Recommendations

I believe that both GAAP and IFRS would be improved if there was a convergence movement on this particular subject. Barring that, adding some uniformity to their codes would help immensely. This could include options such as having both GAAP and IFRS follow the methods prescribed by IFRS regarding the calculation of impairment loss accounts for the time value of money. As mentioned before GAAP using the undiscounted cash flows and IFRS using the discounted cash flows can provide very different numbers for the same case. This can have a significant impact on the recognized value for the asset. It would be beneficial to the users of financial statements if there was only one set of rules to remember when comparing companies.

Pros and cons of US GAAP and IFRS

A pro under US GAAP is that US GAAP requires a two-step approach. The first step allows management to exert judgment over whether an impairment should even be recognized. This first step allows for some freedom in determining when an impairment is going to happen, but it may also cause problems if management does not truly understand their industry or if they willfully ignore an asset that should be written down. A con under US GAAP is that it uses the undiscounted cash flows for impairment testing. Undiscounted cash flows are not as precise as discounted cash flows. This can lead to subpar information. The information is not bad, and it conveys the same general information, but it could be more refined and therefore allow for better decision making

A pro under IFRS is that it uses discounted cash flows for impairment testing. As stated above this is a more precise calculation of cash when testing for impairment. Thus, information about impairment under IFRS may be considered better than the same information given under US GAAP. A serious con under IFRS is the ability to reverse the already recognized impairment loss. Although this ability can have some benefits. It also opens the door for the manipulation of accounting data.

To learn more about Accounting for Impairment Loss on Long-Lived Assets Under IFRS, click here.

Impairment loss for accounting IFRS