Guidance

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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Guidance

Phone company example Impairment losses

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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Guidance

Impairment overview Scope of IAS 36

Scope of IAS 36 (Impairment of Assets): All non-financial assets, except:

Assets held-for-sale Construction contracts Investment property at fair value Biological assets Deferred tax assets IFRS 5 IAS 11 IAS 40 IAS 41 IAS 12

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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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Guidance

Impairment of non-financial assets

Finite life assets: All PP&E Most intangible assets

Indefinite life assets: Goodwill A few intangible assets (rare)

Test only if indicators are present

Test annually or if indicators are present

Test when there is an indicator present in addition to any annual test

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Guidance

Minimum indicators of impairment

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

Evidence of damage Plans to discontinue or restructure

Worse than expected performance

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Long, finite-lived assets impairment model

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.

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Impairment model

IFRS: Impairment is a one-step approach

Carrying Amount
Difference between

Recoverable Amount

US GAAP: Impairment is a two-step approach (long-lived assets & finite lived intangibles)

Carrying Amount

Compared to

Undiscounted Cash flows

Carrying Amount

Difference between

Fair Value

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Indefinite-lived intangible assets

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.

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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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Recoverable amount

The recoverable amount equals the higher of:

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

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Measuring fair value less costs to sell

Fair value hierarchy:

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

2. Price in an active market

1. Price in a binding sale agreement

Typically, options 1 and 2 are not available and so an entity must estimate fair value less costs to sell

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Measuring fair value less costs to sell (continued)

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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Measuring fair value less costs to sell (continued)

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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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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