When we are testing an asset for impairment under US GAAP… While calculating the loss we have to use Fair Value of the asset. However, schweser says that when Fair Value is not available we can use Value-in-use (PV of future cashflows). I couldn’t find this anywhere in curriculum. What do you guys have to say about it?
FRA - Impairment under US GAAP - Loss calculation
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Thank you for being specific
However, I think I have not made my Q clear. The reference to ‘Value in use’ in this section is with regards to IAS (IFRS) and not US GAAP! And my post/question pertains to use of ‘Value in use’ when we calculate impairment as per US GAAP!
IFRS Says-
There is impaiment when Carrying value of asset is greater than the Recoverable amount.
Recoverable amount here is defined as - the HIGHER of the Fairvalue (less selling costs) and Value in use (PV of future cash flow).
Difference between Carrying value and Recoverable amount is the impairment loss!
Thus, IFRS considers Value in use!
US GAAP, on the other hand, does not consider ‘Value in use’! It considers only UNDISCOUNTED Cashflows.
As per US GAAP:
First step is to determine is there is any impairment-
There is impairment when Carrying value of asset Greater than the Sum of the undiscounted future cashflows of that asset
Once need for impairment is recognised, impairment loss is calculated as -
Carrying value - Asset’s fair value.
This is my understanding. And, here US GAAP does not say we need to consider ‘Value in use’.
Schweser on the other hand says, as per US GAAP when asset’s fair value is not available, we can use ‘Value in use’!
I would be more than happy if you can throw some light on this!
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Yes, I did go through all the examples. And I am pretty much cool with US GAAP treatment. This was in level1 as well. It’s just that since I could not find any thing where ValueInUse can be used for US GAAP and schweser says so (use Value in use if Fair value is not provided), I was curious. So I asked!
I even asked a friend who has done ACCA (UK) and he also told me that in US GAAP there is nothing like use VALUE IN USE if you dont have fair value! Which made me even more curious!
Do you feel that sometimes Schweser can be misleading? :/ I sometimes feel so! Especially when they don’t provide much of explanation and assume you know it, it leads to lots of confusion! Just my views!
If you look at the example in CFAI (page 66) specifically part 4, they compute the impairment loss under IFRS and US GAAP. Under the USGAAP impairment computation, they take the PV (future CF) as fair value. Since PV (Future CF) = value in use (this you seem to know per your post above). This is exactly what Schweser says. Don’t know how this confuses you….