Achievable CMA Part 1

1. External financial reporting decisions

1.2. Financial transactions

1.2.12. US GAAP versus IFRS

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Differences in long-lived assets and impairment

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Long-lived assets

The relevant differences between US GAAP and IFRS related to long-lived assets are as follows:

Subtopic	US GAAP	IFRS
Revaluation	Prohibited. Tangible fixed assets are generally reported at cost less accumulated depreciation and impairment.	Allowed. If revaluation is chosen, it must be applied to all items in a class of assets and must be kept current.
Capitalization of borrowing costs	Required for qualifying assets. A qualifying asset is one that requires a substantial period of time to get ready for its intended use. Exchange rate differences from foreign currency borrowings are not eligible for capitalization. Interest earned on invested borrowed funds cannot generally offset interest costs incurred. An investment accounted for by the equity method can be a qualifying asset under certain conditions.	Required for qualifying assets. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Exchange rate differences from foreign currency borrowings may be eligible for capitalization. Interest earned on invested borrowed funds can offset interest costs incurred. Investments accounted for under the equity method are not considered qualifying assets.
Depreciation	Component depreciation is permitted but not required, and rarely used in practice. Useful life, residual value, and depreciation method are revised only when events or circumstances indicate a change may be needed.	Each significant part of an item of PP&E must be depreciated separately (the component approach). Residual value, useful life, and depreciation method must be reviewed at least at each financial year-end.

The key difference is revaluation: IFRS permits revaluing PPE (applied consistently across a class of assets and kept current), while US GAAP prohibits it entirely; both standards require capitalizing borrowing costs for qualifying assets, though IFRS permits offsetting interest income against borrowing costs and capitalizing certain foreign-exchange differences that US GAAP does not. Depreciation follows a similar pattern: IFRS requires component depreciation and an annual review of useful life, residual value, and method, while US GAAP permits but rarely requires componentization and revisits these estimates only when a triggering event occurs.

Impairment of assets

Tangible fixed assets and intangible assets with definite useful life

The relevant differences between US GAAP and IFRS related to impairment of tangible fixed assets and intangible assets with definite useful life are as follows:

Subtopic	US GAAP	IFRS
Determination of impairment	Impairment test is triggered if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.	Similar to US GAAP: an impairment test is triggered by indications of impairment, but IAS 36 requires the entity to assess at each reporting date whether any such indication exists.
Calculation of impairment	If the carrying amount exceeds the undiscounted future cash flows, an impairment loss is calculated. The impairment loss is measured as the difference between the carrying amount and the fair value of the asset.	If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell (FVLCTS) and value in use (VIU)), an impairment loss is recognized.
Reversals of impairment	Prohibited for assets held and used. Allowed for assets held for disposal.	Allowed if the recoverable amount increases.

The two standards differ in how impairment is calculated and whether losses can be reversed, as the example below illustrates.

Example: US GAAP vs. IFRS impairment test

Ashland Co. holds equipment with a carrying amount of $100,000. Expected future cash flows from the equipment (undiscounted) total $105,000. The equipment’s fair value is $82,000, and selling it would require $2,000 of costs to sell, giving fair value less costs to sell (FVLCTS) of $80,000. Its value in use (the present value of its expected future cash flows) is $90,000.

US GAAP: Compare the carrying amount to undiscounted future cash flows. Since $100,000 is less than $105,000, the asset passes the recoverability test and no impairment is recognized.

IFRS: Compare the carrying amount to the recoverable amount - the higher of FVLCTS ($80,000) and VIU ($90,000), which is $90,000. Since $100,000 exceeds $90,000, an impairment loss of $10,000 is recognized ($100,000 − $90,000).

Answer: No impairment loss under US GAAP; a $10,000 impairment loss under IFRS.

Watch out: US GAAP screens for impairment using undiscounted cash flows, while IFRS measures against a discounted recoverable amount - IFRS’s discounted test generally flags impairment earlier, and even when both standards recognize a loss, the amounts can differ because US GAAP measures the loss to fair value while IFRS measures it to the higher of FVLCTS and VIU. Passing the US GAAP recoverability test doesn’t mean there’s no impairment under IFRS.

Intangible assets with indefinite useful life

The relevant differences between US GAAP and IFRS related to impairment of intangible assets with indefinite useful life are as follows:

Subtopic	US GAAP	IFRS
Determination of impairment	Impairment test required annually and triggered if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.	Impairment test is required annually for intangible assets with indefinite useful lives. An impairment test is also triggered if events or changes in circumstances indicate that the carrying amount may not be recoverable.
Calculation of impairment	If the carrying amount exceeds the fair value, an impairment loss is recognized. The impairment loss is the amount by which the carrying amount exceeds the fair value.	If the carrying amount exceeds the recoverable amount (higher of FVLCTS and VIU), an impairment loss is recognized.
Reversals of impairment	Prohibited	Allowed if the recoverable amount increases.

Goodwill

The relevant differences between US GAAP and IFRS related to impairment of goodwill are as follows:

Subtopic	US GAAP	IFRS
Allocation of goodwill	Allocated to a reporting unit. A reporting unit is either an operating segment or one level below an operating segment.	Allocated to a cash-generating unit (CGU). A CGU is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets or groups of assets.
Determination of impairment	Impairment test required annually plus triggered if events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. A qualitative assessment can be performed to determine whether it is necessary to perform the quantitative test.	Impairment test is required annually. An impairment test is also triggered if events or changes in circumstances indicate that the carrying amount of the CGU may not be recoverable.
Calculation of impairment	Compare the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds the fair value, the entity recognizes an impairment loss in the amount of that excess. The amount of impairment loss cannot exceed the amount of goodwill allocated to the reporting unit.	If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell and value in use), an impairment loss is recognized. The impairment loss is allocated first to reduce goodwill to zero, and then to other assets of the CGU on a pro rata basis.
Reversals of impairment	Prohibited.	Prohibited.

Long-lived assets: revaluation & borrowing costs

Revaluation: prohibited under US GAAP (cost less accumulated depreciation/impairment); allowed under IFRS (must apply to entire asset class, kept current)
Borrowing costs: both require capitalization for qualifying assets
- IFRS allows offsetting interest income against borrowing costs; US GAAP generally does not
- IFRS may capitalize FX differences from foreign currency borrowings; US GAAP does not
- US GAAP: equity-method investments can qualify; IFRS: they cannot

Long-lived assets: depreciation

IFRS requires component depreciation (each significant part depreciated separately); US GAAP permits but rarely uses it
IFRS mandates annual review of useful life, residual value, and method; US GAAP reviews only when triggered by events/circumstances

Impairment: tangible assets & definite-life intangibles

US GAAP: two-step test — recoverability via undiscounted cash flows, then loss = carrying amount − fair value
IFRS: one-step test — compare carrying amount to recoverable amount = higher of FVLCTS and VIU (discounted); loss = carrying amount − recoverable amount
IFRS’s discounted test flags impairment earlier than US GAAP’s undiscounted screen; amounts recognized can differ even when both find impairment
Reversals: prohibited under US GAAP (except assets held for disposal); allowed under IFRS if recoverable amount increases

Impairment: indefinite-life intangibles

Both require annual testing plus event-triggered testing
US GAAP: loss = carrying amount − fair value; IFRS: loss = carrying amount − recoverable amount (higher of FVLCTS and VIU)
Reversals: prohibited under US GAAP; allowed under IFRS

Impairment: goodwill

Allocation unit: US GAAP uses “reporting unit” (operating segment or one level below); IFRS uses “cash-generating unit” (CGU)
Both test annually and when triggered by events/circumstances; US GAAP allows a qualitative assessment first
US GAAP: loss = carrying amount − fair value of reporting unit, capped at goodwill allocated
IFRS: loss = carrying amount − recoverable amount, allocated first to goodwill (to zero), then pro rata to other CGU assets
Reversals: prohibited under both standards

Next | 2.1.1 Analysis of external and internal factors affecting strategy

Differences in long-lived assets and impairment

Long-lived assets

The relevant differences between US GAAP and IFRS related to long-lived assets are as follows:

Subtopic	US GAAP	IFRS
Revaluation	Prohibited. Tangible fixed assets are generally reported at cost less accumulated depreciation and impairment.	Allowed. If revaluation is chosen, it must be applied to all items in a class of assets and must be kept current.
Capitalization of borrowing costs	Required for qualifying assets. A qualifying asset is one that requires a substantial period of time to get ready for its intended use. Exchange rate differences from foreign currency borrowings are not eligible for capitalization. Interest earned on invested borrowed funds cannot generally offset interest costs incurred. An investment accounted for by the equity method can be a qualifying asset under certain conditions.	Required for qualifying assets. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Exchange rate differences from foreign currency borrowings may be eligible for capitalization. Interest earned on invested borrowed funds can offset interest costs incurred. Investments accounted for under the equity method are not considered qualifying assets.
Depreciation	Component depreciation is permitted but not required, and rarely used in practice. Useful life, residual value, and depreciation method are revised only when events or circumstances indicate a change may be needed.	Each significant part of an item of PP&E must be depreciated separately (the component approach). Residual value, useful life, and depreciation method must be reviewed at least at each financial year-end.

Impairment of assets

Tangible fixed assets and intangible assets with definite useful life

The relevant differences between US GAAP and IFRS related to impairment of tangible fixed assets and intangible assets with definite useful life are as follows:

Subtopic	US GAAP	IFRS
Determination of impairment	Impairment test is triggered if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.	Similar to US GAAP: an impairment test is triggered by indications of impairment, but IAS 36 requires the entity to assess at each reporting date whether any such indication exists.
Calculation of impairment	If the carrying amount exceeds the undiscounted future cash flows, an impairment loss is calculated. The impairment loss is measured as the difference between the carrying amount and the fair value of the asset.	If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell (FVLCTS) and value in use (VIU)), an impairment loss is recognized.
Reversals of impairment	Prohibited for assets held and used. Allowed for assets held for disposal.	Allowed if the recoverable amount increases.

The two standards differ in how impairment is calculated and whether losses can be reversed, as the example below illustrates.

Example: US GAAP vs. IFRS impairment test

Ashland Co. holds equipment with a carrying amount of $100,000. Expected future cash flows from the equipment (undiscounted) total $105,000. The equipment’s fair value is $82,000, and selling it would require $2,000 of costs to sell, giving fair value less costs to sell (FVLCTS) of $80,000. Its value in use (the present value of its expected future cash flows) is $90,000.

US GAAP: Compare the carrying amount to undiscounted future cash flows. Since $100,000 is less than $105,000, the asset passes the recoverability test and no impairment is recognized.

IFRS: Compare the carrying amount to the recoverable amount - the higher of FVLCTS ($80,000) and VIU ($90,000), which is $90,000. Since $100,000 exceeds $90,000, an impairment loss of $10,000 is recognized ($100,000 − $90,000).

Answer: No impairment loss under US GAAP; a $10,000 impairment loss under IFRS.

Intangible assets with indefinite useful life

The relevant differences between US GAAP and IFRS related to impairment of intangible assets with indefinite useful life are as follows:

Subtopic	US GAAP	IFRS
Determination of impairment	Impairment test required annually and triggered if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.	Impairment test is required annually for intangible assets with indefinite useful lives. An impairment test is also triggered if events or changes in circumstances indicate that the carrying amount may not be recoverable.
Calculation of impairment	If the carrying amount exceeds the fair value, an impairment loss is recognized. The impairment loss is the amount by which the carrying amount exceeds the fair value.	If the carrying amount exceeds the recoverable amount (higher of FVLCTS and VIU), an impairment loss is recognized.
Reversals of impairment	Prohibited	Allowed if the recoverable amount increases.

Goodwill

The relevant differences between US GAAP and IFRS related to impairment of goodwill are as follows:

Subtopic	US GAAP	IFRS
Allocation of goodwill	Allocated to a reporting unit. A reporting unit is either an operating segment or one level below an operating segment.	Allocated to a cash-generating unit (CGU). A CGU is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets or groups of assets.
Determination of impairment	Impairment test required annually plus triggered if events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. A qualitative assessment can be performed to determine whether it is necessary to perform the quantitative test.	Impairment test is required annually. An impairment test is also triggered if events or changes in circumstances indicate that the carrying amount of the CGU may not be recoverable.
Calculation of impairment	Compare the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds the fair value, the entity recognizes an impairment loss in the amount of that excess. The amount of impairment loss cannot exceed the amount of goodwill allocated to the reporting unit.	If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell and value in use), an impairment loss is recognized. The impairment loss is allocated first to reduce goodwill to zero, and then to other assets of the CGU on a pro rata basis.
Reversals of impairment	Prohibited.	Prohibited.

Key points

Long-lived assets: revaluation & borrowing costs

Revaluation: prohibited under US GAAP (cost less accumulated depreciation/impairment); allowed under IFRS (must apply to entire asset class, kept current)
Borrowing costs: both require capitalization for qualifying assets
- IFRS allows offsetting interest income against borrowing costs; US GAAP generally does not
- IFRS may capitalize FX differences from foreign currency borrowings; US GAAP does not
- US GAAP: equity-method investments can qualify; IFRS: they cannot

Long-lived assets: depreciation

IFRS requires component depreciation (each significant part depreciated separately); US GAAP permits but rarely uses it
IFRS mandates annual review of useful life, residual value, and method; US GAAP reviews only when triggered by events/circumstances

Impairment: tangible assets & definite-life intangibles

US GAAP: two-step test — recoverability via undiscounted cash flows, then loss = carrying amount − fair value
IFRS: one-step test — compare carrying amount to recoverable amount = higher of FVLCTS and VIU (discounted); loss = carrying amount − recoverable amount
IFRS’s discounted test flags impairment earlier than US GAAP’s undiscounted screen; amounts recognized can differ even when both find impairment
Reversals: prohibited under US GAAP (except assets held for disposal); allowed under IFRS if recoverable amount increases

Impairment: indefinite-life intangibles

Both require annual testing plus event-triggered testing
US GAAP: loss = carrying amount − fair value; IFRS: loss = carrying amount − recoverable amount (higher of FVLCTS and VIU)
Reversals: prohibited under US GAAP; allowed under IFRS

Impairment: goodwill

Allocation unit: US GAAP uses “reporting unit” (operating segment or one level below); IFRS uses “cash-generating unit” (CGU)
Both test annually and when triggered by events/circumstances; US GAAP allows a qualitative assessment first
US GAAP: loss = carrying amount − fair value of reporting unit, capped at goodwill allocated
IFRS: loss = carrying amount − recoverable amount, allocated first to goodwill (to zero), then pro rata to other CGU assets
Reversals: prohibited under both standards

Long-lived assets

The relevant differences between US GAAP and IFRS related to long-lived assets are as follows:

Subtopic	US GAAP	IFRS
Revaluation	Prohibited. Tangible fixed assets are generally reported at cost less accumulated depreciation and impairment.	Allowed. If revaluation is chosen, it must be applied to all items in a class of assets and must be kept current.
Capitalization of borrowing costs	Required for qualifying assets. A qualifying asset is one that requires a substantial period of time to get ready for its intended use. Exchange rate differences from foreign currency borrowings are not eligible for capitalization. Interest earned on invested borrowed funds cannot generally offset interest costs incurred. An investment accounted for by the equity method can be a qualifying asset under certain conditions.	Required for qualifying assets. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Exchange rate differences from foreign currency borrowings may be eligible for capitalization. Interest earned on invested borrowed funds can offset interest costs incurred. Investments accounted for under the equity method are not considered qualifying assets.
Depreciation	Component depreciation is permitted but not required, and rarely used in practice. Useful life, residual value, and depreciation method are revised only when events or circumstances indicate a change may be needed.	Each significant part of an item of PP&E must be depreciated separately (the component approach). Residual value, useful life, and depreciation method must be reviewed at least at each financial year-end.

Impairment of assets

Tangible fixed assets and intangible assets with definite useful life

The relevant differences between US GAAP and IFRS related to impairment of tangible fixed assets and intangible assets with definite useful life are as follows:

Subtopic	US GAAP	IFRS
Determination of impairment	Impairment test is triggered if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.	Similar to US GAAP: an impairment test is triggered by indications of impairment, but IAS 36 requires the entity to assess at each reporting date whether any such indication exists.
Calculation of impairment	If the carrying amount exceeds the undiscounted future cash flows, an impairment loss is calculated. The impairment loss is measured as the difference between the carrying amount and the fair value of the asset.	If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell (FVLCTS) and value in use (VIU)), an impairment loss is recognized.
Reversals of impairment	Prohibited for assets held and used. Allowed for assets held for disposal.	Allowed if the recoverable amount increases.

The two standards differ in how impairment is calculated and whether losses can be reversed, as the example below illustrates.

Example: US GAAP vs. IFRS impairment test

Ashland Co. holds equipment with a carrying amount of $100,000. Expected future cash flows from the equipment (undiscounted) total $105,000. The equipment’s fair value is $82,000, and selling it would require $2,000 of costs to sell, giving fair value less costs to sell (FVLCTS) of $80,000. Its value in use (the present value of its expected future cash flows) is $90,000.

US GAAP: Compare the carrying amount to undiscounted future cash flows. Since $100,000 is less than $105,000, the asset passes the recoverability test and no impairment is recognized.

IFRS: Compare the carrying amount to the recoverable amount - the higher of FVLCTS ($80,000) and VIU ($90,000), which is $90,000. Since $100,000 exceeds $90,000, an impairment loss of $10,000 is recognized ($100,000 − $90,000).

Answer: No impairment loss under US GAAP; a $10,000 impairment loss under IFRS.

Intangible assets with indefinite useful life

The relevant differences between US GAAP and IFRS related to impairment of intangible assets with indefinite useful life are as follows:

Subtopic	US GAAP	IFRS
Determination of impairment	Impairment test required annually and triggered if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.	Impairment test is required annually for intangible assets with indefinite useful lives. An impairment test is also triggered if events or changes in circumstances indicate that the carrying amount may not be recoverable.
Calculation of impairment	If the carrying amount exceeds the fair value, an impairment loss is recognized. The impairment loss is the amount by which the carrying amount exceeds the fair value.	If the carrying amount exceeds the recoverable amount (higher of FVLCTS and VIU), an impairment loss is recognized.
Reversals of impairment	Prohibited	Allowed if the recoverable amount increases.

Goodwill

The relevant differences between US GAAP and IFRS related to impairment of goodwill are as follows:

Subtopic	US GAAP	IFRS
Allocation of goodwill	Allocated to a reporting unit. A reporting unit is either an operating segment or one level below an operating segment.	Allocated to a cash-generating unit (CGU). A CGU is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets or groups of assets.
Determination of impairment	Impairment test required annually plus triggered if events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. A qualitative assessment can be performed to determine whether it is necessary to perform the quantitative test.	Impairment test is required annually. An impairment test is also triggered if events or changes in circumstances indicate that the carrying amount of the CGU may not be recoverable.
Calculation of impairment	Compare the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds the fair value, the entity recognizes an impairment loss in the amount of that excess. The amount of impairment loss cannot exceed the amount of goodwill allocated to the reporting unit.	If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell and value in use), an impairment loss is recognized. The impairment loss is allocated first to reduce goodwill to zero, and then to other assets of the CGU on a pro rata basis.
Reversals of impairment	Prohibited.	Prohibited.