effects on a company's balance sheet and its resulting financial ratios. It is important for a company to test its assets for impairment periodically. Certain assets such as intangible goodwill, must be tested for impairment on an annual basis in order to ensure that the value of assets is not inflated on the balance sheet.

GAAP also recommends that companies take into consideration events and economic circumstances that occur between annual impairment tests in order to determine if it is "more likely than not" that the fair value of an asset has dropped below its carrying value. Specific situations in which an asset might become impaired and unrecoverable include when a significant change occurs to an asset's intended use when there is a decrease in consumer demand for the asset, damage to the asset, or adverse changes to legal factors that affect the asset.If these types of situations arise mid-year, it's important to test for impairment immediately.

Standard GAAP practice is to test fixed assets for impairment at the lowest level where there are identifiable cash flows. For example an auto manufacturer should test for impairment for each of the machines in a manufacturing plant rather than for the high-level manufacturing plant itself. If there are no identifiable cash flows at this low level, it's allowable to test for impairment at the asset group or entity level.

Under GAAP rules, the total dollar value of an impairment is the difference between the asset’s carrying value and its fair market value. Under International Financial Reporting Standards (IFRS), the total dollar value of an impairment is the difference between the asset's carrying value and the recoverable value of the item. The recoverable value can be either its fair market value if you were to sell it today or its value in use. The value in use is determined based on the potential value the asset can bring in for the remainder of its useful life.

The journal entry to record an impairment is a debit to a loss, or expense account and a credit to the related asset. A contra asset impairment account which holds a balance opposite to the associated asset account may be used for the credit in order to maintain the historical cost of the asset on a separate line item, the net of the asset, its accumulated depreciation, and the contra asset impairment account reflect the new carrying value.

Upon recording the impairment, the asset has a reduced carrying value. In future periods the asset will be reported at its lower carrying value. Even if the impaired asset’s market value returns to the original level, GAAP states the impaired asset must remain recorded at the lower adjusted dollar amount. This is in compliance with conservative accounting principles. Any increase in value is recognized upon the sale of the asset. Under IFRS, impairment losses can be reversed in specific instances.

If an asset group experiences impairment, the adjustment is allocated among all assets within the group. This proration is based on the current carrying value of the assets.
IFRS prefers fixed asset impairment at the individual asset level. If that is not possible then it can be impaired at the cash generating unit (CGU) level. The CGU level is the smallest identifiable level at which there are identifiable cash flows largely independent of cash flows from other assets or groups of assets.