P.425 : In last paragraph (above Example), it is stated : Under US GAAP, assessing recoverability is separate from measuring the impairment loss. My question : What does this mean ?
P.426 last paragraph ~ P427 : Impairment of LLA Held for Sale. My questions : Is the treatment similar to that of Net Realizable Value (NRV) for inventory under IFRS in Reading 29 ? Is it that the “fair value less cost to sell” equivalent to NRV ? Is this a “Fair Value Model” for the inventory (Held for Sales) of PP&E" ?
Under GAAP, you determine whether it is impaired by (STEP 1) comparing book value to the expected undiscounted cash flows (recoverable amount). If it’s determined that the asset is impaired, you (STEP 2) write down to the present value of the discounted cash flows (fair value). Loss recoveries aren’t allowed. Sucks, and its confusing, sorry.
I don’t have the book, but are you referring to impairment of LLAs under IFRS? IFRS allows LLAs to be reported at fair value (though most use historical cost) and GAAP does not.
For LLAs reported at historical cost: Measurement of the impairment is done by comparing book to recoverable amount. If impaired, IFRS defines recoverable amount as greater of “value in use” (PV of future cash flows) and “fair value less selling costs.”
For LLAs reported at fair value: Losses are recognized in P&L and gains (to the extent they reverse previously recorded losses) are also recorded in P&L. Any gains in excess of previously recorded losses bypass P&L and hit OCI. If an asset reported at fair value has no prior losses and its value increases, this increase in value also hits the OCI (no previous loss to reverse).
Essentially, for LLAs reported at historical cost, both GAAP and IFRS compare book to recoverable amount - where they differ is in their definition of recoverable amount.
Hope I came close to providing what you were looking for.
Your explanations clarified my confusion about 1st issue.
As for the 2nd issue, it is about the non-current assets of LLA Held for Sale (rather than held for use in normal operations). The relevant statements in CFAI curriculum are as follows.
At the time of reclasification (from held for use to held for sale), assets previously held for use are tested for impairment. If the carrying amount at the time of reclassification exceeds the fair value less costs to sell , an impairment loss is recognized and the asset is written down to fair value less costs to sell. Long-lived assets held for sale cease to be depreciated or amortised.
Your response to my questions with respect to 2nd issue in my original post will be much appreciated.
in the case fv of equipment - Cost to Sell > Carrying Value - why would the company continue to hold on to old depreciated equipments on its books as Held for Sale? Wouldn’t they sell it outright and book the gain on the IS?
then definitely the Gain would be booked on the I/S - is what I think. There would be no need to classify as “Held for Sale”.
If (FV - cost to sell) > Carrying Value, the asset can be “held for sale” if there is an expectation that the (FV - cost to sell) will rise, although this shall be a rare case.
In contrast, if (FV - cost to sell) < Carrying Value, the asset can be sold too and a loss is realized, unless there is an expectation that the (FV - cost to sell) will rise.
My key questions are :
Are the treatments of the reclassification of an asset (from held for use to held for sale) just as the Net Realizable Value (Fair Value - Cost to Sell) in the treatments of product’s inventory under IFRS (as in Reading 29 : Inventory) ?
Is this just the “Fair Value Model [(Fair Value - Cost to Sell) is recognized on B/S, all G/L are recognized in I/S rather than in Equity (OCI)]” ? According to your explanations, the answer seems to be “yes”.