Impairment of Long-lived Assets including Goodwill

Impairment of Long-lived Assets including Goodwill
Includes Comparison of US GAAP and IFRS

Impairment of long-lived assets IFRS: 1-step process Recoverable amount is higher of Fair value less cost to sell Value in use Discounting required in evaluation stage Impairment losses must be reversed if circumstances change (except goodwill) FASB: 2-step process FAS 144—for an asset in use, undiscounted future cash flows from use establish recoverability used for the impairment calculation Not considered impaired unless undiscounted cash flows are less than carrying value Discounting occurs only for the step 2 valuation stage Impairment losses cannot be reversed

Timing of impairment tests IFRS When an indication of impairment is observed (look for them at least annually) Land, buildings, equipment Intangible assets with finite life At least annually (at same time of year but not necessarily at year end) Intangibles with indefinite life including goodwill Intangibles not yet in use (development costs) US GAAP When indication of impairment exists long-lived assets & intangibles subject to amortization At least annual tests for intangibles with indefinite life including goodwill GW tested at reporting unit level – related to segment reporting rules Detailed evaluation of fair value may not be required every year

IFRS 1-step test Impaired if recoverable amount > carrying value At end of each reporting period, look for indications of impairment Impairment tests need not be done if there are no indications of impairment EXCEPTION Intangible assets with indefinite useful life (including goodwill) and intangible asset not yet available for use For these assets, impairment test is at end of reporting period Similar to US GAAP which requires annual impairment tests for intangibles with indefinite lives but not for other long-lived assets

When there is an indication of possible impairment: IAS 36

US GAAP – “triggering event” Is there an indication that a long-lived asset might be worth less than carrying value? List of items AASC 360-10-35-21 – “When to test a long-lived asset for recoverability” Decline in market value Change in way asset is used or physical change in asset Adverse changes in legal factors or business climate Probable sale of asset before end of useful life Current period losses with history of operating or cash flow losses associated with asset

Step 2 Step 1

To do tests, we must group assets 360-10-35-23 There must be CASH FLOWS related to the long-lived assets (so one can apply recoverability test and do discounted cash flow valuation techniques if necessary) Lowest level for which identifiable cash flows are available Largely independent of cash flows related to other assets or liabilities This is referred to as a “primary asset” approach – because we need to have a group of assets that generates cash flows

US GAAP: Two-step process Step 1: Is carrying value “recoverable” through future (undiscounted) cash flows? If yes, no impairment If no, go on to Step 2 Step 2: Measure the impairment loss: Difference between carrying value and fair value of the asset group

Snowy Ridge Ski Resort Case *Mountain division includes $5M special use permit, an intangible asset with indefinite life

Step 1 – Snowy Ridge Ski Resort Only Mountain Division is not recoverable: Carrying value = $12,360 Future cash flows = $9,625 THEREFORE, go on to Step 2

Snowy Ridge Ski Resort Case – fair values from Question 3 Note that one of these is what we’d get from selling the asset so it is the same as one of the undiscounted cash flows from pervious slide *Mountain division includes $5M special use permit, an intangible asset with indefinite life

Mountain Division Fair value = 9,625,000 Carrying value = 12,360,000 Impairment loss = 2,735,000 Allocate between two major assets:5,000,000 permit 40.5%7,360,000 ski-lifts & infrastructure 59.5%

Mountain Division - IFRS Value in use = 9,625,000 (PV using 6%) Fair value less cost to sell = no information, let’s assume $12M less 5% commission = $11.4M Higher of the two = 11,400,000Carrying value = 13,360,000Impairment loss 1,960,000 {It would be equal to US GAAP loss if fair value were $10M less cost to sell}

Real Estate Division - IFRS No loss under US GAAP Value in use = 13,894,675 Carrying value = 16,500,000 Impairment loss = 2,605,325 No loss for Lodging division under US GAAP and IFRS

Lodging Division - IFRS Value in use = 694,960/.06 = 11,582,667 Fair value less cost to sell = 11,355,150 before commission Higher of the two = $11,582,667 Carrying value = 9,500,000 Therefore NO IMPAIRMENT is recognized

What about Goodwill Impairment? Snowy Ridge Ski Resort Purchase price 46.5M Identifiable assets 41.5M Goodwill 4.0M I think it should be allocated to the operating divisions/reporting units However, the case authors did not allocate so they used the “company value” of $41M from page 61 (bottom of page)

Goodwill Impairment (ASC 350-20-35) Step 1 (35-4 to 35-8) Compare the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit is > 0 and fair value > carrying amount Goodwill is not impaired (second step not necessary) Otherwise, go to step 2

Goodwill Impairment (ASC 350-20-35) Step 2 (35-10 thru 35-13) Compare carrying value to FAIR VALUE of the reporting unit (to get the implied fair value of GW) If Carrying value > implied fair value of GW, the difference is the impairment The loss cannot be > than carrying value No upward adjustment after an impairment

Finding Implied Fair Value of GW Assign fair values to all net assets of reporting unit as though you were initially recognizing goodwill in a business combination (ASC 350-20-35-14) The excess of fair value of a reporting unit over the assigned fair values of assets and liabilities = implied fair value

Implied Goodwill

Step 2 – determine GW impairment (if any)

Impairment: US GAAP vs. IFRS Overall comparison Similar rules overall but impairment test is different which can cause large $$ differences in reported earnings VIU is discounted version of recoverable cash flows approach to estimating fair value that is used in US only if no market-based fair value is available Big differences IFRS requires that impairment losses be restored (except for goodwill) while FASB does not permit restoration

Impairment of Long-lived Assets including Goodwill