Are Fair Value, PV of Future CF, and Value in use all used to assess impairment losses under both GAAP and IFRS? The “prescribed” answer to the impairment loss calculation was 60,000 because they chose to use fair value of the impaired asset. However, I had used the higher of Discounted Cash Flow. Is this not allowed under IFRS? alternatively, are costs to sell also subtracted from PVofFCF? Thanks.
A company using IFRS has experienced a decline in the demand for its products. The following information relates to the company’s equipment for this year:
Carrying value of equipment (net book value): 500K
It was my understanding that value in use is the same as present value of DCF. You’ve probably misread, it’s the undiscounted future CF, not the DCF.
Net realizable value is the higher of 1) fair value - cost to sell 2) Value in use for IFRS. For GAAP, it’s the higher of the recoverable amount or the undiscounted CF.
So the impairment in this case should be 60k under IFRS, and 50k under GAAP.
Agreed. For IFRS, the value in use is discounted, and you have to take the highest (when both are lower than the carrying value of the asset) between the recoverable amount (FV - selling costs) and value in use (NPV of future discounted cash flows). You calculate the impairment loss easily after that.
In US GAAP, it’s a little tricky. You first measure the recoverability by comparing the carrying value to the undiscounted cash flows of the asset. If the latter is lower, you will have to calculate the impairment loss. The impairment loss will be equal to the difference between the carrying value and the FV (if available), or the PV of the DISCOUNTED future cash flows the asset will generate.