Goodwill Impairment under IFRS and US GAAP

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2010CFACFA

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Was doing Schweser Mock Exam 3 (Volume 1) Q45. It appears from the explanation in the answer that the goodwill test for impairment under IFRS and US GAAP is different but the impairment charge that is applied (assuming goodwil is impaired) is the same under both standards. Anyone know why??
Thanks!!
 
I thought that it was the other way around, they both test whether it is impaired if CV>FMV.
If it is, IFRS writes it down to that. Loss to IS
US GAAP is a two stage process…tests it that way and then writes down the impairment as the difference between original GW and current GW. Although that sounds very similar to me!
 
The tests are different, but they end up both comparing FMV to CV. In both cases, the impairment charge would result from CV being greater than FMV.
However, this was a question in a Schweser test or end of chapter question. The answer was that the tests were different but the impairment charge was the same. The errata then said to ignore the question as it was possible that the charge could be different. So….
 
This question is flagged in the Schweser errata.
I don’t recall the difference in testing - but both IFRS and US GAAP calculate the impairment the same way. A difference in the actual impairment can result from the fact that IFRS permits partial goodwill whereas US GAAP requires only full goodwill.
 
+ under IFRS: If loss is greater than unit goodwill, remainder is allocated proportionally to (impairment of) other assets of the cash generating unit
GAAP If loss is greater than current fair value of unit goodwill, unit goodwill is reduced to zero, no other allocation of impairment amount
 
Based on my reading, it appears that since both IFRS and US GAAP end up comparing FMV and CV, i don’t see how the tests are different. Anyway since its in the errata, shall just ignore it. Thanks guys!!
 
tests are not different.
way of calculating the impairment loss is different.
In IFRS : Carrying value > Fair Value
Impairment exists
Impairment Loss = Fair value - carrying value
In US GAAP:
Step 1: Carrying value > Fair Value, Impairment exists
Step 2: Now recompute Implied goodwill based on ownership of parent on Sub.
Implied goodwill = % * (New FairValue of Net Assets - Book Value of Net Assets)
Impairment Loss = Old Goodwill - Implied goodwill calculated above.
in both cases - Impairment loss either goes to net income directly or to an allowance account.
I believe the above is correct (totally from memory). Please correct if I am wrong, anywhere please.
 
i see some mixing up of things… there is impairment to an investment/asset regardless of whether there is or there’s not goodwill. If the goodwill is related to equity method (or general asset):
Under IFRS:
BV = $100, FV=$90
Loss of $10 goes on I/S
BV = $90.
Under U.S.:
BV = $100, FV=$90
Decline has to be believed to be permanent.
BV = $90.
They are the same. The difficulty comes when there is goodwill. Under IFRS, goodwill is included in the BV, so no separate test for GW. U.S. you have to test separately.
Under consolidation (acquisition method):
U.S. calculates full goodwill. IFRS allows full goodwill as optional. Here goodwill is tracked separately, even under IFRS.
IFRS:
BV = $100, FV=$90, Recoverable Amt = $95.
BV > RA, impairment loss of $5 goes to I/S.
GW reduced by the loss. Assume GW = $20 in both cases.
GW = $20-$5=$15
U.S.:
BV > RA –> there is impairment.
Goodwill loss = $20 - (RA-FV) = $2 - ($95-$90) = $15
Goodwill = $20 - $15 = $5. (note that uder IFRS GW=$15).
Loss = $10 on I/S.
Under U.S. GW is punished more than under IFRS because it is reduced by the entire loss in FV, whereas under IFRS goodwill is reduced by the difference between FV and RA.
Now, I agree…this can get tricky, so let us hope they don’t ask it!
 
CP,
Will this not be a negative “(New FairValue of Net Assets - Book Value of Net Assets)” ???
Implied goodwill = % * (New FairValue of Net Assets - Book Value of Net Assets)
 
>
> in both cases - Impairment loss either goes to net
> income directly or to an allowance account.
I doubt this, because I think under US GAAP an allowance account is not used. Are you sure about that?
 
Dreary:
please can you explain a little bit more on the following:
U.S.:
BV > RA –> there is impairment.
Goodwill loss = $20 - (RA-FV) = $2 - ($95-$90) = $15
Goodwill = $20 - $15 = $5. (note that uder IFRS GW=$15).
Loss = $10 on I/S.
Why is
Goodwill loss = $20 - (RA-FV) = $2 - ($95-$90) = $15 ???
Goodwill loss = Goodwill - (RA-FV)?
THANKS!
 
Chicago_Bull Wrote:
——————————————————-
> Dreary:
>
> please can you explain a little bit more on the
> following:
>
> U.S.:
> BV > RA –> there is impairment.
> Goodwill loss = $20 - (RA-FV) = $2 - ($95-$90) =
> $15
> Goodwill = $20 - $15 = $5. (note that uder IFRS
> GW=$15).
> Loss = $10 on I/S.
>
> Why is
> Goodwill loss = $20 - (RA-FV) = $2 - ($95-$90) =
> $15 ???
>
> Goodwill loss = Goodwill - (RA-FV)?
>
>
> THANKS!
sorry Bull, found this while searching.
This should say:
Goodwill loss = $20 - (RA-FV) = $20 - ($95-$90) = $15
 
looks like if imparied loss higher than goodwill in GAAP, GAAP only recognize up to the total amount of goodwill as loss. Please check the text book example: Reading 23, page 159.
while IFRS will reduce the asset carry value by (impaired loss-total good will).
 
How does this balance out on the BS? I’m probably brain farting, but if goodwill is being reduced by 100k, where does the reduction come from on the L+E side? OCI or Sh Eq or something?
 
It reduces equity directly. A - L = E. Asset writedown goes directly to equity since it has no effect whatsoever on liabilities. Therefore in the subsequent periods after a writedown, your ROA, ROE, etc. are going to be higher.
 
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