Which method of accounting for impairments of tangible, operating assets is best: U.
The US financial Accounting Standards Board (FASB) and the International accounting Standards Board (IASB) are more similar than different in most transactions. However, when it comes to impairment of tangible and operating assets, I believe IFRS have a better method of impairment than IFRS. By the end of this paper, I will be able to show you the overview impairment principles, the advantage and disadvantage for both US and IFRS method, and the reason why US GAAP is better. .
According to the US GAAP, if impairment indicator exists, there are two-step approaches to calculate the impairment. First step is called a recoverability test. Under the recoverability test, an impairment loss occurs only when the sum of long-term asset's undiscounted future cash flows is less than the asset's book value. Subsequently, if the first step was true, we go to the second step- measure impairment loss. US GAAP require us to measure impairment loss by calculate the difference between its fair value and the asset's book value. US GAAP use undiscounted estimated of cash flows in recoverability test to determine rather an asset is qualify for impairment, but use discounted cash flows to calculate the amount of impairment loss. US GAAP prohibits the reversal of impairment for any assets. .
On the other hand, IFRS only have one-step approach. If recoverable amount is less than the carrying amount, the impairment losses need to be calculated. The recoverable amount is the higher of fair value and the fair value less costs to sell. Reversals of an impairment loss are required for all the assets except for goodwill. IFRS requires allocation of goodwill to the cash-generating units for which management tracks goodwill internally. .
For the most part, the objective of recognizing impairments of assets in accounting is to ensure the value for the assets recorded in the financial statement is not higher than what it worth to the entity.
