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Impairment of Assets - GAAP v. IFRS
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One cannot open a newspaper or watch the evening news without hearing about "globalization of the world's economies". Simply stated, it is the process by which local or regional economic customs and traditions become one and meld into a single functioning society. It comes as no surprise to those who follow worldwide accounting standards that US Generally Accepted Accounting Principles (GAAP) as promulgated by the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) are beginning the process of melding into a single functioning set of accounting rules. Although the convergence of these rules is not expect to take place until 2011 (at the earliest) awareness of the differences is important for accounting professionals.
Accounting for impairment of assets is one area where there are significant differences between GAAP and IFRS. Both GAAP and IFRS generally agree that when it becomes apparent a company cannot reasonably expect to recover the carrying amount of certain plant asset through sale or use, the asset should be written down to its fair value. This write-off is referred to as impairment. Most often, asset impairment is due to a significant decrease in asset market value or use, adverse legal factors, drastic cost increases, and/or a projection that demonstrates continuing losses associated with an asset. However, GAAP and IFRS differ as to the methodology used to determine impairment.
GAAP methodology of determining impairment uses a two-step recoverability test. Step one, requires a company to estimate the future undiscounted cash...
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