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US GAAP equivalents
IFRS IAS 36, Impairment of Assets IFRS 5, Non-current Assets Held for Sale and Discontinued Operations IFRS 8, Operating Segments
US GAAP CON 7 ASC 280, Segment Reporting ASC 350, IntangiblesGoodwill and Other ASC 360, Property, Plant and Equipment ASC 410, Asset Retirement and Environmental Obligations
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Slide 1
Guidance
The impairment model under IFRS can have very different results than the models under US GAAP For the year ending 3/31/2006 Vodafone recognized impairment losses of 23.515 billion under IFRS. Under US GAAP they recognized 0. (Vodafone 2006 Form 20-F)
US GAAP 0
IFRS 23.515(billion)
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Slide 2
Guidance
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Slide 3
Guidance
Impairment overview
Definition: An asset is impaired when its carrying amount is higher than its recoverable amount (i.e., the greater of the assets value in use or fair value less costs to sell) An assessment is made at each reporting date about the existence of any impairment indicators Impairment test must be performed when indicators detected Impairment test involves comparison of the recoverable amount to the carrying amount of the asset At a minimum, annual impairment test for goodwill and indefinite lived intangibles
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Slide 4
Guidance
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Slide 5
Guidance
Decline in market value Adverse changes to operating environment Net assets > market capitalization Increase in market interest rates US GAAP difference Testing is required when any indicator is present
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Evidence of obsolescence
Slide 6
Deep dive
IFRS If impairment exists, assets are written down to the recoverable amount. Determination of a recoverable amount involves assessment of the fair value and value in use (discounted cash flows).
US GAAP Impairment is a two-step approach. First, impairment is assessed on the basis of undiscounted cash flows. If less than carrying amount, the impairment loss is measured as the amount by which the carrying amount exceeds fair value.
PricewaterhouseCoopers
Slide 7
Deep dive
Impairment model
Recoverable Amount
US GAAP: Impairment is a two-step approach (long-lived assets & finite lived intangibles)
Carrying Amount
Compared to
Carrying Amount
Difference between
Fair Value
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Slide 8
Deep dive
IFRS
US GAAP
If impairment exists, assets are written down Impairment is a one-step approach. to the recoverable amount. Determination of Impairment test consists of a comparison a recoverable amount involves assessment of of an intangible assets fair value with its the fair value and value in use (discounted carrying amount. If the carrying amount of cash flows). an intangible asset exceeds its fair value, Level of assessment is at the an impairment loss is recognized in an Cash-Generating unit level. amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis. Level of assessment is at the asset level.
PricewaterhouseCoopers
Slide 9
Deep dive
Carrying amount
The carrying amount is the amount at which an asset or CGU is recognized less any accumulated amortization and previous impairment losses Cash generating unit Includes the carrying amounts of directly attributable assets, plus The carrying amounts of assets that can be allocated on a reasonable and consistent basis Common issues relating to carrying amount: - Minority interests Gross up the carrying value of goodwill allocated - Allocation of corporate assets
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Slide 10
Deep dive
Recoverable amount
Fair value less costs to sell Amount obtainable from the sale of an asset or a CGU in an arms length transaction, less the costs of disposal
Or
Value in use Present value of future cash flows to be derived from an asset or CGU
If the recoverable amount is less than the carrying amount, an impairment is recognized
PricewaterhouseCoopers
Slide 11
Deep dive
3. Amount (based on the best information available) that could be obtained from disposal in an arms length transaction between knowledgeable and willing parties. An entity considers outcome of recent comparable transactions
Typically, options 1 and 2 are not available and so an entity must estimate fair value less costs to sell
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Slide 12
Deep dive
What does this mean in practice? Binding sale agreements or active markets generally not available If no binding sale agreement or active market for an asset, fair value less costs to sell based on:
Amount that an entity could obtain At end of reporting period From asset disposal at arms length After deducting disposal costs
In determining this amount, an entity considers the outcome of recent transactions for similar assets within the same industry Fair value less costs to sell does not reflect a forced sale, unless management is compelled to sell immediately
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Slide 13
Deep dive
What is a relevant transaction? Risk profile and size generally more important than geography If recent transactions in the industry can be found: Express prices as multiples of revenue or profit Apply the multiples to the CGU or asset being valued, adjusting for all points of difference If no recent market transactions can be found: Fair Value less costs to sell may still be derived using estimation techniques such as a discounted cash flow analysis
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Slide 14
Deep dive
Impairment losses
Impairment loss recognized when an assets recoverable amount is lower than its carrying amount Initial recognition of impairment loss involves: - Reversal of any revaluation reserve - Recognition of remaining losses directly in P&L - Amendment of depreciation or amortization charge
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Slide 15