GAAP/ IFRS- Impairment of assets

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GAAP/ IFRS- Impairment of assets
Countries have for many years developed and embraced their forms of accounting standards, many of their accounting standards are tax oriented, principle based, rules based or business oriented. Due to globalization and business transaction within different countries and continents, there has been a strong need to harmonize these standards to ensure they are applicable to any country in the world. By late ‘90s, many states especially, in U.S had started adopting IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles). In 1999, FASB (Financial Accounting Standards Board) came up with a convergent project to bring together or rather harmonize the two standard setters (GAAP) and IFRS), FASB came up with five different initiatives that include (Holt, 2003):
All members from the two standard setter link with FASB offices
Both setters should conduct joint projects like revenue recognition project, financial statement presentation and conceptual framework recognition.
Both setters should allow direct supervision from FASB as a long-term initiative
Both setters should express consideration of convergence initiative in their board agenda
Both GAAS and IFRS should follow short-term initiatives put in place by FASB
The initial difference is the language used by GAAP, they have adopted terms that are easy and applicable in the U.S compared to IFRS (International Financial Reporting Standards) language making it easier to read and understand in the United States.

This is because IFRS (International Financial Reporting Standards) is a set of international standards on accounting that involves all countries but US GAAP is a set of the United States charter” (Beyersdorff, 2015).
With the current unpredictable economic situation, several companies are trying to figure out long-lived assets and goodwill they own and comparing them to prospects of impairment losses. Today many countries are paying more attention on presentation and recognition differences between IFRS and GAAP rather than focusing on assets impairment. According to Beyersdorff, (2015) the difference between the two standard setters is based on impairment models used to analyze assets. GAAP uses a two-step model that starts with analyzing undiscounted cash-flows, while, IFRS use a one-step model that recognizes recovery of asset value from specific entities like discounted cash flows. The distinction between the two can determine whether an asset can be impaired or not (Steven, 2009).
For example, impairment of Long-Lived Assets process under GAAP takes two-step impairment model that include:
First step: assets with high value are compared or balanced against undiscounted cash flows it can generate. In order to recognize impairment profit, the carrying amount should be higher than the undiscounted cash flows hence quantifying impaired loss (Beyersdorff, 2015).
Second step: the difference between fair value and carrying amount is a reflection of an impaired loss. Fair value is the price received when selling an asset or the amount paid after transferring a liability in accordance with the measured date and participants in the market (Steven, 2009).
On the other hand, one-step test model used by IFRS includes:
Comparing recoverable amount against carrying amount of an asset, if the carrying amount is less than recoverable amount, an accountant achieves impaired loss. Therefore, recoverable amount should be more than the asset value in use or fair value of the asset less selling costs. (The value of assets in use is a reflection of the present value presented against future cash flows using market controlled rate that determine present value of money, pretax and risks associated with the assets that have undisclosed cash-flow estimates). The amount attained from selling a cash-generating plant or asset should be less than selling cost in order to achieve fair value (Anandarajan and Kleinman, 2015).
When comparing the two (GAAP and IFRS), using two-step and one-step test model respectively, results show that, comparing asset carrying value against expected future cash-flow chances are high to attain impairment losses for assets under two-step test model GAAP as compared to IFRS one-step model. Under IFRS, companies are mandated to revalue their long term assets under the accounting policy. Therefore, if impairment is discovered in any long term asset, the company can first compare the impairment loss against revaluated reserve amount. Any impairment loss attributed to long term assets under GAAP is directly inscribed in the companies’ income statement (Steven, 2009).
According to IFRS, (2015) when conducting long term tangible assets under IFRS, chances of impairment results are always higher and in any case if an impairment loss arises they are greater too.
According to IFRS (International Financial Reporting Standards), reports on financial statements are prepared when complying with a fair presentation of financial report framework. However, IFRS (International Financial Reporting Standards) don’t necessarily involve fair framework presentations as compared to GAAP who require and recommend all their financial reports to be prepared in accordance with fair presentation framework (Anandarajan and Kleinman, 2015).
GAAP has two types of professional requirement that include: mandatory requirement and unconditional requirement. It also mandates all auditors or accountants to abide by all unconditional requirements involving all cases where an unconditional requirement is relevant and mandatory requirement in all cases that consider the requirement as relevant with an exception of rare cases. On the other hand IFRS (International Financial Reporting Standards) only involves professional requirement, whereby the auditor or accountant is only required to choose freely on which requirement to use in accordance with the case in hand (Beyersdorff, 2015).
IFRS doesn’t use (LIFO) Last-in, First-out method of accounting for inventory cost, while GAAP prefers First-in, First-out (FIFO). It is, therefore, advisable that countries adopt one method of inventory costing in order to enhance comparability between different countries, and void the process of adjusting to either LIFO or FIFO (Mary, 2015).
IFRS is considered more when accounting for intangible assets under set principles. GAAP, on the other hand recognizes intangible assets at a fair market value while IFRS exhibits intangible assets that are reliable and have future economic benefit (Anandarajan and Kleinman, 2015).
According to IFRS (2014), when writing down inventories, IFRS has the mandate to reverse any written inventory if the criteria to reverse it is adhered to, while under GAAP, written down inventory cannot be reversed to no matter the circumstance (Steven, 2009).
Without research and in-depth understanding of GAAP and IFRS accounting policies, it will appear that both have a similarity when conducting impairment tests, both setters have a responsibility of conducting annual impairment tests on long term tangible assets, meaning both setters should find genuine and proved long term tangible assets. Using one-step or two-step testing model is proved to give different impairment results on tangible assets, a clear indication of the difference between GAAP and IFRS (Anandarajan and Kleinman, 2015).
References
Anandarajan, A. & Kleinman, G. (2015). International auditing standards in the United States: comparing and understanding standards for ISA and PCAOB. New York, New York (222 East 46th Street, New York, NY 10017: Business Expert Press.
Beyersdorff, M. (2015). International GAAP 2015: generally accepted accounting practice under international financial reporting standards. Chichester, UK: J. Wiley & Sons Ernst & Young.
Holt, P. (2003). International accounting. Mason, Ohio: Thomson/Custom Pub.
IFRS. (2014). IFRS 2015. Consolidated without early application. Single (blue) book. Deventer: Kluwer Juridische Uitgevers.
Mary Tokar.(2015). Normas Internacionales de Informacion Financiera emitidas a 1 de Enero de 2015. London: IFRS Foundation.
Steven B. (2009). The real cost implications of moving to international financial reporting standards (IFRS). CPA insider, 1 (1) 1-2