By Paul V. Ennis, MBA, CGA
This month’s article focuses on the impact of major changes to accounting standards affecting both financial statement preparer’s and auditors alike. Under GAAP, impairment was covered by sections 3063 and 3064 of the CICA Handbook. 3063 refers to assets that are “non-monetary long-lived assets including property, plant and equipment, intangible assets with finite useful lives and long-term prepaid assets.” 3064 applies to “goodwill and intangible assets”. An impairment loss is recognized under 3063 when the “carrying amount of a long-lived asset is not recoverable and exceeds its fair value.” Fair value is calculated using the total of undiscounted cash flows resulting from the asset group’s use plus the amount to be received from its sale. The total is compared with the carrying amount and, if fair value is less, then the asset group is written down to fair value. At a later date if fair value of the asset group increases the impairment loss would not be reversed.
The asset group under GAAP is “the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.” Using a multi-store retail grocery chain as an example, all plant and equipment would be an asset group. This test was undertaken whenever an event or change of circumstance occurred for long-lived assets or, annually for goodwill and intangible assets under 3064. We are required to test all other assets for impairment and then test goodwill last with the aim being to offset any asset group changes against goodwill. Any asset write-down is required to be recognized in the Statement of Income.
There are several changes that effect asset impairment under IFRS. IAS 36 Impairment of Assets introduces some new concepts. The first is a “Cash Generating Unit” (CGU) instead of an asset group under GAAP. The CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other assets. Using the same example above, each store would be a CGU. Secondly, “Recoverable Amount” of an asset or CGA is the higher of its fair value less cost to sell and its value in use. “Value in Use” means the present value of expected future cash flows to be derived from the asset.
Under IFRS the use of undiscounted cash flows to calculate fair value is no longer valid. The test is based on recoverable amount being less than carrying amount to generate a write-off or, alternatively if the recoverable amount is greater than carrying value, the asset must be written up to the higher value. Under IFRS, impairment testing is required at each reporting date and annual tests are required for goodwill, indefinite life intangibles (license’s etc) and intangibles that are not available for use.
Where it is possible to test long-lived assets and intangibles at the individual level, then IFRS requires testing at the individual level. The change from asset groups to CGU’s and individual asset testing will mean more impairment. Testing goodwill at the CGU level will also likely lead to additional impairment. Where there is an impairment loss on a CGU the impairment is to be taken up firstly against goodwill and then other CGU assets. This is directly opposite to GAAP. Also under GAAP impairment losses are not reversed whereas under IAS 36 losses may be reversed except where the loss applies to goodwill.
So there are some significant changes in impairment rules resulting from the change to IFRS. CGA’s will need to rely heavily on valuations provided to analyze complex transactions and allow more time to review asset valuations to ensure that any impairment is reflected in the statements. GL accounts will also have to be reorganized to align assets with their CGU’s and be able to provide calculations to auditors. If you haven’t started preparation for the transition year yet this is yet another major change that you will have to consider.