Long-Lived Asset Impairment and Write-Downs

1. Long-Lived Asset Impairment and Write-Downs Bob Menzies, C.A.York University

2. Agenda • International Review of Accounting Standards • Proposed Canadian Standards for Impairment or Disposal of Long-lived Assets • Conclusion

3. International Review of Accounting Standards Background • Cost/Benefit • Relevance, Reliability + Timeliness • Potential Impact

4. International Review of Accounting Standards Three Major Approaches: • The U.S. model • The European/International Model • The Third Model

5. The U.S. Model a) An asset is identified as impaired if its carrying amount exceeds the sum of the future cash flows (undiscounted and without interest charges) expected to be generated by the asset B) An impairment loss is measured as the amount by which the asset’s carrying amount exceeds its fair value c) Reinstatement of previously recognized impairment write-downs is prohibited regardless of whether the conditions that led to the previous recognition of the impairment have reversed..

6. The International /European Model a) An asset would be identified as impaired if its carrying amount exceeds its “recoverable amount” which is defined as the higher of the asset’s net selling price and the value in use. B) An impairment loss would be measured as the amount by which the asset’s carrying amount exceeds its “recoverable amount” (the same attribute is used to identify and measure an impairment) c) Reinstatement of previously recognized impairment write-downs would be made if the asset’s recoverable amount rises above its written down carrying amount due to a change in “economic conditions” or the estimates that were used to determine its recoverable amount

7. The Third Model a) An asset would be identified as impaired if its carrying amount exceeds its fair value B) An impairment loss would be measured as the amount by which the asset’s carrying amount exceeds its fair value (as in the international model, the same attribute would be used to identify and to measure an impairment) c) Reinstatement of previously recognized impairment write-downs would be made if the asset’s fair value rises above its written down carrying amount

8. International Review of Accounting Standards Consensus Views • Recoverable amount test needed for …………... • Screening mechanism is……….. • Assertion of loss in value is……………...

9. International Review of Accounting Standards Consensus Views • Estimates of net cash inflows …………... • Impairment recognition trigger……….. • Costs included are……………...

10. International Review of Accounting Standards Consensus Views • Discount rate used for …………... • Grouping of assets……….. • Application to goodwill……………...

11. International Review of Accounting Standards Consensus Views • Estimates of net cash inflows …………... • Impairment recognition trigger……….. • Costs included are……………...

12. International Review of Accounting Standards Non-Consensus Issues • Fair value less cost vs net selling price + value in use …………... • Inclusion of interest + income taxes……….. • Reinstatement of previously recognized writedowns……………...

13. International Review of Accounting Standards Non-Consensus Issues • Reinstating impairment of goodwill • Recognition of internally generated goodwill • Allocation of the impairment of a group of assets

14. Impairment or Disposal of Long-lived Assets(This website contains a slide discussion by the Accounting Standards Board of the Exposure Draft “Impairment or Disposal of Long-lived Assets February 2002) http://www.knotia.ca/Courses/ASBF/mod3/Eng/pdfs/knotia/ASBF_mod3.pdf

15. Comparison of Canadian and International Approaches • Which of the three models does Canada use in the Exposure Draft? • Which of the Consensus Views apply? • Which of the Non-Consensus Views apply?

16. Conclusion

17. Conclusion What is Your View?