Impairment of Assets
Treatment under IFRS
An annual impairment test for goodwill and intangible assets with an indefinite useful life. Where indicators exist: compare the carrying amount with the recoverable amount (value in use or fair value less costs of disposal).
- Goodwill: a mandatory annual impairment test (no amortisation).
- Recoverable amount: the higher of value in use (DCF) and fair value less costs of disposal.
- Cash-generating units (CGUs) are the unit of assessment.
- A reversal of impairment is required for all assets except goodwill.
Treatment under German GAAP (HGB)
Scheduled depreciation and impairment write-downs under § 253 HGB. There is no separate impairment concept based on CGUs, and goodwill is amortised systematically.
- § 253 (3) sentence 5 HGB: an impairment write-down for non-current assets only where the impairment is expected to be permanent.
- § 253 (4) HGB: impairment write-down for current assets (strict lower-of-cost-or-market principle).
- § 253 (5) HGB: a write-down must be reversed once the reason for it ceases (except for goodwill).
Key differences
- No CGU concept; impairment is generally assessed for the individual asset.
- Goodwill: systematic amortisation under HGB; under IFRS no amortisation, only an impairment test.
- For non-current assets, HGB writes down only on a permanent impairment, whereas IFRS does so as soon as indicators are present.
- Reversal of impairment: mandatory under HGB (except goodwill); under IFRS mandatory except for goodwill.
Example
Worked example
Assumptions: A non-current asset has a carrying amount of €1,000,000. At the reporting date there are indicators of impairment. Value in use (present value of future cash flows) is €700,000; fair value less costs of disposal is €650,000. Scheduled depreciation is ignored for simplicity. All amounts in euros.
Step 1 – Recoverable amount and impairment
Under IFRS the recoverable amount is the higher of value in use and fair value less costs of disposal (IAS 36.18). The impairment is the shortfall against the carrying amount.
| Item | Amount |
|---|---|
| Carrying amount | 1,000,000 |
| Value in use | 700,000 |
| Fair value less costs of disposal | 650,000 |
| Recoverable amount = higher of the two | 700,000 |
| Impairment (carrying amount − recoverable amount) | 300,000 |
Step 2 – Recognition: durable vs temporary impairment
The decisive difference is the trigger: IFRS writes the asset down as soon as the recoverable amount falls below the carrying amount. For non-current assets HGB requires a write-down only for a likely durable (permanent) impairment (§ 253 (3) sentence 5 HGB).
| Case | IFRS | HGB (non-current assets) |
|---|---|---|
| Likely durable impairment | −300,000 | −300,000 |
| Likely temporary impairment | −300,000 | 0 |
HGB exception: for financial assets a write-down is optional even for a merely temporary impairment (§ 253 (3) sentence 6 HGB).
Step 3 – Journal entry (durable impairment)
| Account | Debit | Credit |
|---|---|---|
| Impairment expense (P&L) | 300,000 | |
| Asset | 300,000 |
The carrying amount then falls to €700,000 under both systems.
Step 4 – Reversal of impairment
If the reason for the impairment later ceases in part (e.g. the recoverable amount rises again), both systems require a reversal (IFRS: IAS 36.114; HGB: § 253 (5) sentence 1). The reversal is capped at amortised cost – the carrying amount that would have resulted (after normal depreciation) had no impairment been recognised.
| Account | Debit | Credit |
|---|---|---|
| Asset | 150,000 | |
| Reversal income (P&L) | 150,000 |
Illustrative reversal of €150,000 (carrying amount rises from €700,000 to €850,000), provided the amortised-cost ceiling is not exceeded. Goodwill exception: an impairment of goodwill once recognised may not be reversed under either IFRS (IAS 36.124) or HGB (§ 253 (5) sentence 2 HGB).
Key takeaway
Two differences shape impairment: (1) the trigger – IFRS writes down on any shortfall against the recoverable amount, whereas for non-current assets HGB does so only for a likely durable impairment; (2) goodwill – IFRS does not amortise goodwill but tests it for impairment annually, while HGB amortises it on a scheduled basis; a reversal of goodwill impairment is prohibited under both. For all other assets both systems require a reversal up to the ceiling of amortised cost.