Under U.S. GAAP, impairments are not reversed, whereas under IFRS, they are generally reversible except for goodwill. True False
The correct answer and explanation is:
True
Under U.S. GAAP (Generally Accepted Accounting Principles), once an asset is impaired, the impairment loss cannot be reversed in future periods, even if the asset’s fair value recovers. The impairment loss is recognized in the period when the decline in value occurs, and no adjustments are made later, regardless of any increase in the asset’s fair value.
In contrast, under IFRS (International Financial Reporting Standards), impairment losses on most assets can be reversed if the asset’s fair value increases in subsequent periods. However, there is an important exception to this rule: goodwill is not subject to reversal under IFRS, just like under U.S. GAAP. Goodwill is considered a unique asset, and its impairment is irreversible under both standards.
The primary reason for this difference between U.S. GAAP and IFRS lies in the philosophical approach to accounting. U.S. GAAP tends to be more conservative, focusing on the historical cost model, which doesn’t allow for reversal of impairments to ensure financial statements reflect the most conservative and cautious position. IFRS, however, is more flexible in allowing reversals of impairment losses on certain assets, reflecting a more dynamic approach to asset valuation and recognition.
For example, if a company owns a building and its value decreases, the company will write down the value of the building under both standards. However, if the building’s market value later increases, under IFRS, the company can reverse the impairment and increase the carrying amount. Under U.S. GAAP, the impairment remains on the books regardless of any recovery in value. This flexibility under IFRS can provide a more accurate and current financial representation of the company’s assets.