IFRS for Long-lived

Assets & R&D

With comparison to US GAAP

IFRS for long-lived assets

including intangibles

Relevant IFRS:
IAS 16, Property, Plant and Equipment
IAS 38, Intangible Assets,
IAS 36, Impairment of Assets
IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations)

Plant, Property & Equipment

IFRS

PP&E can be carried at historical

cost or revalued amount less
accumulated depreciation &
impairment
Interest costs are capitalized if
criteria of IAS23 are met
No inclusion of ARO in cost of
asset when used for production of
inventories

US GAAP

PP&E must be carried at

historical cost less
accumulated depreciation
Interest costs must be
capitalized if FAS34
requirements are met
AROs are recognized
where there is a obligation
to be met at retirement (no
exception)

Plant, Property & Equipment

Revaluation under IFRS

Entity

must choose cost model or revaluation

model for an entire class of property, plant &
equipment [IAS16, para. 29]

If revaluation model is chosen, fair values that can be

reliably determined must be done with sufficient
regularity to ensure that the carrying amount does not
differ materially from that which would be determined
using fair value at the end of the reporting period
[IAS16, para. 31]
4

Revaluation under IFRS

Increase

in value:

Debit asset and report comprehensive income

The associated AOCI is called revaluation surplus

Decrease

in value:

Credit asst and

First, debit revaluation surplus to the extent it exists
(for the specific asset) and report that portion of the
loss in comprehensive income
Any remaining loss reduces profit & loss for the period

Class Discussion - Brainstorm

What is it about American culture and
history that makes upward revaluation
unacceptable?
If you are not an American, what is it about
your culture (or others) that make upward
revaluation acceptable?

Research & Development

IFRS

Development costs must be

capitalized and amortize if criteria
are met
Cost to develop websites must be
capitalized if criteria are met,
including probably future economic
benefit
In-process R&D acquired as part of
business combination is capitalized
Revaluation is allowed although
rare

US GAAP

Expense R&D as incurred

Website cost capitalization
depends on phase of
spending based on SOP
98-1 and/or FAS86
IPR&D acquired as part of
business combination is
expensed immediately
Revaluation is not allowed

Research vs. Development

under IFRS (IAS38, para. 54-57)

First step classify internally generated

intangible assets as being in either (1) a
research phase or (2) a development
phase
Research

is expensed as incurred
Development costs are capitalized only when
the entity can demonstrate all of the following:

Next slide 6 criteria

8

Capitalization Criteria [IAS38 57]

a)
b)
c)
d)
e)
f)

The technical feasibility of completing the

intangible
Its intention to complete the intangible asset
Its ability to use or sell the intangible asset
How the intangible asset will generate probable
future economic benefits
The availability of adequate technical, financial
and other resources to complete
Reliable measurement of related expenditures
9

Caveats in IAS 38
Internally generated brands, mastheads,
publishing titles, customer lists and items
similar in substance shall not be
recognized as intangible assets.
Past expenses cannot not later be
recognized as part of an intangible asset

10

Compare to FAS 86
R&D
Costs
(Expense)
Software
project
initiated

Deferred
Costs
(Intangible
Assets)

Technological
feasibility
established

Inventory
Costs

Software
available for
commercial
production

Software
sold

IFRS amortization rules

basically similar to US GAAP
Intangible assets with indefinite life are not
amortized but are tested for impairment
Intangible assets with finite useful lives

Allocated

on a systematic basis over the useful

life to reflect pattern of the economic benefits
expected
Cease amortization at date asset is classified
as held for sale
12

Impairment of
Assets IAS 36
US GAAP
FAS 144 PP&E
FAS 142 Intangibles & Goodwill
18

Impairment of long-lived assets

IFRS: 1-step process

Recoverable amount is
higher of

Fair value less cost to sell

Value in use

Discounting

required in
evaluation stage
Impairment losses must be
reversed if circumstances
change (except goodwill)

FASB: 2-step process

FAS 144for an asset in use,

undiscounted future cash flows
from use establish
recoverability used for the
impairment calculation

Not considered impaired unless

undiscounted cash flows are
less than carrying value
Discounting occurs only for the
step 2 valuation stage
Impairment losses cannot be
reversed

19

IFRS 1-step test

Impaired if recoverable amount > carrying value

At

end of each reporting period, look for indications of

impairment
Impairment tests need not be done if there are no
indications of impairment
EXCEPTION

Intangible assets with indefinite useful life (including goodwill)

and intangible asset not yet available for use
For these assets, impairment test is at end of reporting period

Similar to US GAAP which requires annual impairment tests for

intangibles with indefinite lives but not for other long-lived assets

20

When there is an indication of

possible impairment:

IAS 36
21

Events
indicate possible
impairment?

Yes

Is BV >
undiscounted
future CFs?

Yes

Quoted
market prices
available
for FV?
No

Step 1

No

FASB 144 - Impairment of

Assets To Be Held and Used

Step 2

No

Can FV be
estimated based on
MV of similar
assets?

No impairment
recorded. Use
carrying value.

Yes

Yes

No

Find FV by
discounting
future cash
flows (CFs)

Impairment
loss = excess
of BV over FV

IAS36 Indicators of impairment

Decline in market value greater than expected as a

result of normal use or passage of time
Significant adverse changes affecting entity including
economic, technological, legal environment
Higher interest rates which would make future cash
flows less valuable
Evidence of physical damage or obsolescence
Plans to discontinue use, dispose of asset, etc.

23

FAS 144 Indicators of impairment

Events or changes in circumstances that could indicate

that the carrying amount may not be recoverable
Decline in market value
Change in way asset is used or physical change in
asset
Adverse changes in legal factors or business
climate
Probable sale of asset before end of useful life
Current period losses with history of operating or
cash flow losses associated with asset

Timing of impairment tests

IFRS

When an indication of impairment is

observed (look for them at least
annually)

At

US GAAP

Land, buildings, equipment

Intangible assets with finite life

least annually
(at same time of year but not
necessarily at year end)
Intangibles with indefinite life
including goodwill
Intangibles not yet in use
(development costs)

Very
Similar

When indication of
impairment exists (FAS 144)
long-lived assets intangibles
subject to amortization
(FAS142, para. 15)
At least annual tests for
intangibles with indefinite life
including goodwill

GW tested at reporting unit level

related to segment reporting
rules FAS131
Detailed evaluation of fair value
may not be required every year

25

Timing of impairment tests

IFRS

When an indication of impairment is

observed (look for them at least
annually)

At

US GAAP

Land, buildings, equipment

Intangible assets with finite life

least annually
(at same time of year but not
necessarily at year end)
Intangibles with indefinite life
including goodwill
Intangibles not yet in use
(development costs)

Very
Similar

When indication of
impairment exists (FAS
144) long-lived assets
intangibles subject to
amortization (FAS142,
para. 15)
At least annual tests for
intangibles with indefinite
life including goodwill

GW tested at reporting unit

level related to segment
reporting rules FAS131

26

IAS36 Measuring recoverable

amount
(1)

Recoverable amount can be for an

individual asset unless the asset does not
generate cash flows that are largely
independent of other assets
In

this case, use a cash-generating unit (CGI)

to which the asset belongs
This is the usual case

27

IAS36 Measuring recoverable

amount
(2)

Value in Use based on calculations that

include:
Estimate

of future cash flows related to asset

Expectations about possible variations in amount or
timing of future cash flows
The time value of money
Price for bearing uncertainty inherent in the asset
Other factors such as illiquidity

28

IAS36 VIU

(3)

Discount rate to use Discount rate

The discount rate (rates) shall be a pre-tax
rate (rates) that reflect(s) current market
assessments of:
the time value of money
the risks specific to the asset for which the
future cash flow estimates have not been
adjusted
29

IAS36 Compare recoverable

amounts
(4)

Value in Use (discounted cash flows)

Discount

the future cash inflows and outflows to be derived from

continuing use of the asset and from its ultimate disposal using
appropriate discount rate

Fair Value less costs to sell (market-based)

Best

FV would be a binding sales agreement in an arms length

transaction
Next best would be based on identical or similar assets traded in
an active market
Never actually recommends discounted expected cash flow
analysis
30

Impairment Example

Johnson Company purchased equipment 8 years

ago for $1,000,000. The equipment has been
depreciated using the straight-line method with a
20-year useful life and 10% residual value.
Johnson's operations have experienced significant
losses for the past 2 years and, as a result, the
company has decided that the equipment should
be evaluated for possible impairment.

Impairment Example (cont)

The management of Johnson Company

estimates that the equipment has a
remaining useful life of 7 years. Net cash
inflow from the equipment will be $80,000
per year. The fair value of the equipment is
$240,000 (based on market values of similar
equipment). No goodwill was associated
with the purchase of the equipment.

FAS 144 solution (slide a)

Determine if an impairment loss should be

recognized.
Annual

depreciation for the equipment has been $45,000

($1,000,000 - $100,000)/20 years. Current book value of
the equipment is:

Original cost
Accumulated depreciation
($45,000 * 8 years)
Book value

$1,000,000
360,000
$ 640,000

FAS 144 solution (slide b)

Determine if an impairment loss should

be recognized.

Anticipated future cash flows $ 560,000

(7 years * $80,000 per year)
Look at the flow chart should we recognize an
impairment?

The

fair value is lower, so an

impairment loss should be recognized.

FAS 144 solution (slide c)

The step 2 phase: Determine the amount of the

loss and prepare the journal entry to record the loss.
The

impairment loss is equal to $400,000 ($640,000 $240,000) -- the difference between the book value of the
equipment and its fair value. The impairment loss would be
recorded as follows:

Accd Depreciation
360,000
Loss on Impairment
400,000
Equipment
760,000

VARIATION of Example
(FAS144 solution, slide d)

What journal entry should Johnson Company make

if future cash flows related to the equipment were
$980,000 in total?
Since

the future cash flows (undiscounted) equal

$980,000 and this amount is greater than the book value
of $640,000, Johnson Company will not do anything.
No impairment is recognized and no upward
revaluation is recorded.
No journal entry needed.

IFRS solution to the impairment

example (slide 1)
Synopsis of facts:
Carrying value = $640,000
Future cash flows from use =
$80,000 per year for 7 years
Market-based fair value less cost to sell =
$240,000
Determine VIU using 5% rate

37

IFRS solution to the impairment

example (slide 2)
Determine VIU:
N=7, i=5%, FV=0, PMT=$80,000.
PV = $462,910
Recoverable amount = higher of FV
($240,000) and VIE ($462,910)
Therefore, loss is $177,090
(BV 640,000 VIE 462,910)

38

IFRS solution to the impairment

example (VARIATION)
Synopsis of facts:
Carrying value = $640,000
Future cash flows from use =
$140,000 per year for 7 years
Market-based fair value less cost to sell =
$240,000
Determine VIU using 5% rate

39

Your IAS36 Solution to Variation

of Example:
Fair value less cost to sell = $240,000
Carrying value = $640,000
Determine VIU: (n=7, i=5%, FV=0,
PMT=$140,000)

40

Comparing the solutions

Under FAS144

Original facts
Loss

= $177,090

Under IAS36

Original facts
Loss

= $400,000

VARIATION

VARIATION

No

No

loss recognized

loss recognized

42