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Impairment Loss for Accounting


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
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Impairment Loss Under IFRS

Accounting for impairment loss on long-lived assets under IFRS

Accounting for Impairment Loss Under IFRS

Under IFRS, IAS 36, to be able to account for impairment of a tangible asset, this would be recorded when the asset’s carrying amount is more than the discounted present value of the asset’s expected future cash flow. Now if the carrying amount of an asset is more than its recoverable amount. Then there is an impairment loss and we should be able to recognize it. When we want to record the loss. IFRS provides two options for us. The first option is done when an organization may choose to record the impairment directly against the carrying amount. This is the same way it is done under GAAP. However, an organization may decide to record the impairment within a contra-asset account. No matter which option an organization may go with, the asset’s new fair value is amortized over its remaining useful life of the asset.

Impairment Reversal Under IFRS

Not like U.S. GAAP, here the reversal of a previously recorded impairment is allowed under IFRS. Impairment charges may be reversed if there are changes in the recoverable amount, economic status, or the use of the asset. Although impairments may be reversed, there is a limit on the amount an asset that can be written up for. A reversal may not be more than the carrying amount the asset would have had if no impairment loss had been recognized.

Goodwill Impairment Under IFRS

Under IFRS, to find out the impairment of goodwill, the test should be done at the cash generating unit level. We would have to compare the cash generating unit with its recoverable amount. Now we have to find out the amount of loss. This is accomplished by the amount in which the carrying value of the asset goes over its recoverable amount. Even though the IFRS does allow the reversal of impairment on some assets. Under U.S. GAAP, the reversal of goodwill is not allowed.

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

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Goodwill Impairment Under U.S. GAAP

Goodwill Impairment

Goodwill Impairment Under U.S. GAAP

When we need to determine the goodwill impairment under U.S. GAAP, this requires companies to test when it is likely that the fair value of a reporting unit is less than it is carrying amount. If we find that there was an impairment, the amount by which the carrying amount of goodwill is more than its implied fair value. This creates the loss recognized for the impairment. Under U.S. GAAP, the goodwill amount may be written down, however, in no case where it is allowed to be written up. You must remember that.

Accounting for Impairment Loss for Intangible Assets

When the time comes to account for impairment loss for intangible assets, it is a bit more straight-forward. In a normal case, the intangible assets are evaluated for impairment at least on a yearly basis. The first step to determine impairment for an intangible asset, it is to look at the qualitative factors that might impair the asset. This is very similar to the first step for tangible assets. If management believes that there is the possibility of impairment, then they should elect to move to quantitative testing. The quantitative test for intangibles is much easier than it is for tangible assets. For intangible assets, we simply evaluate the asset’s book value versus its fair value. When the book value is higher than the fair value, then the asset is impaired. The fair value then becomes the new book value and the difference is recorded as a loss.

Long-Lived Assets

When we work with long-lived assets, it comes in two main categories. There are tangible assets such as land, plants, and equipment. Then there are intangible assets such as copyrights, patents, and trademarks. However, no matter which type of long-lived asset you have, you may have to account for the impairment of the long-lived asset. Impairment happens whenever the carrying value of an asset is greater than the expected future economic benefit. Continue reading and we will discuss this phenomenon in a variety of ways.

Impairment Loss on Long-Lived Assets Under U.S. GAAP

Under U.S. GAAP, ASC 360-10, when we account for impairment loss for tangible assets, this method provides us with stages to identify and correct impairment wherever it may be present. The first stage we must determine if recent events or changes have given us a credible reason to believe that certain assets may be impaired. If we have the reason to believe an asset is impaired, we can move on to the next stage which involves estimating the future undiscounted net cash flow we can expect from the asset. If the undiscounted net cash flows are lower than the carrying amount of the asset. Then the asset is impaired, and we have to record it. The recognized loss would be calculated by subtracting the fair value of the asset and the carrying amount of the asset.

To learn more about Accounting for Troubled Debts Under U.S. GAAP, click here.

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Troubled Debt (s) Under U.S. GAAP

Troubled Debt Restructuring (TDR)

Troubled Debts Under U.S. GAAP

Troubled debts or more commonly known as troubled debt restructuring (TDR) is when a creditor restructures or modifies the terms of a loan when a debtor or borrower is financially incapable of paying the loan. Instead of the debtor filing for bankruptcy and leaving the creditor with the entire loan as a loss. In order to minimize the loss to the creditor while assisting the debtor in its financial crisis, can be accomplished by the restructuring of the loan. Now under U.S. GAAP, the location of the explanation for troubled debt restructurings is in ASC 470-60 for Debtors and ASC 310-40 for Creditors.

ASC 470-60 and ASC 310-40

According to ASC 470-60 and ASC 310-40, a troubled debt restructuring is allowable when certain events have happened. In order for a loan to be considered a TDR both creditor and debtor need to agree on the modification of the loan. The first step in doing so is the proof of the debtor absolute inability to pay the original debt. Once the creditor has come to the conclusion that the debtor will no longer be able to pay the loan, the creditor may allow the loan to be restructured. This is better known as concessions.

Several methods are given in ASC 310-40-15-9, such as the reduction or elimination of scheduled interest and principal payments. When the repaying schedule can be extended, a settlement between both parties for cash, other assets, or equity interest. On the other hand, not all reasons are allowed for troubled debt restructuring. ASC 310-40-15-11 considers changes in lease agreements, employment-related agreements, and changes in expected cash flows of a pool of loans not to be a valid reason for consideration for TDR.

Accounting of Modified Loans

The accounting of modified loans or TDR depends on the point of view of the creditor and debtor. The difference in journal entries will be different. Specifically when a loan has been restructured and the interest rate changes from the original rate onto a modified. On the debtor’s ledger, the original ledgers would be DR- Note Payable, Interest Payable, and CR Restructured not Payable. For the Creditor, DR Restructure note receivable, loss on receivable restructuring, CR Note receivable, Interest Receivable. However, these entries do not take into account the new interest rate.

If both parties would account for the change of interest rate in the same year, the debtor would show a loss of value in the loan while the creditor would show no loss in the carry note value. In order to account for the change of interest rate, the FASB mandates for both debtor and creditor to use both interest rate and journalize them for the next two years. This will allow the loan to match between books even though the book value will increase and be different from the initial book value.

Advantage Under U.S. GAAP for Troubled Debt Restructuring

There are advantages for U.S. GAAP guidance for troubled debt restructuring. It allows the creditor to mitigate losses and also allows debtors to continue doing business. By doing this, the market remains steady with no major losses for companies in the economy. Another advantage is that the guidance to use the two interest rates in the books. Using the conservative measurement method, it minimizes the confusion of the new modified interest rate. The conservative measurement method comes with some disadvantages. The most important disadvantage is the initial book value. It will change due to the modification of terms of the loan. The change between the initial book value and the value of the loan at the end of the modified loan will increase. If the loan is a long-term loan, then the difference will exponentially increase.


My recommendation is for U.S. GAAP to use a fair value approach to the valuation of a long term modified loan. Using this approach would minimize the difference between the initial book value and the book value at the end of the loan.

To learn more about Accounting for Securitization of Receivables Under U.S. GAAP, click here.

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Securitization of Receivables Under U.S. GAAP

Securitization of Receivables Under U.S. GAAP

Securitization of receivables under U.S. GAAP is the bundling of loans or receivables and sold to a third party. Lenders gain two advantages with this method. The first advantage is the sale of the bundled loans. It reduces the financial risk for the company. It reduces the risk because when the lender sells a portfolio. the buyer or guarantor assumes a portion of the total risk. This way the lender and guarantor share the risk between them. The other advantage from the sale of the bundle loans is that the portfolio can be sold for a profit to the lender.

FASB ASC 860 – Transfers and Servicing

FASB covers the securitization of receivables under ASC 860 – Transfers and Servicing. Under ASC 860, a two-step approach needs to be done in order to transfer a securitized receivable from a lender to a guarantor. The lender would create a securitization entity (SE). This entity can take the form of a trust or a corporation which is separate from the lender. The SE only purpose is to transfer the securitized receivables. The next step is when the lender sells the receivables to the SE. When this happens, several events occur. The receivable is no longer with the lender. The transfer would be considered a sale. In a case where the lender was to go bankrupt, the securitized receivable is safe from repossession.

Advantages in Securitization of Receivables

The advantages in the securitization of receivables are that it allows lenders to hedge or minimize their risk exposure by the loan. While also making a profit from the “sale” of the loan to a SE. In doing so, the “sale” of the loan is a win-win approach. This practice comes with several disadvantages, such as the overvaluation of the “sale”. The sale of the securitized loan has an inflated cost when a SE or a third party purchases it. If the portfolio on receivable has a higher risk, comparing it to the less risky portfolio the value would be higher. The unsystematic risk increases the price of the portfolio while the present value of the loans remains the same. Another disadvantage is how easy it can be for the lender to take the loans that may have the risk to become bad loans on their balance sheets.


In my opinion, I’m recommending the same implementation that took effect after the Great Recession of 2009. The implementation of more stringent disclosures and notes on the financial statements. The consolidation of financial statements between parent and subsidiaries.

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