A company recognized an impairment loss on a piece of manufacturing equipment (not goodwill) two years ago. This year, the factors that caused the impairment have reversed and the equipment's recoverable amount has risen well above its current carrying amount. The company reports under IFRS and separately evaluates what its treatment would be if it instead reported under US GAAP. What is the correct outcome under each framework?
- Under US GAAP, ASC 360 permits reversing the impairment up to the pre-impairment carrying amount; under IAS 36, no reversal is permitted for any asset
- Under both IFRS and US GAAP, the impairment loss must remain unreversed regardless of how far the recoverable amount has since risen
- Under both IFRS and US GAAP, the impairment loss must be reversed automatically once the recoverable amount exceeds the carrying amount
- Under IAS 36, the reversal is required, limited to the depreciated carrying amount the asset would have had absent the original impairment; under US GAAP, ASC 360 prohibits reversing an impairment loss on held-and-used long-lived assets
Why D? And why not the others?
Correct answer: D. Under IAS 36, the reversal is required, limited to the depreciated carrying amount the asset would have had absent the original impairment; under US GAAP, ASC 360 prohibits reversing an impairment loss on held-and-used long-lived assets
IAS 36 requires an entity to assess at each reporting date whether indicators suggest a previously recognized impairment loss on an asset (other than goodwill) may have decreased or no longer exists, and if so, to reverse the loss, but the increased carrying amount is capped at what the asset's depreciated carrying amount would have been had no impairment loss been recognized in prior years. ASC 360, governing US GAAP treatment of long-lived assets held and used, takes the opposite position: once an impairment loss is recognized, it establishes a new cost basis, and that basis cannot subsequently be written back up even if the asset's value recovers. The option attributing the reversal-permitted treatment to US GAAP and the no-reversal rule to IFRS is wrong because it swaps the two frameworks' actual positions. The option stating neither framework allows reversal is wrong because IAS 36 explicitly requires it, subject to its stated ceiling, once indicators of decreased impairment are present. The option describing an automatic reversal under both frameworks is wrong because US GAAP's ASC 360 prohibits reversal outright, and even under IAS 36 the reversal is capped rather than unlimited, so it is not simply automatic to the full extent of any recoverable-amount increase.
Source: IFRS Foundation, IAS 36 Impairment of Assets, paragraphs 114-117 (reversal of an impairment loss); FASB Accounting Standards Codification ASC 360-10-35-20 (no subsequent reversal for held-and-used long-lived assets)