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By Paul Pacter, PhD, CPA, International Accounting Fellow, International Accounting Standards Committee

In April, the International Accounting Standards Committee approved an Exposure Draft (E55) on impairment of assets; the comment deadline is August 15, 1997.

E55 proposes that an asset be regarded as impaired if its carrying amount exceeds recoverable amount. Assets would be reviewed at each balance sheet date for indications of possible impairment. If so indicated, a detailed calculation of recoverable amount is made.

Recoverable amount is the higher of an asset's net selling price and its value in use. Value in use is the present value of estimated future cash flows from continued use of the asset and disposal at the end of its useful life. Net selling price is the amount obtainable from arm's length sale between knowledgeable, willing buyers and sellers, less costs of disposal.

Recoverable amount would be assessed for an asset's cash-generating unit, which is the smallest group of assets that generates cash flows that are largely independent of other assets or groups of assets. If an asset's carrying amount exceeds its recoverable amount, an impairment loss is recognized.

Under E55, an impairment loss recognized in a prior period should be reversed, and income recognized, if there has been a favorable change in the estimates used when the last impairment loss was recognized. E55 would apply to all assets except inventories, deferred taxes, financial assets, assets arising from construction contracts, and employee benefits.

E55 differs from FASB Statement 121 in three respects. Under FASB 121: 1. An asset is impaired only if the undiscounted amount of its expected future cash flows is below carrying amount. 2. Recoverable amount is measured at fair value (which would differ from the E55 proposal only when there is an active market for the asset). 3. An impairment loss, once recognized, is never reversed.

IASC plans a final standard for first quarter 1998. *

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