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AC 420 Lecture 7, Week 8

Corporate Financial Reporting Dr Kazbi Soonawalla 24th November 2009 2009-10

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Today’s objectives

• Impairments

– US treatment – IAS/IFRS treatment

• Different for long lived assets, various types of intangibles and goodwill • Cash-generating units (CGUs) and Reporting Units (RUs) • Examples from industry • Lots to cover so stay focused!

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So Far

• One company buys another • Pays a certain amount – purchase consideration or cost of acquisition • Assigned to all assets and liabilities • May involve identifying and recording new intangibles • Remaining is goodwill • Goodwill remains on books subject to impairment reviews • Intangibles may have indefinite useful life or may be amortized

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Ongoing and subsequently

• • • • • • • Depreciation of certain fixed assets continues Suppose market for their products declines Economy faces downturns Technology becomes obsolete Competition increases Share price goes down Industry suffers a hit – An impairment review might be necessary – Impairment reviews may be conducted on assets in companies that have never had an acquisition

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Impairments

• When carrying value (value in balance sheet) of an asset or asset group exceeds its fair value • Impairment loss is recognized through income generally • Interesting topic because

– Involves lots of estimates and judgement – Attempts by accounting to accurately portray economic situation – Conflicting rules and methods in spite of harmonization

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Applicable standards

• US FASB

– SFAS 141(R) Business Combinations – SFAS 142 Goodwill and Other Intangible Assets – SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets

• IASB

– IAS 38 Intangible Assets – IFRS 3 Business Combinations – IAS 36 Impairment of Assets

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US GAAP SFAS 144 • Applies to long-lived assets • Excludes goodwill • Excludes intangibles not being amortized (i.e. indefinite life intangibles) • These are covered by SFAS 142...