As International Financial Reporting Standards (IFRS) continue to expand internationally, it is important for U.S. companies to be aware of key differences between it and U.S. GAAP. One area where a distinct difference could impact a company’s financial statements is the recovery of an impairment loss.
U.S. GAAP specifically prohibits restoration of a previously recognized impairment loss regardless of any subsequent indicators of recoverability. IFRS’s approach to the recovery of an impairment loss is outlined in International Accounting Standards (IAS) 36. Other than losses related to goodwill, losses can be reversed if there is an indication of recoverability and there has been a change in the estimates used to determine the assets’ impairment.
If the reduction to the recoverable amount was based on diminished future cash flows, a change in the amount or timing of estimated future cash flows would satisfy the change in estimate requirement. A practical example of this can be seen in the oil and gas companies in the region. Many have taken impairment losses on natural gas properties due to the steep drop in the market prices of natural gas over the past two years adversely affecting the estimated future operating cash flows of their gas reserves. If an outside factor, such as the approval of natural gas exports, caused the market price of natural gas to rise, this would change a key estimate in valuing their reserves and the related future cash flows from these properties. Because this key estimate has changed, the company would re-evaluate the new recoverable amount of the assets and, if necessary, increase the carrying amount to the recoverable amount. This would not be possible under U.S. GAPP, since write-up of any previous impairment losses is prohibited and would leave the true value of the company’s oil and gas assets understated on the company’s balance sheet.
© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter