CFA Level I Exam · Analysis of Long-Term Assets

Impairment of Long-Term Assets: IFRS vs US GAAP

Updated 7 October 2026 · Fact-checked

Impairment means writing an asset down when its carrying amount is more than it can recover. Under IFRS, the loss is carrying amount minus recoverable amount, the higher of fair value less costs of disposal and value in use. US GAAP first tests undiscounted cash flows. IFRS allows reversals except for goodwill; US GAAP bars reversals for held-for-use assets.

Understand Impairment of Long-Term Assets

An asset sits on the balance sheet at its carrying amount. If the asset can no longer earn enough to justify that figure, the balance sheet overstates value. Impairment fixes this by cutting the carrying amount and booking a loss in profit or loss.

Under IFRS (IAS 36), you test an asset when there is an indication of impairment. Goodwill, intangibles with indefinite lives and intangibles not yet available for use are tested at least every year. The recoverable amount is the higher of fair value less costs of disposal and value in use (the present value of expected future cash flows from using the asset). If carrying amount is above recoverable amount, the loss is the difference.

Under US GAAP, long-lived assets held for use use a two-step test. Step 1 is the recoverability test: compare carrying amount with the undiscounted expected cash flows. If carrying amount is lower, there is no impairment. If it is higher, step 2 applies: the loss is carrying amount minus fair value. Because step 1 uses undiscounted cash flows, US GAAP tends to recognize impairment later and less often than IFRS.

Goodwill cannot be tested alone because it produces no independent cash flows. It is tested at the level of a cash-generating unit (IFRS) or a reporting unit (US GAAP). Under IFRS, the loss is first applied to goodwill, then to the other assets of the unit. Under US GAAP, the goodwill loss is carrying amount of the reporting unit minus its fair value, limited to the goodwill balance.

Reversals differ. IFRS allows reversal of an impairment loss on assets other than goodwill if estimates change, but the new carrying amount cannot exceed what it would have been with no impairment (after normal depreciation). US GAAP prohibits reversal for assets held for use: the written-down cost becomes the new basis. For assets held for sale, a later rise in fair value less costs to sell can be recognized, but only up to the cumulative loss previously recognized. Goodwill impairment is never reversed under either framework. Impairment is non-cash, but it lowers earnings and equity and can raise later earnings through lower depreciation. Analysts treat it as a sign of earlier over-optimism.

Key formulas to remember

IFRS recoverable amount: Recoverable amount = max(Fair value − Costs of disposal, Value in use); Value in use is the present value of expected cash flows from continuing use and final disposal.
IFRS impairment loss: Loss = Carrying amount − Recoverable amount (if positive); If recoverable amount is higher than carrying amount, no loss.
US GAAP recoverability test (held for use): Impaired if Carrying amount > Undiscounted expected cash flows; Only if this test fails do you measure the loss.
US GAAP impairment loss (held for use): Loss = Carrying amount − Fair value; Fair value is the measure, not value in use.
Assets held for sale: Carry at lower of carrying amount and fair value less costs to sell; Applies under both frameworks; no further depreciation. Later increases in fair value less costs to sell can be recognized, limited to the cumulative loss previously recognized.
IFRS reversal cap: Reversal limited so carrying amount ≤ carrying amount had no impairment been recognized (net of depreciation); Goodwill impairment is never reversed under IFRS. US GAAP bars reversal for held-for-use assets.

How to solve Impairment of Long-Term Assets questions

Use this order for any impairment question. Settle the framework first, because it decides the test.

1Identify the framework: IFRS or US GAAP. Check the stem for the word 'US GAAP'; otherwise assume IFRS.
2Identify the asset type: PP&E, finite-lived intangible, indefinite-life intangible, goodwill, or asset held for sale.
3Write down the carrying amount at the test date, after depreciation or amortization to that date.
4Under IFRS, find recoverable amount: take the higher of fair value less costs of disposal and value in use.
5Under US GAAP, run the recoverability test: compare carrying amount with undiscounted cash flows. If carrying amount is not higher, stop: loss is zero.
6Compute the loss: IFRS carrying amount minus recoverable amount; US GAAP carrying amount minus fair value.
7For a cash-generating unit with goodwill, apply the loss to goodwill first, then to other assets.
8For reversal or later-period questions, check the framework, exclude goodwill, apply the cap, and recompute depreciation on the new carrying amount.

Quickest way: Three-line impairment check

When to use it: Use for standalone three-option MCQs where you have about 90 seconds.

Line 1: note the framework and the carrying amount.
Line 2: IFRS, pick the larger of the two recoverable measures. US GAAP, compare carrying amount with undiscounted cash flows; if cash flows are higher, answer zero.
Line 3: subtract and check the sign. Eliminate any option that is negative, equals the carrying amount, or uses the wrong measure.
For conceptual items, remember: IFRS reverses (not goodwill), US GAAP does not for held-for-use assets; IFRS test uses discounted cash flows, US GAAP step 1 uses undiscounted.

Common mistakes in Impairment of Long-Term Assets

Using the lower of fair value less costs of disposal and value in use as the recoverable amount.
Students link impairment with conservatism and assume the lower figure.
Fix: Recoverable amount is the higher of the two, because management could either sell or keep using the asset.
Booking a US GAAP loss when fair value is below carrying amount without running the recoverability test.
Students apply the IFRS logic to both frameworks.
Fix: Under US GAAP, first check carrying amount against undiscounted cash flows. If cash flows are at least the carrying amount, there is no loss.
Using discounted cash flows in the US GAAP recoverability test.
Value in use is familiar from IFRS.
Fix: Step 1 uses undiscounted cash flows. Fair value is used only to measure the loss in step 2.
Reversing goodwill impairment under IFRS.
Students remember that IFRS permits reversals and forget the exception.
Fix: Goodwill impairment is never reversed under IFRS or US GAAP.
Ignoring the reversal cap and restoring the asset to its original cost.
Students forget that depreciation would have continued.
Fix: Compare the recoverable amount with the carrying amount had no impairment been booked, after depreciation. The new carrying amount is capped at the lower of the recoverable amount and the depreciated carrying amount had no impairment been recognized.
Forgetting to deduct costs of disposal, or deducting them from value in use.
Mixing up the two recoverable measures.
Fix: Deduct costs only from fair value. Value in use is already a cash flow measure.

Worked examples

Example 1

Under IFRS, a machine has a carrying amount of €8.0 million. Its fair value is €6.5 million, costs of disposal are €0.4 million, and value in use is €5.8 million. What impairment loss is recognized? A) €1.5 million B) €1.9 million C) €2.2 million

Show the solution

Fair value less costs of disposal = 6.5 − 0.4 = €6.1 million.
Value in use = €5.8 million.
Recoverable amount is the higher: €6.1 million.
Loss = 8.0 − 6.1 = €1.9 million.
Check the others: €1.5 million (8.0 − 6.5) uses fair value but ignores costs of disposal, and €2.2 million (8.0 − 5.8) uses value in use, which is the lower measure.

Answer: B) €1.9 million

Example 2

Under US GAAP, equipment held for use has a carrying amount of $12.0 million, undiscounted expected cash flows of $11.0 million, and a fair value of $9.0 million. What loss is recognized? A) $0 B) $1.0 million C) $3.0 million

Show the solution

Run the recoverability test: carrying amount $12.0 million exceeds undiscounted cash flows $11.0 million, so the asset is not recoverable.
Measure the loss against fair value: 12.0 − 9.0 = $3.0 million.
Option B ($1.0 million) wrongly uses undiscounted cash flows to measure the loss.
Option A would apply only if cash flows were at least $12.0 million.

Answer: C) $3.0 million

Exam tips

Read the first line of the stem for the framework. A switch between IFRS and US GAAP is the most common trap.
Memorize the contrast: IFRS uses one step with recoverable amount; US GAAP uses recoverability on undiscounted cash flows, then fair value.
Expect conceptual items on reversals. Answer: allowed under IFRS except goodwill, not allowed under US GAAP for held-for-use assets.
Expect a follow-on item on effects: impairment lowers profit and assets now and lowers later depreciation, which lifts later profit.
With no penalty for wrong answers, never leave a question blank. Eliminate options that use the wrong measure and guess among the rest.

Practice questions from Analysis of Long-Term Assets

Impairment of Long-Term Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Impairment of Long-Term Assets: frequently asked questions

Can impairment losses be reversed under IFRS?

Yes, for assets other than goodwill, if the estimates used to find the recoverable amount have changed. The reversal cannot lift the carrying amount above what it would have been with no impairment. Goodwill impairment is never reversed.

What is the difference between IFRS and US GAAP impairment testing?

IFRS compares carrying amount with recoverable amount, the higher of fair value less costs of disposal and value in use. US GAAP for held-for-use assets first compares carrying amount with undiscounted cash flows, then measures the loss against fair value. US GAAP also bars reversals for held-for-use assets.

How do you calculate an impairment loss on the exam?

Find the carrying amount, then the correct comparison measure for the framework. Subtract and report the positive difference. Under US GAAP, check the undiscounted cash flow test first, because a pass means no loss.

At what level is goodwill tested for impairment?

Goodwill is tested at the level of a cash-generating unit under IFRS and a reporting unit under US GAAP, because it does not generate cash flows on its own. Under IFRS, any loss is applied to goodwill first, then to the unit's other assets.