IFRS AND US GAAP (IAS 38)

Question

Madison Company acquired a depreciable asset at the beginning of Year 1 at a cost of £12 million. At December 31, Year 1, Madison gathered the following information related to this asset:

Carrying amount (net of accumulated depreciation) £10 million

Fair value of the asset (net selling price) £7.5 million Sum of future cash flows from use of the asset £10 million

Present value of future cash flows from use of the asset £8 million

Remaining useful life of the asset 5 years

Required:

Determine the impact on Year 2 and Year 3 income from the depreciation and possible impairment of this equipment under (1) IFRS and (2) U.S. GAAP.

Answer 1

1. Under IFRS 36 impairment is recognized when carrying value of an asset is less than the greater of net selling price or discounted cash flows (called recoverable cost), in this case the present value of future cash flows (recoverable cost) is less than the asset's carrying value so it is considered impaired under IFRS.

YEAR 1: Impairment of 2,000,000 (10,000,000 carrying value - 8,000,000) and 2,000,000 depreciation (12,000,000 less 10,000,000 carrying cost at end of year)

YEAR 2: 1,600,000 (8,000,000/5) depreciation

YEAR 3: 1,600,000 depreciation

1. Under IFRS there would be a total reduction in income for the depreciation of 3.2 million for years 2 and 3.

2 Under GAAP, an asset is also considered impaired when its carrying value exceeds recoverable costs, however under GAAP recoverable cost is considered to be undiscounted future cash flows. In this case the carrying cost of 10,000,000 is equal to its recoverable cost of 10,000,000 or the sum of the future cash flows of the asset. The asset is not impaired under GAAP.

Depreciation would simply be the carrying value / useful life = 2,000,000

Comparing the two

Year 1

IFRS: 4,000,000

GAAP: 2,000,000

= 2,000,000 greater reduction in net income under IFRS

Years 2 & 3

IFRS: 1,600,000

GAAP: 2,000,000

= 400,000 greater reduction under GAAP for each year