An entity is testing a long-lived asset for impairment. Undiscounted future cash flows expected from the asset's continued use and eventual disposal exceed its carrying amount, but a discounted (present value) calculation of those same cash flows would be lower than the carrying amount, and fair value less costs to sell is also below carrying amount. Under US GAAP (ASC 360) and separately under IFRS (IAS 36), is an impairment loss recognized on this asset?
- Under IAS 36, no impairment is recognized because the undiscounted cash flows exceed the carrying amount; under ASC 360, an impairment is recognized based on the discounted value
- Under ASC 360, no impairment is recognized because the recoverability test using undiscounted cash flows passes; under IAS 36, an impairment is recognized because the discounted recoverable amount is below the carrying amount
- Under both frameworks, no impairment is recognized because the asset generates positive undiscounted cash flows
- Under both frameworks, an impairment loss must be recognized because fair value less costs to sell is below the carrying amount
Why B? And why not the others?
Correct answer: B. Under ASC 360, no impairment is recognized because the recoverability test using undiscounted cash flows passes; under IAS 36, an impairment is recognized because the discounted recoverable amount is below the carrying amount
ASC 360 uses a two-step impairment model for long-lived assets held and used: first, a recoverability test compares the asset's carrying amount to the sum of undiscounted future cash flows expected from its use and eventual disposal; only if the carrying amount exceeds that undiscounted total does the entity move to step two and measure a loss based on fair value. Because the undiscounted cash flows here exceed the carrying amount, the recoverability test passes and no impairment is recognized under US GAAP, regardless of what a discounted calculation would show. IAS 36 skips any undiscounted screening step entirely and compares the carrying amount directly to the recoverable amount, defined as the higher of fair value less costs of disposal and value in use, where value in use is calculated using discounted cash flows; since both of those figures are below the carrying amount here, an impairment loss is recognized under IFRS. The option reversing which framework reaches which conclusion is wrong because it swaps the actual outcomes. The option finding no impairment under both frameworks ignores that IFRS's test is based on discounted, not undiscounted, cash flows. The option finding an impairment under both frameworks ignores that the US GAAP recoverability screen is passed on an undiscounted basis, which blocks any loss measurement at this stage.
Source: FASB Accounting Standards Codification ASC 360-10-35-17 (recoverability test using undiscounted cash flows); IFRS Foundation, IAS 36 Impairment of Assets, paragraphs 18 and 6 (recoverable amount as the higher of fair value less costs of disposal and value in use)