With a number of entities transitioning from following U.S. Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS), it is important to be aware of the differences between the two standards when it comes to matters related to fair value and impairment testing guidance.
Goodwill Allocation
Under U.S. GAAP, goodwill is allocated to each reporting unit of an entity. A reporting unit is an operating segment or a segment one level below an operating segment (also referred to as a component). Under IFRS, meanwhile, goodwill is allocated to each cash-generating unit (CGU) of an entity, with a CGU being the smallest identifiable group of assets that generates cash flows largely independent of those of other assets or groups of assets. This difference may not impact an entity switching from U.S. GAAP to IFRS, however, since depending on the circumstances a reporting unit and CGU could be identical.
Testing Goodwill for Impairment
When testing goodwill for impairment under U.S. GAAP, the carrying value of a reporting unit is compared to its fair value. A loss is recognized in the amount, if any, by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.1
The carrying value of a CGU, however, is compared to its recoverable amount under an IFRS impairment test, with the recoverable amount being the greater of:
- The fair value of the CGU less cost to sell, and
- The value in use, or the present value of the cash flows expected to be generated by the CGU.
A loss is recognized in the amount, if any, by which the CGU’s carrying value exceeds its recoverable amount. Generally, any loss exceeding the carrying value of goodwill is allocated on a pro rata basis to the CGU’s other assets.
While there are some definitional differences, a goodwill impairment test might have the same result under U.S. GAAP and IFRS, since depending on the circumstances ‘value in use’ under IFRS will often approximate fair value under U.S. GAAP.
Unlike IFRS, however, an entity may elect to perform a qualitative test for impairment under U.S. GAAP before proceeding with the quantitative test described above. If the qualitative test determines that it’s more likely than not there is no impairment, the entity is not required to perform the quantitative test. A private company may also elect to amortize acquired goodwill over a period of up to 10 years under U.S. GAAP, an option unavailable under IFRS.
Intangible Assets with Indefinite Lives
Intangible assets with indefinite lives are recorded and tested for impairment in a way similar to goodwill, except that each intangible asset’s fair value is tested instead of the entire entity, with applicable impairment losses not to exceed the carrying amount of the asset.2
While impairment losses for indefinite-lived assets may not be reversed under U.S. GAAP, under IFRS, when an asset impairment loss has been recognized previously the entity must perform annual tests for indicators of reversal. If reversal is indicated, the carrying amount is increased, but the adjusted amount may not exceed the initial amount. Note that goodwill is not subject to impairment loss reversal under either U.S. GAAP or IFRS.
Assets with Defined Lives
Under U.S. GAAP, an impairment loss is recognized on assets with defined lives when the carrying value of an asset group is greater than the undiscounted cash flows expected to be generated by the asset group. 3 If undiscounted cash flows are less than the carrying value, the loss is measured as the excess of the carrying value of the asset group over its fair value.
Under IFRS, an impairment loss is recognized when the carrying amount of an asset4 exceeds its recoverable amount, as defined previously. The loss is measured as the excess of the carrying amount of the asset over its recoverable amount.
Similar to goodwill, impairment losses may not be reversed under U.S. GAAP, while IFRS requires annual tests for indicators of reversal. If reversal is indicated, the carrying amount is increased, but the adjusted amount may not exceed the initial amount adjusted for regular depreciation.
Acquired Contingencies
Under U.S. GAAP, an acquirer should recognize contingent assets and liabilities if their fair value can be determined. When it cannot, contingent assets and liabilities are only recognized if it is probable that an asset or liability exists on the acquisition date and the amount can be reasonably estimated.
Under IFRS, an acquirer records contingent liabilities of an acquiree only if they represent present obligations that can be quantified; acquired contingent assets are not recorded.
Schneider Downs has significant experience performing valuation services, including goodwill and intangible asset impairment analyses and intangible asset valuations, for international organizations following U.S. GAAP and IFRS. For more information about valuation and other business advisory services, please contact Joel Rosenthal at 412.697.5387 or [email protected] or Steve Thimons at 412.697.5281 or [email protected]. Schneider Downs also provides assurance and advisory services for international entities and organizations following IFRS. For more information concerning international business matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].
1 Explanation assumes ASU 2017-04 has been adopted.
